HUMAN CAPITAL

THE CONCEPT : The origin of human capital can be traced to the emergence of classical economics in 1776, and thereafter developed as scientific theory. The concept of human capital has been explained from different perspectives. From the individual perspective the human capital was recognized as one of important factors for a national economic growth and could contribute to socio-political development and freedom. 

Some economic theorists recognized the human capital as ‘something akin to property’, ‘the productive capacity of human beings and can be closely linked to knowledge, skills, education, and abilities.  Rastogi (2002) conceptualizes the human capital as ‘knowledge, competency, attitude and behavior embedded in an individual’. The second viewpoint on human capital stresses on knowledge and skills obtained throughout educational activities.  This perspective, however, neglects that human being would acquire knowledge and skills throughout his/her own experience. The third viewpoint refers to the human capital as ‘a fundamental source of economic productivity’, as ‘an investment that people make in themselves to increase their productivity’. It is ‘an integration of factors such as education, work experience, training, the level of intelligence, energy, habits  of work, trustworthiness, and the drive to initiative that influence the value of a worker's marginal product’ and  is ‘the stock of skills and knowledge embodied in the ability to perform labour so as to produce economic value’ (Sheffin, 2003).  Some researchers defined that human capital is ‘the knowledge, skills, competencies and attributes in individuals that facilitate the creation of personal, social and economic well-being’ (Loomis, 2007).

CHARACTERISTICS OF HUMAN CAPITAL

1.         EXPANDABLE AND SELF-GENERATING: As compared to physical labour, human capital is broad and includes expandable, self-generating, transportable, and shareable characteristic (Crawford (1991), which are closely linked to the possibility that the stock of knowledge increases individuals’ human capital.

2.      ENDOGENOUS OR EXOGENOUS: The human capital can be expanded by either endogenous or exogenous factors. Original knowledge can be continuously elaborated and developed through the relationship between external knowledge, information, skills, work experiences, and different knowledge-based factors as well.

3.      CORE ELEMENT TO SOLVE OF SCARCITY: In the economic perspective, the human capital focusing on knowledge can be a core element to solve ‘problem of scarcity’ where scarce materials is optimally distributed to economic agents. Through expanding and self-generating the human capital, it is adequately possible that the capital as an economic agent is extended.

4.      TRANSPORTABLE AND SHAREABLE: This characteristic of human capital means that the original holder of knowledge can distribute his/her knowledge to others. The original knowledge-holder’s exclusive ownership is little acceptable, the equivalent distribution between the holders and the takers can be actually realized.

IMPACTS OF HUMAN CAPITAL:The impact of human capital is broadly categorized into three parts,   Individual, Organization, and Society.

1.      INDIVIDUAL PERSPECTIVE: From the individual’s point of view in the internal labour markets, there is a possibility of increasing individual income if the productivity of the individual increases (Becker, 1993; Denison, 1962; Schultz, 1961; Schultz, 1971; Sidorkin, 2007). As the productivity of the individual increases it goes to enhance the amount of human capital, and for that reason several of the employers prefer to hire productive individuals. The better productivity of the individual in the internal labour market increases mobility of the individual. Also the enhancement of productivity in the workplace, the high-productive individual is identified as the employee with opportunities to go to higher level in the internal market (Sicherman, 1991; Galor 1990). On the internalized human capital, an individual easily grasps the possibility to access job related information with high level of human capital, and thereafter he/she can easily get the occupational chances. In the external market, an unemployed person’s human capital influences his/her job-seeking and opportunities for employment (Greider, Denise-Neinhaus, & Statham, 1992).

2.      ORGANIZATION PERSPECTIVE: With respect to organization, the potential of human capital is closely related to core competences and competitiveness of organization. Individual human capital can influence organizational human capital in terms of shared competences, organizational routines, culture of the company and relational capital’ as well. (Lepak & Snell (1999)

3.      SOCIAL PERSPECTIVE: The social perspective of human capital is the combination of both individual and organizational perspective. There is the possibility of human capital for ‘democracy, human rights, and political stability’ on common consciousness of social constituents (McMahon 1999). Human capital can increase social consciousness of constituents within community (Beach, 2009); As a result, the connection between human capital and social consciousness is based on a close inter-relationship resulting in socio-political development (Alexander, 1996; Grubb &; Sen, 1999).

