human capital essay

What Is Human Capital? Definition and Examples

• U.S. Economy
• Supply & Demand
• Archaeology
• B.S., Texas A&M University

In its most basic sense, “human capital” refers to the group of people who work for or are qualified to work for an organization—the “workforce.” In a larger sense, the various elements needed to create an adequate supply of available labor form the basis of human capital theory and are critical to the economic and social health of the world’s nations.

Key Takeaways: Human Capital

• Human capital is the sum of knowledge, skills, experience and social qualities that contribute to a person’s ability to perform work in a manner that produces economic value
• Both employers and employees make substantial investments in the development of human capital
• Human capital theory is an effort to quantify the true value of an investment in human capital and is closely related to the field of human resources
• Education and health are key qualities that improve human capital and also directly contribute to economic growth
• The concept of human capital can be traced back to the 18th-century writings of Scottish economist and philosopher Adam Smith

Human Capital Definition

In economics, “capital” refers to all of the assets a business needs to produce the goods and services it sells. In this sense, capital includes equipment, land, buildings, money, and, of course, people—human capital.

In a deeper sense, however, human capital is more than simply the physical labor of the people who work for an organization. It is the entire set of intangible qualities those people bring to the organization that might help it succeed. A few of these include education, skill, experience, creativity, personality, good health, and moral character.

In the long run, when employers and employees make a shared investment in the development of human capital, not only do organizations, their employees, and clientele benefit, but so does society at large. For example, few undereducated societies thrive in the new global economy .

For employers, investing in human capital involves commitments like worker training, apprenticeship programs , educational bonuses and benefits, family assistance, and funding college scholarships. For employees, obtaining an education is the most obvious investment in human capital. Neither employers nor employees have any assurances that their investments in human capital will pay off. For example, even people with college degrees struggle to get jobs during an economic depression, and employers might train employees, only to see them hired away by another company.

Ultimately, the level of investment in human capital is directly related to both economic and societal health.

Human Capital Theory

Human capital theory holds that it is possible to quantify the value of these investments to employees, employers, and society as a whole. According to human capital theory, an adequate investment in people will result in a growing economy. For example, some countries offer their people a free college education out of a realization that a more highly educated populace tends to earn more and spend more, thus stimulating the economy. In the field of business administration, human capital theory is an extension of human resources management.

The idea of human capital theory is often credited to the “founding father of economics” Adam Smith , who in 1776, called it “the acquired and useful abilities of all the inhabitants or members of the society.” Smith suggested that differences in wages paid were based on the relative ease or difficulty of doing the jobs involved. 

Marxist Theory

In 1859, Prussian philosopher Karl Marx , calling it “labor power,” suggested the idea of human capital by asserting that in capitalist systems , people sell their labor power—human capital—in return for income. In contrast to Smith and other earlier economists, Marx pointed to “two disagreeably frustrating facts” about human capital theory:

• Workers must actually work—apply their minds and bodies—in order to earn income. The mere ability to do a job is not the same as actually doing it.
• Workers cannot “sell” their human capital as they might sell their homes or land. Instead, they enter into mutually beneficial contracts with employers to use their skills in return for wages, much in the same way farmers sell their crops.

Marx further argued that in order for this human capital contract to work, employers must realize a net profit. In other words, workers must do work at a level above-and-beyond that needed to simply maintain their potential labor power. When, for example, labor costs exceed revenue, the human capital contract is failing.

In addition, Marx explained the difference between human capital and enslavement. Unlike free workers, enslaved people—human capital—can be sold, although they do not earn incomes themselves.

Modern Theory

Today, human capital theory is often further dissected in order to quantify components known as “intangibles” such as cultural capital, social capital, and intellectual capital.

Cultural Capital

Cultural capital is the combination of knowledge and intellectual skills that enhance a person’s ability to achieve a higher social status or to do economically useful work. In an economic sense, advanced education, job-specific training, and innate talents are typical ways in which people build cultural capital in anticipation of earning higher wages.   

Social Capital

Social capital refers to beneficial social relationships developed over time such as a company’s goodwill and brand recognition, key elements of sensory psychological marketing . Social capital is distinct from human assets like fame or charisma, which cannot be taught or transferred to others in the way skills and knowledge can.

Intellectual Capital

Intellectual capital is the highly intangible value of the sum of everything everybody in a business knows that gives the business a competitive advantage. One common example is the intellectual property—creations of the workers’ minds, like inventions, and works of art and literature. Unlike the human capital assets of skill and education, intellectual capital remains with the company even after the workers have left, typically protected by patent and copyright laws and non-disclosure agreements signed by employees.

Human Capital in Today's World Economy

As history and experience have shown, economic progress is the key to raising the standard of living and dignity of people worldwide, especially for people living in impoverished and developing countries.

