Jobs and the Future of Work

What is Human Capital? Everything You Need to Know

what-is-human-capital-answer

There's nothing more positive than investing in people. So how do we measure its effectiveness? Image: REUTERS/Robert Galbraith

Anna Bruce-Lockhart
Editorial Lead, World Economic Forum

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.)

What is human capital & how did it begin?

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.

Why human capital is a good thing

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-index-graph

How to measure human capital

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.

Loading...
Have you read?
Don't miss any update on this topic

Create a free account and access your personalized content collection with our latest publications and analyses.

Sign up for free

License and Republishing

World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

Stay up to date:

Future of Work

Share:
The Big Picture
Explore and monitor how Future of Work is affecting economies, industries and global issues
A hand holding a looking glass by a lake
Crowdsource Innovation
Get involved with our crowdsourced digital platform to deliver impact at scale
World Economic Forum logo
Global Agenda

The Agenda Weekly

A weekly update of the most important issues driving the global agenda

Subscribe today

You can unsubscribe at any time using the link in our emails. For more details, review our privacy policy.

3 lessons from the Middle East’s reskilling revolution

Dr. Ciaran O’Cathain

November 21, 2024

How ports can lead a just transition for workers in an automated future

About us

Engage with us

  • Sign in
  • Partner with us
  • Become a member
  • Sign up for our press releases
  • Subscribe to our newsletters
  • Contact us

Quick links

Language editions

Privacy Policy & Terms of Service

Sitemap

© 2024 World Economic Forum