How do managers measure human capital?
BY STEVEN NICKOLAS Updated Mar 23, 2015
Human capital is the knowledge, skill sets and intangible assets that add economic value to an individual. Human capital is not a static measure and can be improved. It is an intangible asset and is just as valuable as a tangible asset. A manager can use various measures to evaluate the economic value added by his staff. One approach a manager can use is measuring human capital as a return on investment (ROI).
Since human capital can be built upon through investing in employees’ skill sets and knowledge through higher education and workshops, a manager can calculate the investments made on human capital. Managers can calculate the total profits a company generates before and after investing on its employees’ capital. The ROI of human capital is calculated by dividing the company’s total profits by its total investment on human capital.
For example, suppose company TECH, a technology company, launches a new program to invest in its employees’ knowledge and skill sets in order to increase productivity and creativity. Assume the company invests $1 million into human capital and has total profits of $20 million. The managers of TECH can compare its human capital’s ROI year over year so they can track improvements of profitability and whether it is linked to the current program.
Managers can also compare the ROI of human capital to other companies to gauge how well the company’s investments in human capital are, relative to the industry. In the example above, TECH has a ROI of human capital of 20; managers can compare this to other companies of the technology industry. Suppose the industry average of human capital’s ROI is 8; this signals to managers that the company’s program is sufficient and outperforms other companies.
How do firms improve their employees’ human capital?
BY STEVEN NICKOLAS Updated Mar 25, 2015
Human capital describes employees’ knowledge, skill sets and motivation that provide economic value to a firm. It is important for a firm to engage in developing its employees’ human capital to grow the firm. Improving employees’ human capital will result in higher morale, increased productivity and a sense of belonging to a firm. Human capital is not static and can be improved through education. A firm can improve its employees’ human capital through continuing education and on-site education.
A company could look to invest in educating an employee by offering to pay some or all of his college tuition. Investing in an employee’s college education prepares him for work in more advanced positions within the company. For example, suppose an employee is working for the engineering division of a firm. The firm can increase its human capital by investing in a graduate business degree for the engineer.
A company can use on-site education such as workshops to increase its employees’ human capital. Through on-site workshops, a firm can improve its employees’ skill sets. For example, a company can create a workshop to teach its employees a programming language and data analysis. This equips the employees with a new skill set and helps to improve human capital.
Another way firms can improve their human capital is by offering seminars. These seminars provide employees with the opportunity to learn from experts who have similar work functions. This could lead to the exchange of ideas, tips and new techniques to increase the employees’ overall efficiency.
Human Capital vs. Physical Capital: What’s the Difference?
BY CHRISTINA MAJASKI Updated Apr 14, 2019
Human Capital vs. Physical Capital: An Overview
Capital is the lifeblood of a corporation. It allows a business to maintain liquidity while growing operations. Generally, capital is used to refer to physical assets in business. It is also used to refer to how companies obtain physical assets. Both physical capital and human capital are important. Here are the differences between the two.
Physical capital consists of manmade goods that assist in the production process. Cash, real estate, equipment, and inventory are examples of physical capital. Physical capital values are listed in order of solvency on the balance sheet. The balance sheet provides an overview of the value of all physical and some non-physical assets. It also provides an overview of the capital raised to pay for those assets, which includes both physical and human capital.
Physical capital is recorded on the balance sheet as an asset at historical cost, not market value. As a result, the book value of assets is generally higher than market value. Accountants refer to physical capital as a tangible asset.
Intangible assets are non-physical capital. A balance sheet only lists intangible assets when they have identifiable values. Intangible assets can’t be touched, but they are often represented by a legal document or paper.
Human capital is represented by more than the company brand. Harvard University is not Harvard University because of its crimson logo. The value of Harvard University is in its human capital. Human capital includes the knowledge base of the employees and is often measured by the quality of the product. It also refers to the network of the employee base and the general level of influence they have on the industry.
