Human Capital

Human capital consists of the knowledge, skills, general intelligence, educational attainments, and personality characteristics of an individual and covers all strengths and assets of a person. The concept is rooted in two different fields, economics and psychology, thus resulting in two somewhat different perspectives.

Human Capital in Economics

Economists as well as industrial and organizational psychologists see human capital as the sum of all abilities that enable an individual to undertake a certain job, thereby ensuring the success of a company. In this vein, human capital consists of work-related skills and information representing specific knowledge. Such information is referred to as “know what” and “know why.” “Know what” entails knowledge about “facts” and is thus close to what is conventionally called information. “Know why” refers to knowledge about principles and theories in relation to the organization and functioning of the natural world, society, and the human mind. Whereas the first type of knowledge can be communicated relatively easily, the second requires more insight and at times practical experience, which is more difficult to establish in individuals. Both types of knowledge relate directly to certain capabilities.

Human CapitalEven if human capital is successfully implemented in an individual, it does not automatically result in economic growth or other positive outcomes in and of itself. Rather, it must be incorporated into the production of goods and services. As a first step, educated and skilled individuals must be formed via educational and training systems. Then, in a second step, ways must be found to place these individuals in positions that match their abilities and skills, organize their work in ways to ensure the utilization of their competencies, and motivate them to use their knowledge and their skills in the work setting. When this set of prerequisites and conditions does not exist, investment in human capital will not pay off for the state, the company, or the individual. The effectiveness of any investment in human capital relates both to the conditions of the labor market and to the organization inside a specific firm.

Although fostering the success of a company through the systematic increase of each individual’s level of human capital and by ensuring its utilization through the appropriate placement of employees and the provision of excellent working conditions may seem like a new idea, as early as the last decade of the nineteenth century, leading economists had already recognized mechanisms that relate human capital to productivity and the well-being of an enterprise. The German physicist Ernst Abbe (1840-1905), owner and managing director of the Zeiss company (maker of optical instruments in Jena, Germany), saw the success of a business as being fueled mainly by two sources: the capabilities of the workers and the scientific basis of the firm’s technology. Abbe coined the term “human capital” to describe the set of experience, knowledge, and skills contributed by every employee that enables an enterprise to be competitive in the long term and to accumulate resources. His aim was to maximize human capital and firm-specific resources in the workers to ensure lasting prosperity of the company. In accordance with many of today’s management theories, Abbe saw human capital as being of strategic value to a firm and thus undertook efforts to increase human capital in his workers and tie them to the firm for longer periods of time. The means of reaching this goal were manifold. He offered housing benefits, profit-sharing, health insurance, pensions, holiday pay, and recreational programs for the workers, all very unusual concepts in the 1890s.

Abbe’s guiding philosophy in the management of the company was not rooted in philanthropy. Rather, he strived to guarantee the prosperity and long-term survival of the business, and he succeeded in doing so. Human capital as defined by Abbe and many others was, indeed, shown to be relevant to work performance. The more skills a worker has, the better the results of his or her work. Thus, a company has a primary interest in building up human capital in its employees and a secondary interest in persuading its workers to stay with the respective firm once it has invested in their knowledge and skills. Indeed, companies constantly face the threat of losing the most skilled of their workers to competitors once those workers have accumulated substantial knowledge and built up their own networks of contacts within the industry. More than a century after Abbe’s views were implemented in his company, employee ownership and stock option programs are being discussed as useful strategies with which to tie key employees to the firm. In times of increasing specialization and worldwide competition, the importance of human capital for venture success is growing. Thus, companies invest in their employees’ skills and abilities and do more to create attractive working conditions, especially for young, talented, high-performing individuals.

Human Capital in Psychology

Through industrial and organizational (I/O) psychology, the term human capital found its way into psychological research. In I/O psychology, human capital was seen in much the same way as in economics, with the exception that I/O psychology considers factors beyond simply work-related skills and knowledge. With this perspective, human capital was used more broadly, assessing psychological variables such as an individual’s general intelligence, personality traits, and so-called soft skills, such as problem-solving abilities or leadership skills. Typical outcomes studied in this field were work performance, firm formation rates, and entrepreneurial success. Depending on the outcome measure, however, different assets and traits were identified as being related to positive results. Work performance, for instance, was shown to be predicted by different personality traits, depending on the job in question. Even in jobs that stem from related areas, the profiles of successful employees may show significant differences. Sales managers’ work was shown to have the best outcomes if the individuals were extraverted (i.e., outgoing, social), conscientious (i.e., prudent, planful, diligent), and agreeable (i.e., friendly, indulgent) personality types. Entrepreneurs, however, were shown to be more successful if they were not only extraverted and conscientious but also open to new experiences and, interestingly, if they were not agreeable. In comparing personalities of successful social workers with those of creative engineers, differences are likely to be even more obvious.

Researchers in developmental psychology picked up on the term human capital more or less in a similar vein. Individuals who are intelligent, physically attractive, knowledgeable, and have a number of favorable personality traits, such as a strong achievement orientation (i.e., are high in human capital), are likely to attain higher educational and career levels, show less problematic behaviors, reach higher ages in good health, and report better well-being. Longevity, for instance, was shown to relate to higher levels of conscientiousness in the childhood personality. Accidents and injury deaths were shown to be less likely among conscientious individuals. They were also found to show healthier behavior throughout their lives and have more stable careers and relationships. Very much in line with these findings, adolescents with more human capital were found to be less prone to showing risky behavior. In this sense, higher human capital may increase the ability to foresee possible outcomes of one’s behaviors. If an individual has invested substantial time and energy to obtain a certain educational goal, he or she may think twice when it comes to behavior that might endanger earlier success. In this sense, human capital has been found to be a protective factor, especially in the face of adversity. Children who grow up in unfavorable environments may be less vulnerable to any maladaptive effects if they can face difficulties with sufficient resources, that is, human capital.

