The Evolution of Human Capital – Understanding Its Definition and Significance in Today’s Economy

Human capital is an essential determinant of economic growth. Countries that invest in education and health have higher productivity levels than those that don’t.

Human capital can be measured in many ways, including educational attainment, employment rates, and the ability to innovate. However, this concept is only sometimes understood clearly.

Definition

The human capital definition is generally understood to be the intangible assets and qualities that a person possesses that can boost their productivity and that of an organization. This includes an employee’s education, skills, intelligence, health, work ethic and loyalty. It also encompasses the ability to learn and adapt to change. It is a critical component in today’s economy, and employers are placing increasing importance on recruiting, compensating, and retaining the highest quality employees possible.

While the theory of human capital has received some criticism in the past, it is generally considered a sound economic theory. This is because it has a positive relationship with economic growth and productivity. In addition, the theory of human capital helps explain why education is often more important than income in determining economic success.

However, only some have the same opportunity to utilize their human capital. For example, some people need help with educational credentials that can help them maximize their potential. Others may be able to gain employment but are left behind in terms of wage gains due to factors such as gender and nativity biases or discrimination in the workplace. These constraints must be addressed for all people to reap the full benefits of their human capital.

Origins

Understanding human capital can help explain many economic and social questions. For example, why are families in rich countries more likely to send their children to college? Why do companies often provide meals for their employees? Why do some people have more jobs than others?

In the early years of human capital research, economists focused on the specific aspects of education and health that would lead to greater economic output and income. These include skills, intelligence, creativity, health, emotional stability, physical strength, and resilience.

Investing in these qualities improves an individual’s ability to contribute to a company or society. The benefits are not just in the worker’s paycheck but in the economy as a whole. For example, research shows that a college education in the United States substantially raises a person’s income, even after accounting for direct and indirect schooling costs.

Significance

Until recently, economists considered human capital an economic “factor of production” similar to land and machinery. Workers sold their labor power to companies in income return, which was viewed as the interest on an investment in human capital. It was also assumed that such an investment would lead to more significant economic growth, although this correlation has yet to be proven.

Since the 1950s, however, it has become clear that there is a more direct relationship between human capital and economic development. The value of an individual’s human skills, which can be improved through education and training, has proven to be a strong predictor of earning potential. This, in turn, can boost a country’s economy.

This explains why the World Bank Group’s Human Capital Index (HCI) has grown so important. It includes five measures of human capital: child health and learning outcomes, adult survival and health, years of schooling, and education quality. Data for the HCI is collected on a two-year cycle. The 2018 HCI covers 154 countries, and the 2020 update expands coverage to 174 economies.

The HCI aims to measure the distance between a country’s current situation and what it could be with total health and complete education. Its score, which ranges from 0 to 1, reflects the average years a child born today can expect to live with total health and complete formal education.

Examples

The idea that human skills, knowledge, and personality can be compared to the tangible forms of capital, such as money or real estate, has been introduced previously. 

Although the concept of human capital is difficult to measure, it is essential in economics. For example, investment in education consistently leads to higher economic output and income. Therefore, investing in early childhood development is essential, improving quality and choice in schooling, creating excellence in tertiary education, and ensuring that adults have access to training and learning opportunities.

Human capital distinguishes itself from tangible monetary assets in that it has a comparatively consistent growth rate over time, regardless of the economic cycle. It is a valuable asset for individuals and societies, and it is essential to the world’s ability to achieve sustainable development goals and to end extreme poverty by 2030. The challenge is to create systems for people that are conducive to high productivity and performance, both in a nation’s economy and in organizations. This involves educating young people with the skills they need and enabling them to find employment that utilizes those skills now and in the future.