Examples of intangible assets include intellectual property such as brands, patents, customer lists, licensing agreements, and goodwill. When one company acquires or purchases another, and the purchase price is more than the physical assets it purchases, it creates goodwill. The difference is recorded as goodwill, and one of the largest components of goodwill is human capital. In fact, goodwill is one of the only places where an analyst can find a value for human capital on the balance sheet.
Capital is the lifeblood of a corporation. It allows a business to maintain liquidity while growing operations.
Unlike physical capital, which is easy to find on the balance sheet (and in the notes to the balance sheet), the value of human capital is often assumed. In addition to goodwill, analysts can value the impact of human capital on operations with efficiency ratios, such as return on assets (ROA) and return on equity (ROE).
Investors can also determine the value of human capital in the markup on products sold or the industry premium on salary. A company is willing to pay more for an experienced programmer who can produce a higher-margin product. The value of the programmer’s experience is in the amount the company is willing to pay over and above the market price.
The Bottom Line
While human capital can be difficult to measure, the impact of investments in human capital can be measured and analyzed with the same ratios used to measure and analyze the investment performance of physical assets. Investments in physical and human capital both lead to fundamental improvements in the business model and better overall decision-making.
- Both physical capital and human capital are important to businesses.
- Physical capital consists of manmade goods that assist in the production process.
- Human capital is represented by more than the company brand.
REVIEWED BY WILL KENTON Updated May 28, 2019
What Is Human Capital?
Human capital is an intangible asset or quality not listed on a company’s balance sheet. It can be classified as the economic value of a worker’s experience and skills. This includes assets like education, training, intelligence, skills, health, and other things employers value such as loyalty and punctuality.
The concept of human capital recognizes that not all labor is equal. But employers can improve the quality of that capital by investing in employees—the education, experience, and abilities of employees all have economic value for employers and for the economy as a whole.
Human capital is important because it is perceived to increase productivity and thus profitability. So the more a company invests in its employees (i.e., in their education and training), the more productive and profitable it could be.
Understanding Human Capital
An organization is often said to only be as good as its people. Directors, employees, and leaders who make up an organization’s human capital are critical to its success.
Human capital is typically managed by an organization’s human resources (HR) department. This department oversees workforce acquisition, management, and optimization. Its other directives include workforce planning and strategy, recruitment, employee training and development, and reporting and analytics.
Human capital tends to migrate, especially in global economies. That’s why there is often a shift from developing places or rural areas to more developed and urban areas. Some economists have dubbed this a brain drain, making poorer places poorer and richer places richer. Volume 0%
Calculating Human Capital
Since human capital is based on the investment of employee skills and knowledge through education, these investments in human capital can be easily calculated. HR managers can calculate the total profits before and after any investments are made. Any return on investment (ROI) of human capital can be calculated by dividing the company’s total profits by its overall investments in human capital.
For example, if Company X invests $2 million into its human capital and has a total profit of $15 million, managers can compare the ROI of its human capital year-over-year (YOY) in order to track how profit is improving and whether it has a relationship to the human capital investments.
- Human capital is an intangible asset not listed on a company’s balance sheet and includes things like an employee’s experience and skills.
- Since all labor is not considered equal, employers can improve human capital by investing in the training, education, and benefits of their employees.
- Human capital is perceived to have a relationship with economic growth, productivity, and profitability.
- Like any other asset, human capital can depreciate through long periods of unemployment, and the inability to keep up with technology and innovation.
Human Capital and Economic Growth
There is a strong relationship between human capital and economic growth. Because people come with a diverse set of skills and knowledge, human capital can certainly help boost the economy. This relationship can be measured by how much investment goes into people’s education.
Some governments recognize that this relationship between human capital and the economy exists, and so they provide higher education at little or no cost. People who participate in the workforce who have higher education will often have larger salaries, which means they will be able to spend more.
Does Human Capital Depreciate?
Like anything else, human capital is not immune to depreciation. This is often measured in wages or the ability to stay in the workforce. The most common ways human capital can depreciate are through unemployment, injury, mental decline, or the inability to keep up with innovation.
Consider an employee who has a specialized skill. If he goes through a long period of unemployment, he may be unable to keep these levels of specialization. That’s because his skills may no longer be in demand when he finally reenters the workforce.