The qualities that contribute to human capital, particularly education and health—also directly contribute to economic growth. Countries that suffer from limited or unequal access to health or educational resources also suffer from depressed economies.

As in the United States, the countries with the most successful economies have continued to increase their investments in higher education, while still seeing a steady increase in the starting salary of college graduates. Indeed, the first step most developing countries take to advance is to improve the health and education of their people. Since the end of World War II, the Asian nations of Japan, South Korea, and China have used this strategy to eliminate poverty and become some of the world’s most powerful players in the global economy. 

Hoping to emphasize the importance of education and health resources, the World Bank publishes an annual Human Capital Index Map demonstrating how access to education and health resources affect the productivity, prosperity, and quality of life in nations worldwide.

In October 2018, Jim Yong Kim, president of the World Bank, warned, “In countries with the lowest human capital investments today, our analysis suggests that the workforce of the future will only be one-third to one-half as productive as it could be if people enjoyed full health and received a high-quality education.”

Sources and References

• Goldin, Claudia (2014). Human Capital , Department of Economics, Harvard University and National Bureau of Economic Research.
• Smith, Adam (1776). An Inquiry into the Nature and Causes of the Wealth of Nations . Copyright 2007 MetaLibre.
• Marx, Karl. The Buying and Selling of Labour-Power: Chapter 6 . marxists.org
• World Development Report 2019: The Changing Nature of Work . World Bank
• What Is Cultural Capital? Do I Have It?
• The Critical View on Global Capitalism
• The Differences Between Communism and Socialism
• Should I Earn a Human Resources Degree?
• What Is Capital Deepening?
• How Your Employer Can Pay for Your Education
• What Is Convergence Theory?
• Business Administration Education and Careers
• All About Marxist Sociology
• Growing Industries to Consider If You're Going Back to School
• The Three Historic Phases of Capitalism and How They Differ
• The 5 Sectors of the Economy
• How Sociology Can Prepare You for a Career in Business
• Sociology of Work and Industry
• Introduction to Sociology
• History of the American Labor Movement

Essay on Human Capital | Economic Growth | Economics

Here is an essay on ‘Human Capital’ for class 9, 10, 11 and 12. Find paragraphs, long and short essays on ‘Human Capital’ especially written for school and college students.

Introduction to Human Capital :

Simon Kuznets (1955) argued that the main stock of an economically advanced country is not its physical capital but “the body of knowledge as tested from findings and discoveries of empirical science, and the capacity and training of its population to use this knowledge effectively.”

The contrast in economic growth between Japan and Germany on one hand and the Third World countries, on the other hand, in the post Second World War (1939-45) period illustrates the importance of labour quality. Although much of the physical capital in Germany and Japan was in ruins or depleted, their economies grew rapidly after the war, as the skill, experience, education, training, health, discipline and motivation of the existing labour force remained intact.

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Why is labour productivity higher in developed countries (DCs) such as Japan and Germany than in the LDCs? The key variable is formal education and training. The term ‘human’ refers to the stock of useful and valuable skills and knowledge accumu­lated by people in the process of their education and training. Doctors, lawyers and engineers invest in their formal education and on-the-job training. They spend large sum of money on wages foregone and often work long hours.

A major portion of the high salaries of these profes­sionals should be viewed as a return on their investment in human capital—a return on the education that makes these highly trained workers a very special type of labour.

In other words, human capital refers to the productive capacities of human beings as income producing agents in the economy. Capital is a stock which has value as a source of current and future flow of output and income.

Human capital is the stock of skills and productive knowledge embodied in people. The yield or return on human capital investment lies in enhancing a person’s skills and earning power, and in increasing the efficiency of economic decision-making—both within and without the market economy.

Three Points:

1. Education improves labour productivity by increasing workers’ ability to perform a task quickly and efficiently.

2. Education and human capital formation lead to technological progress.

3. Human capital can act as a substitute of natural capital. So growth of human capital implies a consumption of non-renewable natural resources.

No doubt investment in human capital is productive on average. Individuals who have quan­titative abilities or computer skills have an economic advantage in today’s labour market. Peo­ple with higher education start out with higher incomes and enjoy more rapid growth in income than do less educated groups. The World Development Report (2004) showed that higher PCI is strongly associated with lower mortality and higher school completion.

Often people refer to the role of luck in determining economic circumstances. But chances favour the prepared mind. In a world of rapidly changing technology, education enables a person to understand and profit from new circumstances. [In his permanent income hypothesis, Milton Friedman focussed on the development of a person’s skill and earning capacity over the life cycle and suggested that luck gives temporary income but human capital is a source of permanent income.]

