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
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
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).