Human Capital

Written By
Paul Tracy
Updated November 4, 2020

What is Human Capital?

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 Human Capital Works

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 Human Capital 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.

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