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Human Capital Theory: Characteristics & Investment

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  • 0:06 Introduction to Human Capital
  • 0:56 Elements of Brand Preference
  • 1:56 Characteristics of…
  • 3:08 Investing in Human Capital
  • 4:08 Measuring Human Capital
  • 5:29 Lesson Summary
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Lesson Transcript
Instructor: Savannah Samoszuk

Savannah has over eight years of hotel management experience and has a master's degree in leadership.

Human capital theory started back in the 17th century. This lesson will give a brief history of human capital and its characteristics, explain how to measure it, and provide a relevant example of human capital theory.

Introduction to Human Capital

Mary runs her own small business, and she has been struggling to keep up with competitors who are ahead of her technologically. They are able to offer online orders and use technology to make their service faster. When Mary considers her own team, she recognizes that she has had the same team for ten years, and they provide significant experience in the business. However, she discovers that she needs to invest in more education and training for her employees. She may also need to hire new employees who are more familiar with newer technology to help her business.

This shows the various ways that Mary needs to invest in human capital to improve her business. Mary isn't the only person thinking this way. Human resource managers in organizations of all sizes need to focus on human capital because understanding and investing in it can lead to organization success.

Elements of Human Capital

The official theory about human capital is relatively recent, but the concept of human capital itself started as far back as the 17th century. In the past, human capital meant the labor power of people, a person's earning potential, or even output minus consumption per person. Today, we think about this a little differently. Human capital is defined as the knowledge, skills, assets, and experiences that an individual has which add value to a company. It explains that not every employee has the same value; it depends on their knowledge, skills, and assets.

Human capital is a way to determine economic performance in a workforce and this idea of human capital itself gave rise to human capital theory. This theory has developed over time but has continued to be a theory that shapes government policies and business decisions. In essence, human capital theory asserts that human capital is a key determinant of economic success in all industries.

Characteristics of Human Capital

Every employee brings a different value of human capital to the workforce. Human capital, as we discussed, is characterized by factors such as a person's experience, tenure, education, training, and health. For example, the earnings of a person with a college education have shown to be higher in most cases than a person with less education. Also, a person's experience in a certain industry can add value to that person's human capital compared to a new entry. Consider Tom. He has worked in the engineering industry for thirty years, and his experience offers value to a new company because he knows how the industry works and its history.

Human capital theory derives from what we might call neo-classical economics, which separates economic activities from social activities, almost as though the economy is a separate world outside of society itself, and it assumes people act in generally rational and intentional ways at all times. A lot of the nuance of human activities and social meaning is lost in this view of the world. Human capital theory also tries to make very universal statements and doesn't concern itself with more discrete or specific explanation of less general phenomena.

Investing in Human Capital

A key idea, given what we know about human capital, is that investing in human capital is hugely important. The mistake some companies make is thinking they should simply hire people with valuable human capital, and they forget that the quality of employees can be improved by investing in them. The education, experience, and abilities of employees have an economic value for employers, but it is possible to turn people the business already has into hugely valuable employees!

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