Human Capital Theory

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In a strict economic and sociological interpretation, "human capital theory" designates a theory or theories about the cost-benefit relationships among investment in human capital, worker and employer income and productivity. It addresses questions such as whether investment in employee education results in greater productivity and higher income for organizations and employees (investment in human capital being illustrated by investment in employee skill sets, education, well-being and other productivity-related human attributes that factor into production).

In less academic terms, the kinds of questions human capital theory addresses include whether the costs of investing in human resources, i.e., personnel, are, in a given concrete situation, justified from the standpoint of the company bottom line, as well as from the perspective of the employee, clientele and society at large. May it not happen that investing in employee education results in resignations for better-paying jobs? From a human capital theoretical perspective, in that instance, investment would prove to be counterproductive.

"Human capital" in its most basic sense refers to the people that are working within an organization or hoping to. However, at root, human capital is everything that those people bring to an organization as potentially contributing to its success, but generally with a greater emphasis on more elements than just simply available man-hours of labor These includes education, experience, skills, personalities, social connections, innate strengths and more.

Like any other resource, a.k.a., "factor of production", such as land, equipment and money itself, human capital is a target for investment in pursuit of returns. Land is farmed, equipment is upgraded, T-bills are bought. Likewise, employees are trained, equipped and otherwise enriched by comparable investments in them as human capital-with an emphasis on the productive implications (not always easily predicted or measured) of such investments. One of the main matters that human capital theory focuses on is the complex relationships among such investments and their outcomes-outcomes for the employee, employer, clientele and society at large.

A core tool of such analyses is the cost-benefit dimension of enhancements of human capital. Not every investment in personnel will pay off for an organization; hence, the factors that determine when human capital investment is wise and successful are prime elements in theorizing about and predicting when specific investments will be likely to succeed or fail.

In anticipation of increased income or revenue, both employees and employers invest in education, equipment, etc., that can develop valuable skills, greater efficiency or even broader business connections (through parallel investment in social capital, such as social media networks). Of course, for both employee and employer, there is no guarantee that the investments will ultimately be justified, e.g., completing an MBA in a depressed market or funding advanced training of an employee who is headhunted as a consequence.

Apart from such micro-economic questions, there are macroeconomic issues that human capital theory can address: Under what conditions is human capital investment on a large scale a prerequisite for a higher standard of living, for sustainable growth or for employment and social equity?

Although such questions may seem academic and theoretical, the issues they address are embedded in and impact our lives-at work and at home.
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