Human Capital

Updated Jan 19, 2023

Definition of Human Capital

Human Capital describes the collective skills, knowledge, competencies, and other attributes of individuals or groups of individuals that can be used to create value. That means in an economic context, it includes all the relevant expertise and creative skills people have acquired throughout their careers that help them to do their job. That may include assets like education, on-the-job training, or prior work experience.

Example

To give an example of human capital, picture a small restaurant with three employees: a chef, a kitchen hand, and a server. All three have finished their primary education and picked up some prior work experience in the labor market. In addition to that, the chef has obtained specialized training in culinary school. They have all worked at the restaurant for several years, so they know many customers and have become an experienced team. The sum of all this knowledge and experience is considered human capital.

To highlight the value of this capital for the restaurant, imagine the management replacing all three employees with a new group of untrained and inexperienced employees for some reason. Without proper culinary training, the new chef won’t be able to produce the same quality of food. Also, the new server forgets orders, drops a few plates now and then, and needs more time to serve customers. In other words, both the quality and quantity of output suffer, and productivity goes down. As a result, the restaurant makes less money, and neither the owner nor the customers are happy.

Why Human Capital Matters

Human Capital is an extremely valuable asset to any organization, even though it is an intangible asset that does not show up on any balance sheet (unlike physical capital). Not all employees provide the same quality of work. Thus, well-trained and educated employees can significantly increase the productivity of an organization. That, in turn, often leads to an increase in profitability. That means companies can improve their profitability and value by investing in the education and training of their employees. In addition to that, investments in human capital also benefit the economy and society as a whole, because they enable advanced research and development, innovation, and an increase in the collective wealth of society.