Conservation :

According to environmentalists, output can be produced with either natural capital (K N ) or human capital (K H ). The isoquant in Fig. 1 shows the combination of inputs that will yield a given amount of output in the future (Q*), holding other inputs con­stant. This output can be produced at point C with a very little natural resource (energy) leaving much oil and gas and relatively little human capital for the fu­ture. Alternatively, it might be produced with huge natural resource.

This strategy is feasible if natural capital is abundant. At point B, society consumes stocks of natural capital today and builds up stocks of human capital and improves technology through R and D (i.e., research and development).

Point A indicates that we can produce future output level Q* with no oil and gas. With greater scientific and technical knowl­edge represented by point A, society can develop and introduce substitute technologies like coal or solar energy to replace the exhausted oil and gas.

Contribution of Human Capital to Economic Growth :

In a broad sense, labour inputs consist of workers and of the skills of the workforce. Many economists believe that the quality of labour inputs—the skills, knowledge and discipline of the labour force—is the single most important element in economic growth. A country might buy fast computers, modern telecommunication devices, sophisticated electricity generating equipment, and hypersonic fighter aircraft.

However, these capital goods can be efficiently used and maintained only by skilled and trained workers. Improvements in literacy, health and discipline, and, most recently, the ability to use computers, add greatly to the productivity of labour. India’s green revolution rate had achieved limited success since most farmers were illiterate and did not know how to use modern technology.

Policy Implications :

Perhaps the main policy area where human capital is important is in public provision of train­ing and manpower and development programmes for the poor. The logic of these policies rest on the proposition that a person’s income in a market economy reflects the quality of resources that the person controls and the value of these resources. People who are permanently poor have less skills than the non-poor. So, an attractive policy to help eliminate poverty is to give them more and better resources through education and training.

Signalling and Information :

Spence’s signalling hypothesis maintains that education has no direct effect on improving a per­son’s skills but rather serves as an informational device for identifying more and less talented people. Education serves as a signal of ability.

Since education and ability are highly correlated, higher education implies higher productivity and earnings. Since direct observation of a person’s ability and productivity is costly it is interesting to examine the direct effects of education on productivity (and not on income alone).

Much research has been made on educational production functions. Griliches reviews the issues at the aggregate level. However, the sharpest results have arisen in agriculture, a sector which has shown an enormous and sustained growth in productivity for at least five decades. The rate of return to education among farmers is substantial.

More educated farmers control larger resources in the form of larger farms. These farmers are also much more efficient in their techniques of production. Moreover, their education is used primarily to keep them informed of recent technological changes in agricultural produc­tion, which they adopt with greater frequency and with quicker response. No doubt, education makes farmers more efficient processors of new information.

New Growth Theory :

New growth economists such as Paul Romer stress external economies to capital accumulation that can permanently keep the marginal product of physical or human capital above the interest rate and prevent diminishing returns from causing stagnation.

Views of Schultz and Other Researchers :

In the 1950s, and 1960s economists developed considerable interest in understanding the na­ture and sources of economic growth and development. Detailed national income accounting showed that conventional aggregate output measures grew at a more rapid pace than aggregate measures of factor inputs.

Some researchers identified the-unexplained ‘residual’ with techni­cal change. Research associated with T. W. Schultz and Edward Denison attributed much of the measured residuals to improvements in factor inputs.

Schultz adopted an all-inclusive concept of human capital. At the heart of the concept lay secular improvements in worker’s skills based on education, training and literacy; but he also pointed to sources of progress in improved health and longevity, the reduction in child mortal­ity and greater resources devoted to children in the home, and the capacity of a more educated population to make more intelligent and efficient economic calculations.

No doubt human capital as well as physical capital can yield a stream of income over time: Schultz assumed that a society can invest in its citizens through expenditure, training, re­search and health—that enhances their productive capacity. Although there are direct returns to physical capital by itself, there are constant returns to all (human and physical) capital.

John Kendrick systematically pursued the empirical implications of these ideas and demon­strated that the rate of return on these inclusive human capital investments is of comparable magnitude to yields on non-human capital.

Conclusion :

For all these reasons, developing countries should not underestimate the importance of human resources. Most other factors can be bought in the international market place. Most labour is home-grown, although labour can sometimes be augmented through immigration.

The crucial role of skilled labour has been shown time and again when sophisticated mining, defence or manufacturing machineries fell into disrepair and disuse because the labour force of develop­ing countries had not acquired the necessary skills for its operation and maintenance.

Eco­nomic planners in the developing countries should improve education, reduce illiteracy and train workers. Educated people are more productive because they can use capital more effec­tively, adopt new technologies and learn from their mistakes.

For advanced learning in science, engineering, medicine and management, countries will benefit by sending their best minds abroad to bring back the newest advances. But countries must be aware of the ‘brain drain’ in which the most able people get drawn off to high-wage countries.

