Human capital refers to the knowledge, skills and set of capabilities possessed by the working force of a nation. It is an asset for countries, and its inherent value lies in its uniqueness that comes from different individuals. To define: human capital is the collective productive capacity of the existing labour force of a nation.
Human capital is an asset which is hard to replace, unlike other types of assets. It is that feature of an economy which ultimately defines its growth rate given the amount of endowment and technological advancement that the country has.
Human capital was first recognised as a source of productivity for a nation by Nobel prize winners Gary Becker and Theodore Schultz. This theory was given light under the pretext that investing in labour is as important as investing in other tangible assets. Both tangible and intangible forms of capital are essential to the production process and can be improved upon.
According to Gary Becker, there are two types of human capital on a microeconomic level:
A company would inevitably value specific human capital more than general human capital. The former includes skills and abilities that are present in a few select individuals, however the same is not true for general human capital.
Companies need a basic level of education to build upon. They need surety that the labour force that they are investing in would be beneficial to them.
Various other aspects influence human capital. Many professional qualities are developed with time and through training.
The World Bank recognises Human Capital Index (HCI) as a measure of the strength of human capital in an economy. A lot of aspects that constitute human capital are not quantifiable. However, various economic indicators can be used as proxies to include the aspects mentioned above.
HCI has the following components:
HCI is a widely accepted measure of Human Capital used by countries. It gives foreign investors an estimate of the economic strength of a country and its labour force.
Businesses need to be competitive to sustain profits. Labour force forms an integral part of any operation. The employees are hired with the intent of providing productive inputs to the business so that they can provide a future stream of income.
Thus, if the labour force underperforms, or does not possess appropriate skills, then it becomes a liability to the company rather than an asset.
For a nation, a strong labour force ensures that there are greater economic growth, increased foreign investment and a lower unemployment rate. Moreover, skilled and educated labour would be able to better complement the tangible assets in a business.
It is important to invest in the labour force before employing them. The responsibility of providing basic education and vocational skills lies upon the government. As a result of this, governments offer free education in some countries. It has also been observed that on average, the percentage of the population that has completed graduation is more likely to get a job than the percentage without a graduation degree.
Like any other form of capital, human capital is also susceptible to depreciation. As the working force grows old, their productivity declines, thus making it less incentivising for a company to hire them. While businesses value experienced employees, this knowledge is only beneficial to them if it brings output.
Thus, human capital formation is a vital aspect of the growth of an economy. There have been objections with respect to the theory of human capital. Many people feel that making assets out of humans was exploitative and selfish. Therefore, on a broader level, human capital benefits society overall and provides a wholistic means to achieve global competitiveness.