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Friday, June 21, 2013

Human Capital: The development of success


Human Capital Theory postulates that the more biological, psychological, creative, knowledge, social, and work skills a person develops the more successfully they are going to be in life.  The theory is often broken into intangible capital that focuses on things like social abilities and tangible capital that focuses more closely on skills and education. In many ways educational attainment and skill development are used to measure human capital. Generally, the human capital a person retains, or can develop, the more beneficial they become to the organization and society. 

Human capital creates an incentive for developing employees to their highest possible skill level. By raising the human capital of an organization it is believed that the organization will become more efficient, creative and productive. The time, effort, and costs are some of the detractors associated with the developing employees. Yet those organizations that do not engage in training generally have stagnant workers stuck in low skilled jobs and in turn maintain lower profits. 

Assuming that each organizations is a process that takes inputs and transforms them into greater outputs it is possible to see how low skilled labor minimizes the opportunities to make profits out of the process. For example, a plant that simply nails a few boards together to create a box, but must purchase pre-cut boards, will make less money per transaction than one that can process the entire chain of development from uncut board to box. When employee skill levels are low the organization must focus on automation and volume to develop enough products to raise profit margins. 

In highly competitive markets it is necessary to move beyond basic rudimentary skills into highly developed reasoning and decision-making abilities. Specialization often occurs as people seek to maximize a smaller set of skills for higher productivity. At the executive and management level a greater level of general skills are needed to complete a variety of reasoning tasks on a complex global scale. Education becomes a medium to this growth.

The very education a person chooses to raise their human capital is based in expectations, perceptions and beliefs (Van der Merwe, 2009). Such people who choose to pursue a high level of education do so because of an expected economic, personal, and social return. Intellectual markets seek to recruit from that education and experience to maximize their market opportunities. 

On a macro level human capital, education, and skill obtainment have something to do with the overall productivity of a nation. When regions, nations, and cities retain more skilled employees they are able to foster more productivity and earn higher profits than areas where low skills abound. According to research by Neagu (2012) on 22 countries it found that nations with the highest level of productivity also had the highest level of human capital. 

Whether one is discussing the individual level, the organization level, or the national level the development of human capital is important for economic success. Where productivity and creativity are high so are the opportunities for financial success. In today’s world, many emerging countries can compete on low skilled labor and therefore nations must adapt and develop to retain their financial strength. Through organizational training, formal education, and experimentation people develop higher sets of skills that they can use to enhance their own earning power and sell on the market for larger economic improvement. 

Neagu, O. (2012). Labour productivity and human capital in the EU countries: an empirical analysis. Annals of the University of Oradea, Economic Science Series, 21 (1). 

Van der Merwe, A. (2010). Does human capital theory account for individual higher education choice? International Business & Economics Research Journal, 9 (6).

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