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THREE ESSAYS CONSIDERING HUMAN CAPITAL COMPOSITION AND ECONOMIC GROWTH

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Home — Essay Samples — Economics — Economy — The Meaning and Concept of Human Capital

The Meaning and Concept of Human Capital

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Words: 1201 |

Published: Sep 19, 2019

Words: 1201 | Pages: 3 | 7 min read

Table of contents

Introduction, the meaning of human capital, concept of human capital.

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What Is Human Capital?

Understanding human capital, special considerations.

• Human Capital FAQs

The Bottom Line

Human capital definition: types, examples, and relationship to the economy.

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

Investopedia / Ellen Lindner

The term human capital refers to the economic value of a worker's experience and skills. Human capital includes assets like education, training, intelligence, skills, health, and other things employers value such as loyalty and punctuality.

As such, it is an intangible asset or quality that isn't (and can't be) listed on a company's balance sheet . Human capital is perceived to increase productivity and thus profitability. The more investment a company makes in its employees, the chances of its productivity and success become higher.

Key Takeaways

• Human capital is an intangible asset not listed on a company's balance sheet.
• Human capital is said to include qualities like an employee's experience and skills.
• Since all labor is not considered equal, employers can improve human capital by investing in the training, education, and benefits of their employees.
• Human capital is perceived to have a relationship with economic growth, productivity, and profitability.
• Like any other asset, human capital has the ability to depreciate through long periods of unemployment, and the inability to keep up with technology and innovation.

An organization is often said to only be as good as its people from the top down, which is why human capital is so important to a company. It is typically managed by an organization's human resources (HR) department, which oversees workforce acquisition, management, and optimization. Its other directives include workforce planning and strategy, recruitment , employee training and development, and reporting and analytics.

The concept of human capital recognizes that not all labor is equal. But employers can improve the quality of that capital by investing in employees. This can be done through the education, experience, and abilities of employees. All of this has great economic value for employers and for the economy as a whole.

Since human capital is based on the investment of employee skills and knowledge through education, these investments in human capital can be easily calculated. HR managers can calculate the total profits before and after any investments are made. Any return on investment (ROI) of human capital can be calculated by dividing the company’s total profits by its overall investments in human capital.

For example, if Company X invests $2 million into its human capital and has a total profit of $15 million, managers can compare the ROI of its human capital year-over-year (YOY) in order to track how profit is improving and whether it has a relationship to the human capital investments.

Human capital tends to migrate, especially in global economies. That's why there is often a shift from developing places or rural areas to more developed and urban areas. Some economists have dubbed this a brain drain or human capital flight. This describes the process that keeps certain areas underdeveloped while others become even more developed.

Human Capital and Economic Growth

There is a strong relationship between human capital and economic growth , which is why it can help boost the economy. That's because people come with a diverse set of skills and knowledge. This relationship can be measured by how much investment goes into people’s education.

Some governments recognize that this relationship between human capital and the economy exists, and so they provide higher education at little or no cost. People who participate in the workforce with higher education will often have larger salaries, which means they can spend more.

Does Human Capital Depreciate?

Like anything else, human capital is not immune to depreciation . This is often measured in wages or the ability to stay in the workforce. The most common ways human capital can depreciate are through unemployment, injury, mental decline, or the inability to keep up with innovation.

Consider an employee who has a specialized skill. If they go through a long period of unemployment , they may be unable to keep these levels of specialization. That's because their skills may no longer be in demand when they finally reenter the workforce.

An individual's human capital may depreciate if they can't or won't adopt new technology or techniques. Conversely, the human capital of someone who does adopt them will.

History of Human Capital

The idea of human capital can be traced back to the 18th century. Adam Smith referred to the concept in his book An Inquiry into the Nature and Causes of the Wealth of Nations, in which he explored the wealth , knowledge, training, talents, and experiences of a nation. Adams suggested that improving human capital through training and education leads to a more profitable enterprise, which adds to the collective wealth of society. According to Smith, that makes it a win for everyone.

In more recent times, the term was used to describe the labor required to produce manufactured goods. But the most modern theory was used by several different economists including Gary Becker and Theodore Schultz , who invented the term in the 1960s to reflect the value of human capacities.

Schultz believed human capital was like any other form of capital to improve the quality and level of production . This would require an investment in the education, training, and enhanced benefits of an organization's employees.

Criticism of Human Capital Theories

The theory of human capital has received a lot of criticism from many people who work in education and training. In the 1960s, the theory was attacked primarily because it legitimized bourgeois individualism, which was seen as selfish and exploitative. The bourgeois class of people included those of the middle class who were believed to exploit those of the working class. The theory was also believed to blame people for any defects that happened in the system and of making capitalists out of workers.

What Are Examples of Human Capital?

Examples of human capital include communication skills, education, technical skills, creativity, experience, problem-solving skills, mental health, and personal resilience.

