Human Capital definition and importance

Measuring human capital

For statistical purposes, human capital can be measured in monetary terms as

the total potential future earnings of the working age population. (However, this
only captures part of human capital and is a limited measure)

Human Capital at UK ONS

The decline in UK human capital reflects the rise in unemployment and fall in
real wages during this period. It should be noted relying on potential earnings
is a limited view of human capital. Earnings don’t necessarily reflect accurately
all aspects of human capital. The OECD consider different ways to measure
human capital taking a range of indicators.
Human capital in primary and secondary sector

In agriculture and manufacturing, human capital was easier to measure. The

human capital of an assembly line worker could be measured in simple terms
of productivity – e.g. the number of widgets produced per hour. In mining,
human capital may be strongly related to physical strength and quantity of coal
produced per day.

Human capital in tertiary sector/knowledge economy

The tertiary/service sector has a greater variety of jobs, which require different
skills. These skills and qualities are often more difficult to measure regarding
output. For example, the human capital of a teacher, cannot be measured by
university degree and A-Levels. The best academics may lack some teaching
skills – like empathy, the ability to inspire and command a class.

In a job, such as management, important characteristics will be factors such as

interpersonal skills, ability to work in a team and the creativity to problem
solve.

In other words, as the economy has developed the concept of human capital
has also broadened to include a greater variety of skills and traits of capital.

Since the 1960s/70s, human capital has become a more popular economic
concept as the emerging ‘knowledge economy‘ makes greater use of a wider
range of human capital.

How to increase human capital

1. Specialisation and division of labour. Specialisation allows workers to

concentrate on specific tasks and increased specialisation of skills.
(Though specialisation can also lead to boring, repetitive jobs and
limited skill development of workers.)
“The greatest improvement in the productive powers of labour..
seem to have been the effects of the division of labour.”

– Adam Smith
2. Education. Basic education to improve literacy and numeracy has an
important implication for a basis of human capital.
3. Vocational training. Direct training for skills related to jobs, electrician,
plumbing nursing. A skilled profession requires particular vocational
training.
 4. A climate of creativity. An education which enables children to think
outside the box can increase human capital in a way that ‘rote learning’
and an impressive accumulation of facts may not.
5. Infrastructure. The infrastructure of an economy will influence human
capital. Good transport, communication, availability of mobile phones
and the internet are very important for the development of human capital
in developing economies.
6. Competitiveness. An economy dominated by state monopolies is likely
to curtail individual creativity and entrepreneurs. An environment which
encourages self-employment and the creation of business enables
greater use of potential human capital in an economy.
Different views on Human Capital

Theodore Schultz “Investment in human capital” (1961) was an early

proponent of theory. He stated:

“Although it is obvious that people acquire useful skills and

knowledge, it is not obvious that these skills and knowledge are a
form of capital, that this capital is in substantial part a product of
deliberate investment”
Gary Becker “Human Capital” (1964) In his view, human capital, is
determined by education, training, medical treatment, and is effectively a
means of production. Increased human capital explains the differential of
income for graduates. Human capital is also important for influencing rates of
economic growth.
Howard Gardener – different types of human capital. Gardener
emphasised the different types of human capital. One could increase
education, but be a poor manager. A successful entrepreneur may have no
education. Human capital is not unidimensional.
Schultz/Nelson-Phelps – ability to adapt. Human capital should be looked at
from the ability to adapt. Can workers adapt to a changing labour market? A
labour market which is shifting from full-time manual work in manufacturing to
flexible work in the service sector.
Spence View – Observable signs of human capital like education are
essentially a signalling function.
Evaluation of human capital

