Investment in Human Capital
Human capital is one of the most important investments a company needs to make. It is intangible assets that are not listed in the balance sheet of a company. Hence, it can easily be seen as the economic value of a worker's experience and skills. When a firm has a good team of employees to work with, they can easily get the best products from their business. This is why they have to invest carefully in assets like education, training, intelligence, skills, and other things employers look for. Employers expect their employees to work hard and ensure good products in their company.
The concept of human capital is one of the biggest aspects of business development. Economic experts look at this concept as an idea that plays a key role in the development of markets and the general economies. It recognizes that not all labor is equal. However, an employer has the option to improve the quality of that capital when they invest in employees. The modern market is quite competitive, and it is only those who have realized the value of investing in good staff that can make it. Education, experience, and employees' abilities have a great economic value for employers and the general economy. Human capital is perceived to increase productivity, which results in not in more profits. In other words, the more a company invests in employees, the more productive and profitable they can be.
History of the concept
The idea of human capital is not a new one in the modern world. It can be traced back to the 18th century. In his book, "An Inquiry into the Nature of Wealth and Causes of Wealth in Nations," Adam Smith uses this concept as one of his main references. Smither explored wealth, knowledge, training, talents, and experiences for a nation. He suggests that using different approaches like education to improve human capital ensures a more profitable enterprise, which adds to society's collective wealth. He, therefore, looks at this as a win for everyone.
In the recent past, this term was used to imply the labor required to produce manufactured goods. However, renowned economists like Gary Becker and Theodore Schultz used the most modern theory, among others, who invented the term in the 60s, used it to explain the value of human capacities. According to Schultz, human capital is not different from any other capital used to improve different production levels. And in this case, it would be very crucial to invest in the education, training, and enhanced benefits of employees in an organization. This also means that firms that have invested more in building skills for their employees have better chances of growing and boosting the real economy.
This sounds like a good idea, and anyone would agree with his thoughts. But this not always the case, since not all economists agree. One Harvard economist, Richard Freeman, argues that human capital was a signal of talent and ability. He says that a firm needed to train and motivate their employees properly in order to see real productivity. Hence, according to him, human capital is not a production factor. This means it does not matter how well the employee comes educated. The firm can train and motivate them until something good comes out of their projects.
The human capital theory has also faced much criticism from many experts in the education and training sectors. For example, it was widely attacked in the 1960s because it made bourgeois individualism legitimate, yet it was considered selfish and exploitative. The bourgeois class of people included those of the middle class who were seen as exploiters of the working class. Also, many believed that this theory blamed people for any defects that happened in the system and of creating capitalists from workers.
For this reason, human capital has always remained a hotly debated subject. Those who think it is the right idea firm and economic growth say it has contributed largely to societies' good living. They believe we would not go anywhere without it, and that it should be encouraged widely. On the other hand, opposer believes it leads to discrimination, which is not what society needs. Every aspect of this theory has met different views. One exact thing, however, it that it has become a crucial subject of study for modern economics students.
What is the impact of human capital?
In economic theory, the relationship between markets and consumers determines the growth of the economy. Human beings are rational decision-makers who base their decisions on what is more profitable. Also, they are social beings who cannot live with these relations. And this means we always have to be careful with the decisions we make. Any decision they make affects others around them. This is why theories like Deontology have been used to explain why people make the decisions that make and why they do it. In the same way, firms also have to make decisions that benefit them the most. Among them is choosing the right employees and giving the proper incentives to perform their duties.
Human capital is made up of directors, employees, and leaders in an organization. They are crucial to any organization's success as it is they who make the decisions that affect the growth of a firm. If the company is not careful in picking the right people to work with, they may not be able to realize its goals effectively. It is managed through the human resource department of the organization. This department is put up to oversee workforce acquisition, management, and optimization specifically. Other duties they play include workforce planning and strategy, recruitment, employee training, and development. They also give reports and analytics that are crucial to the development of their company.