What Is the Relationship Between Human Capital and the Economy?

Human capital allows an economy to grow. When human capital increases in areas such as science, education, and management, it leads to increases in innovation, social well-being, equality, increased productivity, improved rates of participation, all of which contribute to economic growth. Increases in economic growth tend to improve the quality of life for a population.

How Can I Increase My Human Capital?

Ways to increase your own human capital include more education, automating finances to improve efficiency, expanding your horizons outside of your social and workplaces, obtaining more experience, increasing participation in a multitude of activities or organizations, improving your communication skills, improving your health, and expanding your network.

What Is Human Capital Risk?

Human capital risk refers to the gap between the human capital requirements of a company or organization and the existing human capital of its workforce. This gap can lead a company towards inefficiencies, inability to achieve its goals, a poor reputation, fraud, financial loss, and eventual closure. To reduce and eliminate human capital risk, an organization should train, foster, and support its workforce.

Human capital refers to the economic value of a worker's abilities and skills. Companies can enhance their human capital through recruitment or training, as well as by implementing management techniques that optimize the productivity of their existing workers. Maintaining and improving the value of human capital is usually the role of a company's HR department.

World Bank. " Building Human Capital ."

Scholars at Harvard. " Human Capital ," Page 1.

Schultz, Theodore W. " Investment in Human Capital ." The American Economic Review, vol. 51, no. 1, 1961, pp. 1-17.

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Essay on Human Capital: Top 5 Essays | Organisation | Management

Here is a compilation of essays on ‘Human Capital’ for class 9, 10, 11 and 12. Find paragraphs, long and short essays on ‘Human Capital’ especially written for school and college students.

Essay on Human Capital

Essay Contents:

• Essay on the Conventional Measurement Method of Human Capital

Essay # 1. Meaning of Human Capital:

Human capital is the intersection of an organization’s skills, the required roles, and the people available and it can be explained as:

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Skills includes hard skills, leadership, business skills and interpersonal skills.

Roles pertains to jobs, project roles and positions within the organization.

People are the key; finding people with the right skills, competencies, experience and education to fill the necessary roles.

Human capital is referred to as knowledge, education and competencies of individuals as well as health Sharpe, 2001; Business and Information 2013 – G3 – UNESCAP, n.d., and the aggregation of investments in such areas as education, health, training, and migration to improve skills and competencies with realizing about tasks and goals, that enhance an individual’s productivity.

It is quite difficult to find studies or scholarly propositions stating directly that human capital holds a relationship with, or can lead to sustainability of organizations. However, Hatch and Dyer suggested the believed that having elements of human capital allows organization to learn faster than competitors, which can lead to sustainable advantage. Nevertheless, jumping to the conclusion that human capital is the way to sustainability might not be solid enough to communicate to the field.

ADVERTISEMENTS: (adsbygoogle = window.adsbygoogle || []).push({}); Essay # 2. Concept of Human Capital :

The concept of human capital is semantically the mixture of human and capital. In the economic perspective, the capital refers to ‘factors of production used to create goods or services that are not themselves significantly consumed in the production process’.

Along with the meaning of capital in the economic perspective, the human is the subject to take charge of all economic activities such as production, consumption, and transaction. On the establishment of these concepts, it can be recognized that human capital means one of production elements which can generate added-values through inputting it.

The basic concept of human capital can be variously categorized by each perspective of academic fields and to explain the main concept of human capital three view-points can be mentioned as:

1. The first viewpoint is based on the individual aspects. Schultz (1961) recognized the human capital as ‘something akin to property’ against the concept of labor force in the classical perspective, and conceptualized ‘the productive capacity of human beings in now vastly larger than all other forms of wealth taken together’.

2. There is the second viewpoint on human capital itself and the accumulation process of it. This perspective stresses on knowledge and skills obtained throughout educational activities such as compulsory education, postsecondary education, and vocational education.

3. The third is closely linked to the production-oriented perspective of human capital. Romer (1990) refers to the human capital as ‘a fundamental source of economic productivity’. Rosen (1999) states the human capital as ‘an investment that people make in themselves to increase their productivity’.

More recently, Frank & Bemanke (2007) define that human capital is ‘an amalgam of factors such as education, experience, training, intelligence, energy, work habits, trustworthiness, and initiative that affect the value of a worker’s marginal product’.

ADVERTISEMENTS: (adsbygoogle = window.adsbygoogle || []).push({}); Essay # 3. Characteristics of Human Capital :

Characteristics of human capital can be mentioned as:

1. Expandable and Self-Generating Characteristics:

To begin with, the expandable and self-generating characteristics of human capital are closely linked to the possibility that the stock of knowledge increases individuals’ human capital. Furthermore, the increase of human capital can be expanded by either endogenous or exogenous factors.