Similarly, the human capital of someone may depreciate if he can’t or won’t adopt new technology or techniques. Conversely, the human capital of someone who does adopt them will.
A Brief History of Human Capital
The idea of human capital can be traced back to the 18th century. Adam Smith referred to the concept in his book “An Inquiry into the Nature and Causes of the Wealth of Nations,” in which he explored the wealth, knowledge, training, talents, and experiences for a nation. Adams suggests that improving human capital through training and education leads to a more profitable enterprise, which adds to the collective wealth of society. According to Smith, that makes it a win for everyone.
In more recent times, the term was used to describe the labor required to produce manufactured goods. But the most modern theory was used by several different economists including Gary Becker and Theodore Schultz, who invented the term in the 1960s to reflect the value of human capacities.
Schultz believed human capital was like any other form of capital to improve the quality and level of production. This would require an investment in the education, training and enhanced benefits of an organization’s employees.
But not all economists agree. According to Harvard economist Richard Freeman, human capital was a signal of talent and ability. In order for a business to really become productive, he said it needed to train and motivate its employees as well as invest in capital equipment. His conclusion was that human capital was not a production factor.
Criticism of Human Capital Theories
The theory of human capital has received a lot of criticism from many people who work in education and training. In the 1960s, the theory was attacked primarily because it legitimized bourgeois individualism, which was seen as selfish and exploitative. The bourgeois class of people included those of the middle class who were believed to exploit those of the working class.
The human capital theory was also believed to blame people for any defects that happened in the system and of making capitalists out of workers.
economics study human action and behavior?
BY SEAN ROSS Updated Jul 24, 2018
In many respects, economics is more similar to social sciences such as psychology and sociology than physical sciences such as chemistry and biology. Economics (particularly microeconomics) is ultimately concerned with why, when and how human beings trade with each other. Different schools of thought have taken the field toward increasing levels of mathematical sophistication and model-based regression forecasting, but the building blocks continue to be human actors and their behaviors.
Consider the laws of supply and demand in economics. When placed on a microeconomic chart, it looks as though price is determined through a mechanical adjustment based on the quantity of a product and the number of buyers in the market. In reality, a price is the agreed-upon level at which a seller is willing to part with a good and the buyer is willing to assume it. Consumers have to compete with other consumers when bidding for a good. Producers have to compete with other producers for those consumers. It’s the actions of individual actors that determine economic reality – not the other way around.
The field of economics attempts to understand the patterns of individual decisions within the context of a world that has scarce resources.
Human Action and Determining Value
Economic actors will regularly engage in transactions that they anticipate will make them better off. If a consumer buys a loaf of bread for three dollars, he/she is implicitly stating that they value the bread more than three dollars. The seller, by offering the loaf for three dollars, is implicitly stating that the three dollars are more valuable than the bread.
Presumably, the general market for bread in the area suggests that three dollars is an acceptable price to entice businesses to become bread retailers and assume the associated risks. This also means that wheat farmers are sufficiently compensated, transportation is economically feasible and hundreds (if not thousands) of other human actions can be coordinated in a sustaining way.
Each actor in the chain of financing, production and consumption is receiving enough value to entice their cooperation. To save time, economics studies the price rather than breaking down every single trade, transaction and motivation. The root is a huge series of human value judgments and behaviors. The price, in a sense, economizes on the information.
Analyzing and Understanding Human Behavior
Economics appears to be superficially concerned with abstractions such as demand curves, production possibilities frontiers or interest rates. None of those inputs actually exist in a tangible sense. However, the root is always individual human action. Every actor is simultaneously coordinating his activities in a meaningful, value-driven way. Those values and actions are dynamically captured through broad economic indicators and subsequently analyzed.
Human action cannot be predicted with any certainty. No economist knows how much any single consumer will be willing to pay for a 50-inch television in 2024, for example. A basic understanding of human action can help economists identify meaningful tendencies in resource allocation, however.
HUMAN CAPITAL 7:6