Human capital seems to migrate a lot, especially in the global economies, which is a reason they shift a lot from developing places or rural areas to more developed and urban areas. Some economists refer to this behavior as a brain drain that causes poorer places to become poorer and richer. In other words, human capital does not only affect the growth of an organization but a region as a whole. Economies that are seen to grow faster have invested more in human capital than in anything else. They develop proper education systems to ensure the products that come out are ready to take over the market effectively. There are some who even go to the extent to sourcing for proper human capital from outside their region.
Studying human capital in the global economy in the university and college education is one good way to ensure proper knowledge is impacted by society. In many regions, this has become a key area of study with a lot of focus on ways to make economies grow faster and stronger. It is an investment that firms have to make from them to achieve their long term and short-term goals. Hence, they have to calculate what they need in their employees.
Human capital is based on the investment of employee skills and knowledge through education—this why the investments can also be calculated. After all, companies spend a lot of resources for recruiting new employees. It takes a long time for them to get proper approval, which may be of value to the company. Also, the wages used in paying these workers play a huge role in the company's general growth, which extends to the general economy. Human resource managers have to calculate the total profits before and after making any more investments. They calculate the return on investment of human capital by dividing the company's total profits by its overall investment in this department.
For instance, think of company A which has invested $2 million into their human capital, where it gains a total profit of $15 million. In this case, managers can compare the human capital year-over-year as a way or tracking how profit is growing and whether it has a relationship with their investments in human capital. And this is not only for the sake of the company but also for the economy's general growth. Positive growth in economies is seen as the main goal of markets and firms. And this is why it becomes crucial to determine how much each investment is bringing out.
What to consider when calculating human capital
There are many other aspects of growth that are directly linked to its human capital. We have already determined that investing in human capital is one of the most important steps the organization has to make. But to make it sink further, we need to understand that human capital different and similar to other investments, which is why companies have to take in special considerations.
First, human capital plays a huge role in economic growth. People come with diverse sets of skills and knowledge, which they use to add their contribution to the existing ideas. When companies are sourcing for new employees, they don't just look for anyone but go for people who have proven to have a specific skill set. There is an excellent reason why interviews are held before bringing any new employees on board. The employer is looking for a specific set of skills that is vital in their line of work. These skills can help in boosting the economy. The relationship can be measured through the investments put in education systems. Many governments have realized that there is a crucial relationship between human capital and education at little or no cost. Those who come with higher education and from more reputable institutions often end up on larger salaries, which means they can spend more.
Another important thing to note is that human capital is not immune to depression. Hence, just like other assets in economies lose their value, human capital also tends to lose value. This is measured most in terms of wages or the ability to stay in the workforce. Things like unemployment, injury, mental decline, and the lack of ability to keep up with advancement can largely affect human capital. Think about a good employee who has a specialized skill. If they stay too long without employment, they may not keep up with the different specialization levels needed in their field. The skill may not be in demand when they come back into the workforce. Also, if someone is not ready to adopt new technologies or techniques, they may fail to meet growing markets' demands. This only means that an individual's values in their knowledge and skills of a particular field depend on how much they practice those skills. However, some factors affect their ability to gain such experience, most of which are beyond our control.
Is it important to invest in people? This is the most important question in understanding the benefits of human capital. We need to learn that human capital is a concept that has met different views concerning its existence, like any other out there. The World Bank released the Human Capital Index in October 2018, aimed at encouraging more meaningful investment in people for proper economic growth and equity. This Human Capital Project was called a project of the word, and it led to the publication of the index highlighting the current emphasis on investment in human capital and funding. Traditionally, this was geared towards improving hard infrastructure, where fewer values were placed on human capital even though they were directly linked.
Many organizations have tried to understand and explain human capital's impact through different initiatives, which all indicate this aspect has come more important today than ever before. Human capital is key to the growth and development of an economy. This can be seen through projects such as the Sustainable Development Goals created by and accepted by the United Nations. Though it, clear guidelines are given a clear blueprint on what countries must do to ensure prosperity. Some of the key goals mentioned include quality education, decent work, economic growth, poverty and hunger, and fewer inequalities among many others. They all indicate how important human capital is today.
Author: James Hamilton