It is possible that original knowledge can be continuously elaborated and developed through the relationship between external knowledge, information, skills, experiences, and other knowledge- based factors as well.

In the economic perspective, the characteristic of human capital focusing on knowledge can be a core element to solve ‘problem of scarcity’ which little materials is equivalently distributed to economic agents. Throughout expanding and self- generating the human capital, it is sufficiently possible that the portion of that capital as an economic agent is extended.

2. Transportable and Shareable Characteristic:

The transportable and shareable characteristics of human capital mean that the original holder of knowledge can distribute his/her knowledge to others. On the circumstance that the original knowledge- holder’s exclusive ownership is slightly acceptable, the equivalent distribution between the holders and the takers can be actualized. Consequently, the former two characteristics extend the ‘volume’ of human capital, and the latter two expand the ‘range’ of human capital.

ADVERTISEMENTS: (adsbygoogle = window.adsbygoogle || []).push({}); Essay # 4. Importance of Human Capital :

Importance of human capital can be explained as:

1. It is important because it is closely linked to core competences and competitiveness of organization.

2. It directly affects the productivity of the organization.

3. It is required for the purpose of maximizing organizational profits.

4. Human capital is important because it can increase social consciousness of constituents within community.

5. It is important because higher performance of employees directly leads to customer satisfaction, productivity, profit, employee turnover and safety at work.

6. It helps in building organization’s image in the market.

7. It is important because it is the most important pillar of an organization. An organization is nothing without employees.

8. Human capital is the backbone of Human Development and economic development in every nation.

9. Better use of capital goods- modern technology is becoming more and more complex. With the growth of science, machinery and equipment are becoming more sophisticated. Their efficient operation requires skill and technical knowledge. Therefore skilled human capital is very significant.

10. Better use of improved knowledge- knowledge about production and management of economies is expanding at a very fast rate and to move with that pace human capital helps a country a lot

11. It is important for the overall performance of an organization because if not taken care properly then the individual human capital can affect organizational human capital such as ‘collective competences, organizational routines, company culture and relational capital as well and that would cause a bad impact on the overall performance.

Essay # 5. Conventional Measurement Method of Human Capital :

The conventional standard to measure human capital stock has been largely categorized into various parts such as, Cost-, and Income-based approach etc.

They can be described as:

1. Cost-Based Approach:

Cost-based approach is based on measuring the stock of human capital through summing costs invested for one’s human capital. For the purpose of calculating the invested costs, Kendric (1976) utilized an individual’s investment costs considering depreciation, and Jorgenson & Fraumeni (1989) presented discounted income in the future. Considering that this approach is based on indirectly measuring stock of human capital, it is difficult to precisely classify boundary between investment and consumption in the perspective of costs for the human capital.

2. Income-Based Approach:

This approach is based on the returns which an individual obtains from a labor market throughout education investment. Mulligan & Sala-i-Martin (1995) defines that aggregate human capital is the sum of quality adjustment of each individual’s labor force, and presents the stock of human capital utilizing an individual’s income. Considering that ‘human-unrelated factors’ can more influence an individual’s income, this approach rarely presents a complete measurement for human capital.

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Strategic Human Capital Management Essay Example

Type of paper: Essay

Topic: Management , Finance , Performance , Human , World , Strategy , Organization , Challenges

Published: 02/11/2020

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Introduction

In our modern day world, the economic global environment is rapidly and intensively changing. The constant changes are reflected by increased global product competition, changes in consumer demands and introduction of modern technologies. In light of these changes, many organizations have gradually realized the fundamental contribution of their personnel who make up the human capital in an organization. The workforce is the most fundament organizational asset. Unlike the traditional human capital approach that viewed the workforce as a cost, organizations are now maximizing the input of its personnel in order to achieve high production levels. People are the backbone of organizational character, performance and contribute to the knowledge –base of the organization (Bowin &Harvey, 2001). It is therefore important for organizations to strategically adopt transformational human resource practices that will enable the organization to sustain themselves amidst global human capital management challenges. The following is a research paper that aims at discussing the Human Capital Management practices and how organization X can subsequently address such challenges and improve its human resource.

Human Capital Management

It is commonly said that the people in an organization reflect the organization’s character and image. They are also considered the largest determinants of quality and quantity of the organization’s output. This is because the production process can be done fast and easily with the use of other resources; however, this allows room for duplicated of goods and services hence human capital is the last critical arsenal to gaining competitive advantage in the global market. Innovation, creativity, natural talent and knowledge are key asset in any organization. The establishment of a solid, functional and proper human capital management is very essential to every organization in increasing its performance. An effective human capital management ensures that every employees’ needs and goals are meet and this in turn boosts employees’ morale to work, increase work satisfaction, minimizes the rate of turnover and creates a hard working, loyal and disciplined workforce. In addition, HCM also is an avenue for the organization to create organizational targets and operating practices that is incorporated into the workforce vision therefore ensuring general high performance of the enterprise (Bowin &Harvey, 2001).