Social upbringing. A sociologist like Pierre Bourdieu argues that human

capital is strongly related to social upbringing. This influences cultural, social
and symbolic forms of capital. For example, UK society dominated by Old
Etonians and Oxbridge graduates who gain confidence and social capital from
having the right social networks.
Signalling. Related to the social capital of going to the right school, is the idea
that what constitutes human capital is often just ‘signalling’. For example,
gaining a degree from Oxbridge improves status in the workforce and enables
a higher salary for the graduate. However, three years of studying a degree in
modern history/PPE may give only a small amount of knowledge directly
related to the work environment.
Discrimination. Differences in wages and job opportunities are not
necessarily due to differences in human capital, but the result of
discrimination, labour market imperfections or non-monetary benefits of jobs.
Related posts
 Factors affecting economic growth
 Labour productivity
 Factor immobility
 The knowledge economy
Further Reading on Human Capital
 Human Capital by Gary S.Becker
 Basic theory of human capital LSE
CategorieseconomicsPost navigation
Examples and Types of Protectionism
Inelastic demand

What is the Relationship between Human Capital

and Economic Growth?
Human capital and economic growth have a strong correlation. Human capital
affects economic growth and can help to develop an economy by expanding
the knowledge and skills of its people.

Human capital refers to the knowledge, skill sets, and experience that workers
have in an economy. The skills provide economic value since a knowledgeable
workforce can lead to increased productivity. The concept of human capital is
the realization that not everyone has the same skill sets or knowledge. Also,
the quality of work can be improved by investing in people's education.

What Drives Economic Growth

Economic growth is an increase in an economy's ability, compared to past
periods, to produce goods and services. Economic growth is measured by the
change in the gross domestic product (GDP) of a country. GDP is a
representation of the total output of goods and services for an economy. For
example, if a country has a GDP rate of 2.5% for the year, it means the
economic growth of the country rose by 2.5% from a year earlier. In order to
determine how human capital impacts growth, we must first look at two key
drivers of economic growth in an economy.

Consumer Spending
It's estimated that consumers are responsible for more than two-thirds of the
economic growth in the U.S. economy.1 As consumers become employed or
experience wage increases, they tend to increase their purchases of clothes,
cars, technology, homes, and home goods such as appliances. All of that
spending creates a positive ripple effect leading to improved employment in
various industries such as retail, auto manufacturers, technology stores, and
home builders, to name a few. The spending also leads to higher GDP growth
throughout the economy.

Business Investment
The increased GDP growth from consumer spending leads to improvements in
business conditions. As companies become more profitable, they tend to
invest more money into their businesses to create future growth. Business
investment can include new equipment and technology purchases. The
investments businesses make are called capital investments. Capital
investments, which require large outlays of capital or cash, are designed to
boost a company's productivity and profits in the long term.

KEY TAKEAWAYS

 Human capital affects economic growth and can help to develop an

economy by expanding the knowledge and skills of its people.
 The level of economic growth driven by consumer spending and
business investment determine the amount of skilled labor needed.
 Investing in workers has had a track record of creating better
employment conditions in economies throughout the world.
In a growing economy, companies also take on additional borrowing from
banks to expand production due to higher consumer demand. The loan
proceeds are usually used for large purchases of assets such as
manufacturing plants and equipment. The added production also leads to
higher wages and increased employment as more workers are needed for the
increase in consumer demand for a company's products.

As companies look to hire workers to help with the increase in sales, it leads to
new job openings in various types of employment. However, if the labor
market becomes too tight, due to an expanding economy, companies are
forced to train workers for the skillsets needed since there aren't enough
available skilled workers.

As a result of business investment, companies are more productive, while

GDP growth rises since business investment is a key component of growth.
Both consumer spending and business investment, not only lead to more
economic growth, but also play a prominent role in determining the level
training and development of workers.

Human Capital and Economic Growth

Human capital is positively correlated to economic growth since investment
tends to boost productivity. The process of educating a workforce is a type of
investment, but instead of capital investment such as equipment, the
investment is in human capital.

The Government's Role

The role of governments is key to expanding the skillsets and education levels
of a country's population. Some governments are actively involved in
improving human capital by offering higher education to people at no cost.
These governments realize that the knowledge people gain through education
helps develop an economy and boost economic growth. Workers with more
education or better skills tend to have higher earnings, which, in turn,
increases economic growth through additional consumer spending.

