Human capital

Human capital theory is an economic theory that deals with the labor market.

The premise of the human capital theory is that a person’s work is a capital that can change its value over time in different ways for different employees, based on changes occurring in the employee’s qualities, skills, and competencies.

Human capital theory represents the development of neo-classic economy of the late 1950s and of the 1960s associated with several of U.S. economists, most prominent among them Gary Becker and G. Schultz.

Human capital is defined as the total of the employee’s competencies, whether natural (age, gender, etc.) or acquired (education, physical fitness, etc.). According to this theory, the labor market consists of positions (and not of working hours) whose value is determined, among others, by the human capital of the position holder. This method allows measuring the value of different employees and classifying them based on the degree of benefit they can contribute to a certain organization over time.

In practice, referring to human capital makes it possible to express functionally the general competencies of an employee and make them an integral part of the technical factors (structure, technology, information, capital, etc.) of the organization.

This is a new and inclusive approach to existing issues. Unlike the traditional psychological approach, this is a business approach to human resources management. HCM (Human Capital Management) refers to an employee as a resource like any other resource in the organization, and a business approach is needed (in addition to other approaches) to make the most of it. This field is currently part of business administration and complements the traditional psychological approach to HR.

In various instances, HCM is described in the literature as the next step in the development of HR, referred also as HR 2.0. In practice, the innovation is in the combination of the two fields that were, until recently, separate: Human Resources (HR), which dealt with the human aspect of the employee, and workforce management (WFM), which related to the employee as a resource of the organization.

According to this conception, the employer’s investment in employee development increases the value of human capital, as well as the value of the entire organization. Therefore, the employer should examine this investment from the point of view of its ROI (return on investment): degree of investment in employee skill development vs. the contribution of this investment to the organization.

Together with HCM, the term Human Assets Management (HAM) is also used, with the same intention, but the term HCM is more widely accepted on the market.

Learn more about Human Resource Management