Global HCM challenge

Among the main challenges many organizations face in HCM is the inability to maximize their human resource and lack of adequate knowledge on how to capitalize on this essential organizational asset. Many organizations are not aware of the fact that there are global challenges that directly affect their performance and need to be addressed (Boxall & Purcell, 2003). This barrier of lack of adequate knowledge prevent s most organizations from improving its HCM. In general, this global challenge can be categorized and discussed as follows: -Organizations do not have access to mature and proper analytic capabilities to constantly review employee data and performance levels in order to conclusively acquire the general contribution of its human capital. -Use of short term strategies to improve the human capital rather than making long term investments that will ensure effective improvements on human capital. -Poor methods of implementing HCM practices and initiatives due to inability to achieve timely agreements across all departmental heads. -Inability to set up and design efficient and cost effective human capital strategies and solutions hence leading to poor HCM practices (Boxall & Purcell, 2003). The above are main barriers to HCM in most global organizations. The ability to manage the human capital allows an organization to register tremendous growth and maximize on productivity. It is also important to note that the challenge facing organizations regarding the establishment of an effective HCM is addressed. This will provide room for many organizations to strength their human resource and re organize its goal toward future success of the organization. Developing long term solutions will increase the quality of human capital and later on bring a huge positive impact and returns to the organizations. Moreover the dilemma that many organizations face is the in the inability to understand the significant role of strategic HCM. However, gradually, these organizations are recognizing that the employees are the innovators and creators hence take into consideration the need to have a well strategized HCM.

Organization X can adopt different HCM practices and strategies that will be essential in boosting its general performance. For instance, long term investment in human capital is important since employees are the key assets in any business venture. The role played by the human capital overlaps the contribution of other resources and eventually drives them to work towards the organization’s goals. Employees can contribute a great percentage on the productivity levels if the effective HCM practices are put in place. Moreover, for a company to have market advantage, it requires a creative, talented, loyal and innovative workforce. This type of workforce that is self-driven will be more willing to work and more satisfied with their job descriptions. There are many global challenges that face HCM. Lack of adequate knowledge on the need to improve the HCM is one of the major challenges many organizations are facing. Inclusively, barriers such as short-term decisions, lack of adequate funds for reconstruction and slow establishments of strategies. However, with access to effective HCM strategies, the success of any organization is guaranteed. In conclusion, the establishment of strategic HCM should be in line with possible global challenges so as to find solutions that will help the organization sustain it own self and develop good management competencies.

Bowin, R. B., & Harvey, D. (2001). Human resource management. Upper Saddle River: Prentice-Hall. Boxall, P., & Purcell, J. (2003). Strategy and human resource management. Industrial & Labor Relations Review, 57(1), 84.

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The Philippines economy in 2024: Stronger for longer?

The Philippines ended 2023 on a high note, being the fastest growing economy across Southeast Asia with a growth rate of 5.6 percent—just shy of the government's target of 6.0 to 7.0 percent. 1 “National accounts,” Philippine Statistics Authority, January 31, 2024; "Philippine economic updates,” Bangko Sentral ng Pilipinas, November 16, 2023. Should projections hold, the Philippines is expected to, once again, show significant growth in 2024, demonstrating its resilience despite various global economic pressures (Exhibit 1). 2 “Economic forecast 2024,” International Monetary Fund, November 1, 2023; McKinsey analysis.

The growth in the Philippine economy in 2023 was driven by a resumption in commercial activities, public infrastructure spending, and growth in digital financial services. Most sectors grew, with transportation and storage (13 percent), construction (9 percent), and financial services (9 percent), performing the best (Exhibit 2). 3 “National accounts,” Philippine Statistics Authority, January 31, 2024. While the country's trade deficit narrowed in 2023, it remains elevated at $52 billion due to slowing global demand and geopolitical uncertainties. 4 “Highlights of the Philippine export and import statistics,” Philippine Statistics Authority, January 28, 2024. Looking ahead to 2024, the current economic forecast for the Philippines projects a GDP growth of between 5 and 6 percent.

Inflation rates are expected to temper between 3.2 and 3.6 percent in 2024 after ending 2023 at 6.0 percent, above the 2.0 to 4.0 percent target range set by the government. 5 “Nomura downgrades Philippine 2024 growth forecast,” Nomura, September 11, 2023; “IMF raises Philippine growth rate forecast,” International Monetary Fund, July 16, 2023.

For the purposes of this article, most of the statistics used for our analysis have come from a common thread of sources. These include the Central Bank of the Philippines (Bangko Sentral ng Pilipinas); the Department of Energy Philippines; the IT and Business Process Association of the Philippines (IBPAP); and the Philippines Statistics Authority.

