What is Human Capital? Everything You Need to Know

By the time we've been alive two or so decades, many of us will have picked up some skills, possibly a little work experience, hopefully some sense of direction. We might even find we are now reasonably attractive to an employer. We have become human capital.

But what is human capital? Why can’t we just be “staff” or “a potential employee”, or some other designation that doesn't sound so unsavoury that it was once named German Un-Word of the Year? (In 2004, a jury of linguistic scholars voted to banish the word Humankapital from the German lexicon. They said it minimized people's abilities and reduced them to mere economic quantities.)

Three centuries ago, there lived a political economist called Adam Smith, and to him the key to business success was clear. Production depended on four types of fixed capital: tools, buildings, land and the “acquired and useful abilities of all the inhabitants or members of the society”.

Working humans had become a form of capital, like natural capital or economic capital. But this mechanistic analysis didn’t pass into common usage until after 1928, when English economist Arthur Cecil Pigou immortalized it in a book. "There is such a thing as investment in human capital as well as investment in material capital,” he wrote.

In the 1960s, the term human capital was made popular by two American economists, Gary Becker and Jacob Mincer, who used it to describe the mixture of skills, knowledge, experience, habits and personality in each of us that can be put to productive use. At that time people did not know what is human capital or if there's any capital by that name.

Human capital isn't just beneficial to the person involved and the company they work for; countries stand to gain as well. A creative and productive workforce contributes more to the long-term economic success of a nation than virtually any other resource, says the World Economic Forum in its annual Human Capital Report.

The boost to national prosperity is easy to see. This chart shows the close correlation between how much a country invests in its workforce and the strength of its GDP.

Human capital is vital for growth, say the report's authors. Invest in it and it will generate returns, not just for the individuals involved but for the economy as a whole. This means educating young people with the skills they need to thrive in the modern economy. It benefits them and it benefits the companies whose needs they answer.

But understanding what is human capital hasn't been that simple. In a survey conducted in 2014, more than a third of the world's employers reported difficulties in finding strong candidates for their open positions, and nearly half expected the shortage of talent to have a negative impact on their businesses.

Clearly, we need to work out ways to improve human capital. It has become more important than ever, as technological, political, demographic and economic forces reshape our labour markets.

This is where the Human Capital Index comes in: it tracks and quantifies how countries develop and deploy their working people.

The latest index ranked 130 countries according to how well they engaged and developed their people. Which areas of the world perform best? Take a look at this map and find out.

Read the Human Capital Report 2016 here