In cultural psychology and acculturation research, human capital has been used to describe the skills and experiences that are protective of the individual, especially in an immigrant situation. An individual who has acquired knowledge about another country’s cultural values and the associated behaviors and attitudes of that culture can adjust to the new host country more easily. Such skills, which have been called cultural knowledge, can support access to information and social contact and can contribute to less anxiety and better coping. In addition to cultural knowledge, many other variables have been found to contribute to good adaptation of immigrants, although not necessarily under the heading of human capital. Optimistic, sociable, highly educated individuals have been shown to blend into a new culture more easily than their less advantaged counterparts.

Direct and Indirect Effects of Human Capital

The role of human capital is seen as twofold. There are direct effects, in that the more human capital an individual can draw on, the better the outcomes in all areas listed. There are also indirect effects. Human capital enables utilization of social capital, allowing the pursuit of interests and the subsequent development of self-efficacy. Thus, sociable, friendly, and easygoing people who are intelligent, creative, and open to new experiences are successful in establishing significant social relationships, pursuing interests, and maintaining high levels of self-efficacy—factors that contribute to healthy development, successful educational attainment, and excellent career outcomes. Consequently, human capital, although not explicit in most cases, has played a role in areas of career development and career counseling. The fit between the requirements of a position and characteristics of the person are known to direct outcomes in both work satisfaction and performance. The higher the congruence between individuals’ traits and their work environments, the more satisfied respondents are with their work, the better their work output, and the higher the stability in jobs over time.

Interventions for Fostering the Utilization of Human Capital

Three general principles in interventions address human capital. One is to strengthen the human capital of an individual by fostering work-related skills or knowledge. Such programs are run as part of promotion initiatives in companies or on a private basis, and most of them are not evaluated scientifically. They are tailored specifically to fit the needs either of a certain firm or branch or of individuals wanting to qualify in specific areas. Target groups are employed and unemployed adults. The second principle also addresses the acquisition of individual assets but is directed to more general characteristics of a person, such as self-efficacy, problem-solving skills, and other broader abilities. Programs in this category are often institution based, and many are evaluated by psychologists or related groups. They usually aim to increase the employability of individuals or lower their current and future problem behaviors. Programs of this category usually target adolescents or young adults. The third principle in programs on human capital can be seen in the promotion of individual self-exploration. Exploring one’s traits, abilities, interests, and skills (i.e., one’s human capital) may help one gain insight into careers that would match a personal profile of assets. There are no specific target groups for programs aiming at exploration, though most research on such programs is conducted with adolescent groups.

At first sight, research on the acquisition of human capital appears to have been done almost exclusively in the second category of programs. However, a significant amount of work has centered on the positive effects of a thorough exploration of traits and skills, and yet another body of literature deals with the relationships of certain traits and skills and career outcomes. Both the research on exploration and the work on career-related assets usually do not specify the keyword of human capital, even though they are clearly related to the concept.

Criticism of the Concept

In Germany, human capital was designated as the “worst word of the year for 2004.” The jury making this judgment consisted of artists, journalists, and linguists. Their primary reason for the decision was “the increasing economization of all aspects of human life” and the fact that the term “degrades not only employees but the human being as such to an economic variable.” Although this criticism may seem somewhat unjust and was thus was rejected by major economic leaders and consultant companies, researchers had earlier put forward similar arguments. The concept of human capital was criticized because of its strong notion of individual responsibility. In line with neoclassical economic models, a lack of human capital has often been seen as a personal failure to achieve goals—and thus as an issue of choice and rationality rather than the result of unfavorable social backgrounds or lack of learning opportunities. According to such models, individuals make voluntary decisions to invest in human capital. Following this line, one would have to assume, for instance, that individual disparities are simply a result of choice. However, given socioeconomic and institutional barriers as well as problems of individual discrimination, it is obvious that there is more to the acquisition of human capital than just individual initiative. Individuals have very different opportunities to learn, according to their social and personal backgrounds and characteristics (i.e., gender, family background, disability, age, socioeconomic status of the family of origin, and so forth). The results of individual learning, as mirrored in academic achievement following initial and post-compulsory education, as well as the extent to which a person can make use of other individual resources and assets are clearly related to the educational and economic opportunities afforded that individual.

See also:

References:

  1. Becker, G. 1994. Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education. Chicago, IL: University of Chicago Press.
  2. Buenstorf, G. and Murmann, P. 2003. “Ernst Abbe’s Scientific Management: Insights from a 19th Century Dynamic Capabilities Approach.” Papers on Economics and Evolution 2003-12. Jena, Germany: Max Planck Institute for Research into Economic Systems, Evolutionary Economics Group.
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  4. Johnson, C. F. 2000. “Racial Disparities and Neoclassical Economies: The Poverty of Human Capital Explanations.” Social Science Journal 37:459-464.
  5. Organization of Economic Co-Operation and Development (OECD). 2001. Cities and Regions in the New Learning Economy. Paris, France: Author.
  6. Rees, G. 1997. “Vocational Education and Training and Regional Development: A Conceptual Framework.” Journal of Education and Work 10:141-149.
  7. Schmitt-Rodermund, E. 2004. “Pathways to Successful Entrepreneurship: Parenting, Personality, Competence, and Interests.” Journal of Vocational Behavior 65:498-518.