Human capital definition
/What is Human Capital?
Human capital is the value represented by the skills and experience of employees. When properly deployed, human capital should result in a high level of productivity, which in turn increases a company's market position, profits, and/or cash flows. A logical outcome of the human capital concept is that a business can increase it by investing in the training of its employees. This training may be accomplished not only through the use of formal training, but also by implementing a policy of hiring from within, so that the experience level of employees increases as they move upward through increasingly more challenging positions. Job rotations can also be used to force employees to gain experience in a number of functional areas.
When a business has developed or hired a high level of human capital, a concern will be its ability to retain employees. A low level of employee turnover can be achieved by attending to the work environment, offering competitive compensation and benefits, and training managers in proper supervisory skills. Otherwise, a business will find that its human capital trickles away, and may then be employed by more attentive competitors.
A higher level of human capital in society should result in an increase in wages over time.
Related AccountingTools Courses
Responsibility for Human Capital
The department best positioned to administer and improve upon a company’s human capital is the human resources department. It can discuss training needs with employees, arrange for training classes, and take whatever steps are needed to minimize employee turnover. It can also develop plans for when to transfer employees into more advanced positions. A further activity is to recommend wage increases as employee skill levels increase, in order to keep them from leaving to work for other companies.
Valuation of Human Capital
The value of human capital is not recorded anywhere in the financial statements of an organization, nor can it be created as an intangible asset as a result of a business combination. In fact, human capital is not owned by an organization at all, but rather by its employees. This is why investments in human capital are charged to expense in the period incurred - no quantifiable owned asset is created.
Problems with Human Capital
The concept of human capital, while valuable for understanding the economic contributions of education, skills, and health to individual and societal productivity, has faced several criticisms and challenges. Below are some of the main problems associated with the concept:
Treats humans as assets. Critics argue that the concept reduces individuals to economic units or "capital," focusing solely on their economic value while ignoring their intrinsic worth as human beings.
Overemphasis on productivity. It frames people primarily in terms of their contributions to economic growth, which can overshadow other dimensions of human life, such as creativity, morality, and relationships.
Commodification of labor. The idea risks commodifying human abilities, treating education, skills, and health as mere investments to enhance economic output.
Reinforces social inequality. Policies based on human capital theory may inadvertently favor those with existing access to education and opportunities, exacerbating inequalities.
Difficult to measure. Measuring human capital is challenging, due to the intangible nature of many skills, knowledge, and qualities.
Neglects non-economic factors. Metrics often fail to account for social, emotional, and cultural contributions that do not have direct monetary value.
Focuses on economic returns. The concept prioritizes economic outcomes, often at the expense of well-being and life satisfaction.
Neglects structural factors. The theory often emphasizes individual effort and responsibility for skill acquisition, downplaying the role of societal and policy-level interventions in enabling human development.
Causality issues. The relationship between human capital and economic growth is complex and bidirectional; improvements in human capital might stem from, rather than cause, economic growth.
Short-term focus. Policies based on human capital theory may prioritize immediate economic gains over long-term human development and equity.
Neglects broader societal goals. By emphasizing economic returns, such policies might underfund areas like arts, humanities, and social sciences, which have broader societal benefits.
By addressing these challenges, a more holistic and equitable approach to human capital can be developed that balances economic considerations with social, ethical, and humanistic values.