The Corporate Sector's Role

Companies also invest in human capital to boost profits and productivity. For
example, let's say an employee working at a technology company receives
training to be a computer programmer through on-site training and in-house
seminars. The company pays for a portion of the tuition for higher education. If
the worker remains at the company after the training has been completed, she
may develop new ideas and new products for the company. The employee
might also leave the company later in her career and use the knowledge she
learned to start a new company. Whether the employee remains at the firm or
starts a new company, the initial investment in human capital will ultimately
lead to economic growth.

Human Capital Investments and Employment Growth

Investing in workers has had a track record of creating better employment
conditions in economies throughout the world. If employment is improving,
consumer spending rises, leading to increased revenue for companies and
additional business investment. As a result, employment is a key indicator or
metric for determining how GDP growth may perform.

The OECD or The Organisation for Economic Co-operation and

Development is a group of more than thirty member countries that help to
shape and develop economic and social policies across the globe.2

OECD routinely analyzes the impact of education levels on employment and

ultimately, economic growth. The OECD's 2020 annual Education at a
Glance report reviewed how education systems operate, the level of spending,
and who benefited or participated.3 The OECD also measures how increases
in education for men and women drive employment growth. 

In 2020, the OECD found that for countries with people that had grammar and
high school educations experienced an employment rate among 25-34 year-
olds of 72% for men and 45% for women. However, for those who had college
or graduate education levels experienced an employment rate of 89% for men
and 81% for women.4
Although investment in human capital tends to produce more growth, it doesn't
necessarily mean the jobs are available for the newly-educated workers. Also,
geography plays a role when it comes to job openings and the movement of
labor. If job openings are located in the northern part of a country, but the
skilled labor is in the south, growth could be hindered due to the cost of
moving or the lack of desire to move.

Human capital on Economic Growth

Human capital and Economic growth are related to each other. Human capital influences
economic growth and can generate an economy through knowledge and abilities.

Meaning of Human Capital

Human capital refers to the stock of skill, ability, expertise, education and knowledge in a
nation at a point of time. We need investment in human capital to produce more human
capital out of human resources.
Nations require adequate human capital who are educated and qualified as educators and other
specialists. In other words, we need great human capital to create other human capital like
doctors, engineers, professors, etc which later will become a human asset and contribute to the
economy of the country.
Quick link: Impact of Human Capital on Economic Growth

Impact of Human Capital on Economic Growth

When we talk about economic growth, human capital is the main reason for accelerated
growth and expansion for many countries, which provide investment in human capital. This
gives the best advantages to these countries for providing the best situation for work and life.
A significant advantage in generating a stable environment for growth is that the nation has
the expanded high-quality human capital in fields like health, science, management,
education, and other fields. Here the main components of human capital are definitely human
beings, but presently, the principal component is creative, an educated, and enterprising
person, with a high level of professionalism.
The human capital in the economy manages the central portion of the national wealth of the
country. Hence, all researchers consider that human capital is the most important resource of
the community, more powerful than natural or wealth. In most countries, human capital
determines the rate of development, economic, technological and scientific progress.
(i) Inventions, Innovations and Technological Improvement
1. It will lead to more innovations in the areas of production and related activities.
2. Innovation leads to more growth.
3. It also creates the ability to absorb new technologies.
(ii) Higher Productivity of Physical Capital
1. Human capital increases labour productivity.
2. Trained workers will use the physical capital (like machines etc.) more efficiently.
(iii) Raises Production
1. Human capital formation raises production levels and leads to economic growth by adding
to GDP.
2. Knowledgeable and skilled workers can make better use of resources at their disposal.
(iv) High Rate of Participation and Equality
1. By improving productive measures of the labour force, human capital formation increases
excellent employment.
2. This leads to a high rate of participation in the labour force.
3. It reduces the gap between poor and rich.
(v)Improves the Quality of life
1. Quality of life is indicated by income and health.
2. Income and health depend upon the level of education, skill formation, etc.
3. Human capital formation increases these skills and improves the quality of life of masses.
4. Better quality of population means more economic growth.