Human capital is a loose term that refers to knowledge, experience and skills of an employee. The theory of human capital is relatively new in finance and economics. It states that companies have an incentive to seek productive human capital and to add to the human capital of their existing employees. Put another way, human capital is the concept that recognizes labor capital is not homogeneous.

In the 1960s, economists Gary Becker and Theodore Schultz pointed out that education and training were investments that could add to productivity. As the world accumulated more and more physical capital, the opportunity cost of going to school declined. Education became an increasingly important component of the workforce. The term was also adopted by corporate finance and became part of intellectual capital.

Intellectual and human capital are treated as renewable sources of productivity. Organizations try to cultivate these sources, hoping for added innovation or creativity. Sometimes, a business problem requires more than just new machines or more money.

The possible downside of relying too heavily on human capital is that it is portable. Human capital is always owned by the employee, never the employer. Unlike structural capital equipment, a human employee can leave an organization. Most organizations take steps to support their most useful employees to prevent them from leaving for other firms.

Not all economists agreed that human capital directly raises productivity. In 1976, Harvard economist Richard Freeman believed that human capital only acted as a signal about talent and ability; real productivity came later through training, motivation and capital equipment. He concluded that human capital should not be considered a factor of production.

  1. How do managers measure human capital?

    Learn what human capital is, how managers measure it and how managers measure human capital's return on investment to gauge ... Read Answer >>
  2. What is the relationship between human capital and economic growth?

    Learn what human capital and economic growth are, how human capital is related to economic growth and see examples of the ... Read Answer >>
  3. What causes human capital to depreciate?

    Read about what life events may cause a worker's human capital to depreciate, both in absolute terms and relative value compared ... Read Answer >>
  4. Human capital vs. physical capital: What is the difference?

    Learn the difference between physical capital and human capital. How to find the value of each type of capital in a company's ... Read Answer >>
  5. What are some examples of different types of capital?

    Learn about the different types of capital, including financial, human and social capital, and how each is a valuable asset ... Read Answer >>
  6. What are the main goals of human resources planning?

    Learn about human resource planning, a business strategy that heavily incorporates workforce considerations into long-term ... Read Answer >>
Related Articles
  1. Financial Advisor

    Human Capital, An Important Asset For Portfolio Diversification

    An investor’s total wealth consists of two parts – financial capital and human capital. The latter should not be overlooked in investment strategies and portfolio management.
  2. Investing

    Human Capital: The Most Overlooked Asset Class

    The skills and knowledge that allow you to make money are your best asset. Remember to invest in yourself!
  3. Investing

    As Hedge Funds Automate, Some Managers Prefer Human Analysts

    Some fund managers see human emotion and intuition as liabilities, but others see them as a positive.
  4. Personal Finance

    The Seven-Figure Asset You’re Probably Ignoring

    What is human capital and how should it factor into your investment decisions?
  5. Investing

    Your Human Capital Might Be Your Greatest Asset

    When allocating your assets, don't forget one of your most valuable assets - human capital.
  6. Investing

    Why Robos Will Still Need Human Advisors

    Will a future of Robo-Advisors still need human counterparts?
  7. Small Business

    The Value Of A "Useless" Degree

    Think a humanities degree will leave you penniless? Think again.
  8. Investing

    Twitter Aims to Humanize Customer Service Dealings

    Twitter wants you to know when you are dealing with an actual human on the other end of that DM.
  9. Tech

    Is Automation Destroying Intellectual Jobs?

    As more jobs are automated, intellectual jobs that require the human brain remain, but does artificial intelligence pose a threat to these jobs, too?
  1. Human Capital

    A measure of the economic value of an employee's skill set. This ...
  2. Homo Economicus

    A term that describes the rational human being assumed by some ...
  3. Intellectual Capital

    Intellectual capital is the value of a company or organization's ...
  4. Natural Law

    A set of rules inherent in human behavior and human reasoning ...
  5. Capitalization Of Profits

    The capitalization of profits is the process of converting a ...
  6. Capital Accumulation

    Capital accumulation typically refers to an increase in assets ...
Hot Definitions
  1. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center