Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Human Capital

What it is:

Human capital is the skill, talent, and productivity that employees bring to a company. Coined by University of Chicago economist Theodore Schultz in 1964, the term refers to capital produced by investing in knowledge.

How it works (Example):

Better skills can increase an employee's value in the workplace, and an employer that obtains highly skilled employees can therefore gain a significant competitive advantage via human capital. Human capital is largely responsible for innovation, which can also be a tremendous competitive advantage for companies.

Accordingly, companies are usually very interested in investing in and acquiring human capital. They do this via recruiting new employees, training existing employees, and ensuring that the relationships between employees and their managers are positive.

There are two kinds of human capital: specific and general. Specific human capital refers to knowledge and skills that few find useful and are willing to pay for. For example, knowing how to operate a proprietary machine that is owned and operated by Company XYZ might be a skill that only Company XYZ is willing to pay for. General human capital refers to knowledge and skills that many employers find useful, such as knowing accounting, knowing how to transplant a heart, or knowing how to design a bridge.

Why it Matters:

Employment is essentially the purchase and sale of human capital: employees own their talents, skills, and time, and they sell these assets to companies in return for money. This is the idea underlying the philosophy that employees are really consultants who sell their time and expertise to clients, and that the value of one's labor is not always based on his or her amount of physical exertion but on the market value of his or her knowledge and skills. Some economists argue that market rates are not the only thing that establishes the value of skills and knowledge; personal connections, prestigious schooling, and character can also influence the value of one's human capital.

Human capital tends to migrate in global economies, most often from poor places to richer places. Some economists argue that this "brain drain" makes poor places poorer and rich places richer.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...