Human Capital

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When most people think about investments, people think of stocks, banks and in general everything that has to do with money, but it is also possible to invest in education, training and experience. Human capital is the stock of knowledge and skills, embodied in an individual as a result of education, training and experience that makes the individual more productive in the labor market INSERT INTO `cofwp_posts` VALUES (De la Fuente & Ciccone, 2002). It is now accepted that the foundation of human capital is based on knowledge and skills acquired by an individual throughout an individual???s lifespan. Human Capital is a non-tradable good.

Capital is defined as a factor of production. In neoclassical theory, capital is defined on the aspects of production and represents the status of investments made in the past in the economy, which requires the exchange of current consumption for future consumption. How to acquire Human Capital Whether an individual acquired or inherited human capital, skills and knowledge are embodied into every individual. Individuals who acquire human capital do not always have control over of how and what kind of human capital they acquire. Human capital is attained formally or informally INSERT INTO `cofwp_posts` VALUES (Laroche, Merette & Ruggeri, 2001).

Informal human capital is acquired through a variety of social organizations, personal contacts, self-teaching and work experience like learning by doing. Formal human capital acquirement is gained through established institutions and programs, where skills and knowledge are transmitted in educational environments. Human capital can not only be formal or informal, it can also be general or specific. Knowledge and skills are said to be general human capital, because there is a great range of activities where you can use them, if they are easily exchangeable from one firm to another without any significant loss of value.

Sometimes human capital can only be used in a limited number of settings and, if a termination of employment happens, it represents a significant loss of value because of the initial investment. The knowledge and abilities humans are born with may not always be fully used. This might happen due to a gap between the acquired and required skills, which are demanded by the labor market from economic changes from the labor market distortions or from individuals? conscious or unconscious decisions not to use and exploit their potential.

Especially when the individuals are younger, they are not able to make rational decisions about their needs and wants for human capital and they also do not have the ability to evaluate the potential of their native skills. During the first years of life, the decisions are not made by the infant; instead they are made by parents, teachers, governments, and society. As people get older, they start to make more independent decisions; they start to adopt the decision making process on their own human capital investment.

A person? s ability to additionally invest in human capital depends on past investments and on their social environment, the influence of their friends and family and of the institutional setting in which they live. All of these shape a person? s attainment of human capital. History The modern theory of human capital has only been in place for a little over 50 years, but the concept of human capital is much older. The first mention was as early as 1691, when Sir William Petty estimated the value of human capital to demonstrate the power of England.

He presented a cost-benefit analysis for all the lives lost in the war INSERT INTO `cofwp_posts` VALUES (Kiker, 1966). Human capital has long been accepted as a source of progress and economic growth. One of the world? s first classical economists who mentioned human capital in his publications was Adam Smith in 1776. Since then, the concept of human capital was forgotten and rebirthed in the 1960? s with the publications of Gary Becker, Charles Schultze and Jacob Mincer. These economists stated that human capital is a stock of skills through training, education, experience and that increases the value of a person as an employee.

They also examined how the market price of labor was affected by better training, education, etc. Resource Based Economy vs. Knowledge Based Economy Human capital induces growth by stimulating technological improvement or by enhancing labor productivity. In the early years, most economists supported a resource based economic also known as labor based economy to achieve and create new products. The resource based economy is created by the contribution of labor force as other production factors such as financial capital, land, machinery, and labor hours.

The resource based economy concept was introduced by Jaques Fresco. He believes that there are plenty of resources to meet the needs of all humans, if all global resources are managed sensibly. Fresco supports a complete reform of society, without any of the present political, economic, monetary system. INSERT INTO `cofwp_posts` VALUES (Fresco, 1969) After the rebirth of human capital in the 1960? s, a shift from a resource-based economy to a knowledge-based economy took place. Knowledge is the major force in today???s productivity and economic growth; it shifted the focus to information, technology and economic performance.

For a knowledge-based economy to function, it needs highly- skilled workers, so it is important to invest in knowledge to increase the productivity to increase the production for new products and processes. The knowledge- based economy puts great importance on the distribution and use of information and knowledge as well as its foundation. Impact of Human Capital The influence of human capital can be categorized into individual, organization and society. Becker INSERT INTO `cofwp_posts` VALUES (1993) stated that from the perspective of an individual in the internal market, the individual???s income may increase due to increased productivity.

All individuals go through some kind of basic education like high school and/or college. Through education, the individual???s human capital increases, which means that the chances of getting hired by a company increase with more education? After the individual gets hired, the job might require some sort of training to meet all the requirements for the particular job to complete job activities. The focus lies on the individuals??? knowledge, abilities, and skills in the company.

On the other hand, once employees are trained for the job, they can take all the experience and knowledge with them and leave the company, and start to work at a different establishment. This is an example of a negative aspect of human capital only individuals can claim ownership to their own human capital. The training provided is not only beneficial to the firm, but also to other companies. When a trained employee leaves a company, it can be expensive for a business, which is why many companies started to appreciate their employees more, with more vacation, better training or an increased salary.

Hansson INSERT INTO `cofwp_posts` VALUES (2008) proposes a solution for this problem; he recommends that in competitive labor market where salaries increase because of the companies training, employees should pay for this type of training themselves. Hansson also states that the employees can either pay directly by picking up the cost of training or that the individual completes the training after work hours or indirectly by receiving a wage below the individual???s human capital or productivity during training periods.

On the other hand, special training such as learning a special computer program especially designed for the firm should not be paid for by the employee. Specific training does not influence wages or increase the employee???s market value. The employer may share some of the increased productivity with the employee in order to prevent the trainee from leaving the firm before the specific training investment is retrieved. Theoretically, the introduction of staff turnover into the equation will result in joint investments in firm-specific human capital.

This is because the higher wage for employees receiving specific training leads to an excess supply of workers willing to be trained. INSERT INTO `cofwp_posts` VALUES (Hansson, 2008) Lepak & Snell INSERT INTO `cofwp_posts` VALUES (1999) suggested that the prospective of human capital is related to the core competence and effectiveness of an organization. As mentioned above, an individual???s human capital can influence the organizational human capital such as competence, routines, work environment and relational investment. The social standpoint of human capital is the fusion of both individual and organizational prospects.

Alexander INSERT INTO `cofwp_posts` VALUES (1996) shows that the there is an opportunity for democracy, human rights and political stability, which means that human capital and social perception are grounded on socio- political development. Many countries have tried to measure their human capital to estimate its current value and status. The measurement is a crucial source in terms of proposing and applying policies regarding human resources. Ashton and Green INSERT INTO `cofwp_posts` VALUES (1996) suggest that it is crucial to connect human capital and economic performance, and that it should only be mentioned in a social and political context to measure human capital.

References

http://www.mckinsey.com/client_service/organization/case_studies/growth_through_talent

http://www.mckinsey.com/client_service/organization/expertise/human_capital

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