What Is Human Capital? - Importance to An Organization

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  • 0:03 Human Capital Defined
  • 0:40 Importance of Human Capital
  • 1:21 The Role of Human…
  • 4:02 Lesson Summary
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Lesson Transcript
Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Expert Contributor
Joseph Shinn

Joe has a PhD in Economics from Temple University and has been teaching college-level courses for 10 years.

All organizations require human capital to function and accomplish their goals. In this lesson, you'll learn what human capital is, its importance and the role that human resource management plays in it. A short quiz follows.

Human Capital Defined

Dave is a human resource specialist for a smartphone company, and his job is to find and cultivate human capital. Capital is a type of asset that allows a business to make more money or otherwise further its goals. Examples of capital include plant, tools, and equipment. Human capital is the sum total of a person's knowledge and skills that the company can use to further its goals. For example, Dave's company needs people with knowledge and skills in engineering, computer software design, manufacturing, finance, law, accounting and management, just to name a few.

Importance of Human Capital

Until we develop artificial intelligence, we pretty much need human capital to accomplish anything in the world today. In fact, it takes human capital to create some other forms of capital. While a machine may eliminate the need to have hundreds of production workers make stuff, it still took human capital to design and build the machine. And as we move deeper and deeper into a knowledge-based economy that depends on information, knowledge and high-level skills, human capital will become increasingly important. Dave's smartphone company is an example of a knowledge-based business where information, data and knowledge is paramount for success.

The Roles of Human Resource Management

Human resource management is involved in acquiring, cultivating, and retaining human capital. Dave and his department are responsible for finding, recruiting and selecting people possessing the right knowledge, skills and abilities that the company needs. In other words, the staffing function can be thought of as acquiring human capital.

Employees will come on board with a general level of human capital, including communication skills, the ability to collect and process information in various ways and the ability to critically think and problem solve. Some employees will have specialized knowledge, such as software engineering and management skills. However, sometimes human capital needs to be refined like crude oil is refined into gasoline.

As a human resource specialist, Dave may build up firm-specific human capital through orientation and training. Firm-specific human capital is knowledge and skills that are specific to a particular business that make a person more productive within the specific business. Examples range from knowing how to operate the company's custom computer software to understanding the company's specific organizational culture to knowing where to find the restrooms.

Human capital can be increased through education and training. Dave can offer in-house educational and training programs to keep employees up to speed on their areas of expertise. The company can also reimburse for outside educational and training opportunities, ranging from seminars to certification programs to college degrees relevant to the company's needs.

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Additional Activities

Questions for Further Reflection:

  1. Consider the concept of capital. Why would a company be unable to provide any goods or services without capital?
  2. Consider and write a short paragraph about the concept of human capital. In your answer, be sure to discuss how more human capital in a company would be beneficial.
  3. List and describe three ways that a worker could increase his or her human capital prior to starting a job. When describing these ways, discuss how these acts increase human capital.
  4. Often, an employee will increase his or her human capital with a company by simply gaining on-the-job experience. Explain how an employee could become more productive using this approach alone.
  5. Consider a call center that specializes in handling customer complaints. If the head of this call center wanted to improve his/her employees' human capital as it relates to their jobs, what type of training could be offered to them?
  6. Consider the role of a human resources specialist, and then respond to the following questions:
  • A human resources specialist wants to make sure that his or her firm won't spend money on training to increase employees' human capital only to have those employees leave the firm. How could the specialist achieve this goal?
  • What role does a human resources specialist play prior to an employee actually being hired by a firm?

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