Human Capital: Definition and Meaning

The importance of human capital to a corporate world or in everyday life is one of the most essential features, as it ensures overall quality of life. Specifically, in the corporate world, human resources (HR) departments, which are in charge of managing and optimising the workforce, are responsible for managing such different skill sets. For example, skill set of hiring, employee training, employee retention and development, reporting, and analytics. Besides, workforce planning and strategy are also included.

What is the Meaning of Human Capital?

A nation's current pool of skill, aptitude, expertise, education, and information is referred to as its "human capital." To create more human capital from human resources, we must invest in human capital. Countries need a sufficient amount of educated, competent human capital in the form of teachers and other specialists.

In other words, we require excellent human capital to produce other human capital, such as physicians, engineers, professors, etc., who then develop into human assets and support the national economy.

The idea of human capital acknowledges that not all work is created equal. Employers can, however, raise the quality of that capital by spending money on their workforce. The knowledge, skills, and experience of the workforce can help with this. For both employers and the economy at large, all of this has significant economic worth.

Historical Development of Human Capital

Human capital has been a concept since the eighteenth century. In his book β€œAn Inquiry into the Nature and Causes of the Wealth of Nations,” which examined a nation's wealth, knowledge, training, abilities, and experiences, Adam Smith made reference to the idea.

Adams argued that enhancing human capital through education and training results in more successful businesses, increasing the overall wealth of society. Smith claims that this makes it a win for everybody.

The phrase was more recently used to refer to the labour needed to produce manufactured items. However, the most recent idea was developed by a number of economists, including Gary Becker and Theodore Schultz, who used the phrase in the 1960s to express the value of human potential.

In Schultz's view, human capital may be used to raise the quality and volume of output just like any other kind of capital. This would necessitate spending money on employees' benefits, benefits enhancement, and education.

Human Capital and Economic Growth

Human capital may contribute to the economy because there is a strong correlation between it and economic growth. People have a wide range of knowledge and talents, which explains why. How much money is spent on people's education serves as a proxy for this relationship. Some governments provide higher education at little or no cost because they understand the connection between human capital and the economy. More educated workers frequently earn better salaries, which enables them to spend more money.

Human Capital and Education

The study of human capital has shown to be extremely fruitful, having implications for individuals, organisations, and governments. Education as an investment in this capital has been the primary focus of the huge amount of research that has been done on the subject overall. Education is in charge of creating the human capital resources needed by the economy and society, which is a critical component of the productive foundation. With the improvement of human capabilities, social norms, habits, and output, education improves a society's quality of life.

An investment in education is necessary for a country to foster economic growth. One cannot overstate the importance of doing so for sustainable development. t greatly aids in economic growth and sustainable development. The measurement of the human capital stock has undergone a number of methodological developments. Modern literature assesses costs, income, education, and health in order to measure them. It is also a major contributor to differences in firm ownership among groups, particularly in terms of education and language proficiency.

Importance of Human Capital

Following are the major importance of human capital βˆ’

  • It is necessary since it boosts productivity in a number of ways. First, the hypothesis states that investing in education is an investment in skills that increases production.

  • A person's human capital stock increases with education, increasing productivity and promoting economic growth.

  • The accumulation of scientific knowledge, which is a measure of human capital, is what leads to new designs and concepts. Investment in such capital also encourages a rise in physical capital, which leads to economic growth by advancing research and development.

  • Learning by doing or via purposeful effort, people continuously enhance their knowledge, which boosts labour and capital productivity and supports economic progress.

Criticisms of Human Capital

Major criticisms of human capital are βˆ’

  • The concept of human capital has drawn criticism from many individuals who work in the field of education and training.

  • In the 1960s, the theory faced criticism mostly for supporting bourgeois individualism, which was perceived as rapacious and exploitative.

  • The middle-class individuals who made up the bourgeoisie were accused of taking advantage of the working people.

  • The idea was also supposed to make people accountable for any systemic problems and transform workers into entrepreneurs.

Does Human Capital Depreciate?

Human capital is susceptible to depreciation just like any other asset. Wages or the capacity to remain in the workforce are frequently used to gauge this. The most frequent reasons for human capital to deteriorate are unemployment, accidents, mental illness, and a failure to keep up with technological advancements.

Think about a worker who possesses unique expertise. If they have a protracted period of unemployment, they might not be able to maintain these levels of specialization. This is due to the possibility that when they ultimately reenter the workforce, their abilities may no longer be in demand.


The word "human capital" refers to attributes like a worker's expertise and experience. Because not all labour is created equal, businesses can increase their human capital by funding the benefits, training, and education of their staff members. The relationship between human capital and economic growth, productivity, and profitability is widely accepted. Like any other asset, human capital can lose value over time as a result of extended spells of unemployment and a failure to keep up with advancements in technology.

Frequently Asked Questions

Q1. Who is the father of human capital?

Ans. The human capital hypothesis was mainly given by Gary Becker and Theodore Schultz in the 1950s and early 1960s. Becker realised that investing in personnel was no different from investing in capital equipment, as both were production variables.

Q2. What is the human capital risk?

Ans. The process of managing the human capital or human resources of a company requires understanding the potential hazards involved. An organisation can more easily hire new employees and boost employee morale when human capital risk is properly managed.

Q3. What are the benefits of human capital formation?

Ans. Health and wealth are influenced by education, skill development, etc. These talents are increased by the development of human capital, which also raises the standard of living for most people. More economic growth is correlated with higher population quality.

Q4. How is health a source of human capital?

Ans. For the development of human capital, health is a crucial source. An unhealthy person will never be as productive or as helpful to the country as a healthy person. Spending money on health will directly provide the country with a healthy labour force.

Q5. What is the transformation of human capital?

Ans. By concentrating on what the organisation can do for its people, human capital transformation, according to Deloitte, helps businesses better "design, develop, and realise their human capital management strategy."

Updated on: 09-May-2023


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