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What Is Human Capital?

An employee has economic value for an employer.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 July 2014
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Human capital is the economic value that an employee provides to an employer. The assessment of this value is related to the body of skill, knowledge, and experience that the employee possesses. Factors such as formal education and participation in ongoing training related to the workplace also help to enhance the value that the employee has.

As one of the basic factors of production, human capital is essential to the operation of just about any type of business. Employing individuals who have the necessary expertise, judgment, and ability to function within their assigned roles allows the business to operate at maximum efficiency. This, in turn, increases the potential of earning a profit and remaining successful. A failure to identify individuals with the necessary combination of skills, experience, and education can undermine the efforts of even the most well-organized company.

Businesses often make investments in their employees. Just as a company may invest in new technology to enhance its internal communication processes, the business can identify employees who demonstrate an aptitude for needed skills and arrange for those workers to receive professional instruction. This allows the company to have access to a wider skill set without the need to hire additional people. At the same time, the business helps to raise the economic value of each of those individuals.

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One example of how an individual acquires more capital is the professional athlete. Often, the athlete begins the process of preparing for a career in sports by learning the basics of the sport, receiving instruction in specific strategies related to participating in an actual sporting event, and ultimately gains experience by playing that sport. Assuming the combination of knowledge, talent, and experience are sufficient, the athlete is offered the opportunity to play professionally, where he or she gains additional experience. All through this process, the economic worth of that athlete increases, resulting in a higher value to whomever ultimately employs the athlete.

Human capital is a form of value that should be understood only in economic terms. Worth of this type does not include consideration of the value of the individual to the family, community, or other aspects of his or her social network. The focus is strictly on the skills, knowledge, and experience that the person possesses, and how much those assets are worth to a given employer. For this reason, individuals should not base their total worth in terms of this value alone.

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Discuss this Article

anon344923
Post 9

The beauty of this is this works two ways. In the old days, one goes to work often without any fancy 'human capital management' in place, but they still go to work because that what put food on the table and roof over their head and clothes on their backs.

Nowadays, companies invest in their people in the hope that the employees will in turn grow the company. It is not slavery, as one is paid his salary and the training is normally paid by the company. The company invest in identified employees,taking a business risk. Whatever the employee learn from the training is theirs, it stays with them even after they leave the company that provided them with the training. It is only fair to take and give back.

Your personal person is a whole different thing altogether, your core value, your soul, your ethics, your motivations, your purpose etc.; this is the other half that balance the equation.

anon254504
Post 8

"Human capital" sounds like we are reduced to an economic number, because in that sense we are. I greatly value the paragraph which states that we should not base our total value on our human capital, because it cannot adequately represent what we mean to our friends, our families, and our social network.

It is only that one facet which one particular company can use to rank our relevant skills, experience and ability. There is so much more to a person, and we mustn't forget it.

anon241513
Post 7

San someone please explain what human capital theory is, in simple understandable English?

anon204389
Post 6

Human capital evaluation can have industry specific effect. For instance an exercise in the construction industry will help evaluate vendors impartially where outsourcing to the right vendor is the key.

anon193485
Post 5

I agree with the commenter above. Human capital sounds like chattel (slavery). It's dehumanizing and demeaning. Our worth/value is determined by how much money we can make for corporations? I reject that.

I was born worthy and whole and complete. While I'm highly educated, holding several degrees, they aren't what make me. What makes me is my soul, my character, and my moral fortitude; my love for all humanbeings and everything in the universe. Not my ability to make money.

anon115691
Post 4

what does human capital mean to modern day managers?

pleats
Post 3

I think human capital management is great -- it really has evolved from the old strategies of HR, or personnel management, and can make things so much easier and better for both employers and employees.

What's not to like?

lightning88
Post 2

There is also a subset of human resources called "strategic human capital management". Quite a mouthful, I know.

You can even get certified in it.

What it means, as far as I can tell, is forming strategies to best manage people's talents, keep them motivated, and see who would benefit the company if it invested in training them.

StreamFinder
Post 1

I've always found the term "human capital" to be distasteful, even demeaning.

I know that it isn't intended to refer to a person's whole value, but I don't like being thought of as an economic cipher, and I think that's what terms like human capital encourage people to do.

Guess that's why I don't really fit in with the whole rat race thing...

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