DIVISION OF HUMAN CAPITAL: Human capital is divided into general and specific one (Becker 1964)

General human capital consists of generic knowledge and skill, which is not specific to a task or a firm, usually acquired along working experiences and education and holds transferable feature across jobs, firms and industries. It is relatively easy that the general human capital embedded in an individual transfers to different industries.

Job/Firm specific human capital is usually amassed through formal education, training, work experience on knowledge specific to a firm/job (Alan at al., 2008).

The specific human capital is rarely transferable to be applied to other jobs, firm, and industry Becker (1964, 1976). Furthermore, human capital is ‘specific if it increases a worker’s productivity only at the firm’ (Becker, 1964). The specific human capital embedded in an individual is difficult to be transferred to different industries.

Human capital measurement is related with finding connections, mutual relations, and ideally, causation, between sets of human resource data, using statistical techniques. The aim is to facilitate information on how well the human capital of an organization is organized as a guide for future action. Human capital is considered as a ‘combination of factors such as education, work experience, job  training, level of intelligence, energy, habits of work, mutual trust, and drive to initiative that influence the value of a worker's marginal product.

THE NEED FOR HUMAN CAPITAL MEASUREMENT: An urgent need was felt to evolve methods to assess the value of human capital which can serve as an aid to decision-making. This requires finding out the key people management drivers and estimating the effect of varying them. The need is to evolve a framework within reliable information can be gathered and analyzed such as value added per employee, measures of and cost savings. The need to develop the methods of measuring the human capital was recognized due to the following reasons:

Human capital constitutes an important constituent of the market worth of a business firm

People in the organization make addition of value and there is reason for evaluating the value of human capital to provide a platform for human resource planning and controlling the impact of HR policies and practices. The process of finding out measures and accumulating and analysing information regarding people will concentrate the focus of the organization on the things to be done to acquire, maintain, develop and utilize the human capital. Measurement of human capital can be utilized to monitor progress in realizing the HR goals and regularly evaluate the effectiveness of human resources. Human resources are difficult to manage unless we do not the exact amount of human capital.

THE APPROACHES TO HUMAN CAPITAL MEASUREMENT

The major approaches to measurement of human capital area:

1. Output-Based Approach: For the purpose of analyzing relationship between human capital and economic growth, some economists attempted to measure the stock of human capital utilizing ‘school enrolment rates’ as a proxy of human capital (Barro & Lee, 1993). While calculating the ratio between individuals of school age and students enrolling in the educational institutions, the economists evaluate the amount of human capital that each country holds. This method suffers from a drawback that a student’s effectiveness can be recognized only when he takes part in productive activities.  In the perspective of educational attainment, an attempt was made to measure relationship between human capital and students’ ‘accumulated years of schooling’ in the employable age was attempted as a measure of educational attainment (Nehru, Swanson, & Dubey1993). The stock of human capital is assumed as the aggregate of each individual’s years of schooling; as such it is difficult to clearly show this relationship, as the educational attainment is a part of regular education. Really, several of adults tend to participate in many formal education and training activities to improve their productivity.  The ratio between skilled-adults and total adults was also suggested to measure the stock of human capital in the national economy (Romer (1990).  The Organization for Economic Cooperation and Development (OECD) uses International Adult Literacy Survey (IALS) ratio between literate adults and total adults to measure the stock of human capital. But this method partially relates to labor productivity which can be increased by informal learning activities such as personal learning and On-the-Job training. The average years of schooling to measure the stock of human capital (as a proxy) was also put forward (Psacharopoulos & Arriagada, 1986). This assumes that an individual’s productivity increases in proportion to his/her average years of schooling. This method has a drawback that an individual’s years of schooling can be partially related to his/her productivity.

2. Cost-Based Approach: Cost-based approach measures the stock of human capital through aggregating costs invested for one’s human capital. In calculating the invested costs an individual’s investment costs and depreciation was suggested (Kendric, 1976). Since this approach is based on indirect measure of stock of human capital, it is difficult to precisely demarcate a line between investment and consumption in the costs for the human capital.

3.  Income-Based Approach: The income based measure of human capital considers the returns an individual gets from a labour market through education investment. The aggregate human capital is the sum of quality adjustment of each individual’s labor force.  It presents the stock of human capital utilizing an individual’s income(Mulligan & Sala-i-Martin, 1995). In fact, ‘human-unrelated factors’ can more influence an individual’s income than related factors.  This approach rarely presents a comprehensive measurement of human capital.

4. Human Capital Index: Watson Wyatt developed four major categories of HR practice which could be linked to a 30 percent increase in shareholder value creation.

Practice                                                            Impact on market value in %

Rewards and accountability                             16.5

Collegial, flexible workforce                             9.0

Recruiting and retention excellence                 7.9

Communication integrity                                 7.1

This measure of human capital is also not comprehensive.

5. THE ORGANIZATIONAL PERFORMANCE MEASURE:Mercer consulting developed the Organizational Performance measure of human capital based on elements including people, management structure, work processes, information and knowledge, decision making and rewards etc. Each of these elements plays a different role in the context of the organization generating a different DNA. All these elements are necessary to be developed together. Piecemeal development results in misalignment of different factors and there is possibility of human capital not optimally utilized for improving the returns. ‘Internal Labour Market Analysis’ Mercer developed utilizes the regular record of employee and labour market data to analyse the real experience of employees rather than perceptual HR programs and policies. Thus it goes to fill the gaps between what is needed in the human resources to assist business goal and what is really being delivered.

6. UNDP MEASUREMENT: Since 1990, United Nations Development Programme (UNDP) is reporting Human Development Index (HDI) measuring a country’s human development and well-being.  The structure of the index includes birth, adult literacy rate, gross enrolment ratio, and GDP per capita. HDI index covers quality aspects.  The approach of HDI concentrates on all of individuals’ life quality and economic condition. International Labour Office (ILO) also uses the similar index considering the quality aspects such as the Key Indicators of the Labour Market (KILM). It is essential that any advanced measurement of human capital considers the concept of ‘human development’, including both quantitative growth and qualitative progress with attention to social capital.

7. OECD APPROACH TO MEASUREMENT: OECD approach of the human capital measurement is based on UNDP’ measurement of social capital. Considering that the core of the social capital is based on the networking among constituents, it is possible that the networking component of social capital contributes to the increase of human capital due to the transportable and shareable characteristics of human capital. The accumulation of one’s human capital is easily carried out through social capital. Really, the networking of family, colleagues, social and constituents can improve one’s level of knowledge and skills as compared to isolated situation (Coleman, 1988). Thus, human capital can play a significant role in social progress. OECD’s measurement of human capital is closely linked to international comparable statistics and education-related factors such as high-level qualification, graduation and enrolment rates, time invested in education, and investment in education, quality adjustment in human capital investments and results of education (Hansson, 2008).

POLICY IMPLICATIONS: Undoubtedly, human capital is difficult to identify and measure directly. So researchers have used indirect measures. More accurate measurement of human capital can be accomplished with more indicators as proxies. Moreover, the concept of human capital needs to be expanded toward ‘human development’ with one’s wellbeing on health, knowledge, and standard of living. The conventional measure of human capital concentrates on the monetary perspective of human capital and neglects the significance of non-monetary aspects such as creativity, motivation, social networks etc. Today’s main feature is to stress the ‘human ware’ approach, such as reinforcing the role of knowledge creator and human relationship creator to improve overall productivity including the possibility of creating added-values.

 It is also essential to consider how the broader concept of human capital can be measured on all of monetary and non-monetary characteristic of human capital which is closely linked to social capital. The core of social capital is the networking among constituents. The degree of one’s knowledge creation and sharing depends on the variety of networks focusing on tie density, frequency, strength and so on. This characteristic can result in stronger human capital in this emerging era. 

It is pertinent to analyze the results of human capital measurement within the socio-cultural framework of a society as without the consideration of socio-cultural background it is difficult to exactly understand the status of human capital in a nation. It requires construction of an effective and efficient database to present estimates of human capital stock and flow at all levels such as individual, organization, and/or nation. Throughout the database, policymakers and practitioners can easily understand the current weaknesses and strengths of human capital at all levels. The collaboration with other nations can fill the gaps between the existing and desired level human capital.