The state of the Philippine economy across seven major sectors and themes

In the article, we explore the 2024 outlook for seven key sectors and themes, what may affect each of them in the coming year, and what could potentially unlock continued growth.

Financial services

The recovery of the financial services sector appears on track as year-on-year growth rates stabilize. 6 Philippines Statistics Authority, November 2023; McKinsey in partnership with Oxford Economics, November 2023. In 2024, this sector will likely continue to grow, though at a slower pace of about 5 percent.

Financial inclusion and digitalization are contributing to growth in this sector in 2024, even if new challenges emerge. Various factors are expected to impact this sector:

• Inclusive finance: Bangko Sentral ng Pilipinas continues to invest in financial inclusion initiatives. For example, basic deposit accounts (BDAs) reached $22 million in 2023 and banking penetration improved, with the proportion of adults with formal bank accounts increasing from 29 percent in 2019 to 56 percent in 2021. 7 “Financial inclusion dashboard: First quarter 2023,” Bangko Sentral ng Pilipinas, February 6, 2024.
• Digital adoption: Digital channels are expected to continue to grow, with data showing that 60 percent of adults who have a mobile phone and internet access have done a digital financial transaction. 8 “Financial inclusion dashboard: First quarter 2023,” Bangko Sentral ng Pilipinas, February 6, 2024. Businesses in this sector, however, will need to remain vigilant in navigating cybersecurity and fraud risks.
• Unsecured lending growth: Growth in unsecured lending is expected to continue, but at a slower pace than the past two to three years. For example, unsecured retail lending for the banking system alone grew by 27 percent annually from 2020 to 2022. 9 “Loan accounts: As of first quarter 2023,” Bangko Sentral ng Pilipinas, February 6, 2024; "Global banking pools,” McKinsey, November 2023. Businesses in this field are, however, expected to recalibrate their risk profiling models as segments with high nonperforming loans emerge.
• High interest rates: Key interest rates are expected to decline in the second half of 2024, creating more accommodating borrowing conditions that could boost wholesale and corporate loans.

Supportive frameworks have a pivotal role to play in unlocking growth in this sector to meet the ever-increasing demand from the financially underserved. For example, financial literacy programs and easier-to-access accounts—such as BDAs—are some measures that can help widen market access to financial services. Continued efforts are being made to build an open finance framework that could serve the needs of the unbanked population, as well as a unified credit scoring mechanism to increase the ability of historically under-financed segments, such as small and medium-sized enterprises (SMEs), to access formal credit. 10 “BSP launches credit scoring model,” Bangko Sentral ng Pilipinas, April 26, 2023.

Energy and Power

The outlook for the energy sector seems positive, with the potential to grow by 7 percent in 2024 as the country focuses on renewable energy generation. 11 McKinsey analysis based on input from industry experts. Currently, stakeholders are focused on increasing energy security, particularly on importing liquefied natural gas (LNG) to meet power plants’ requirements as production in one of the country’s main sources of natural gas, the Malampaya gas field, declines. 12 Myrna M. Velasco, “Malampaya gas field prod’n declines steeply in 2021,” Manila Bulletin , July 9, 2022. High global inflation and the fact that the Philippines is a net fuel importer are impacting electricity prices and the build-out of planned renewable energy projects. Recent regulatory moves to remove foreign ownership limits on exploration, development, and utilization of renewable energy resources could possibly accelerate growth in the country’s energy and power sector. 13 “RA 11659,” Department of Energy Philippines, June 8, 2023.

Gas, renewables, and transmission are potential growth drivers for the sector. Upgrading power grids so that they become more flexible and better able to cope with the intermittent electricity supply that comes with renewables will be critical as the sector pivots toward renewable energy. A recent coal moratorium may position natural gas as a transition fuel—this could stimulate exploration and production investments for new, indigenous natural gas fields, gas pipeline infrastructure, and LNG import terminal projects. 14 Philippine energy plan 2020–2040, Department of Energy Philippines, June 10, 2022; Power development plan 2020–2040 , Department of Energy Philippines, 2021. The increasing momentum of green energy auctions could facilitate the development of renewables at scale, as the country targets 35 percent share of renewables by 2030. 15 Power development plan 2020–2040 , 2022.

Growth in the healthcare industry may slow to 2.8 percent in 2024, while pharmaceuticals manufacturing is expected to rebound with 5.2 percent growth in 2024. 16 McKinsey analysis in partnership with Oxford Economics.

Healthcare demand could grow, although the quality of care may be strained as the health worker shortage is projected to increase over the next five years. 17 McKinsey analysis. The supply-and-demand gap in nursing alone is forecast to reach a shortage of approximately 90,000 nurses by 2028. 18 McKinsey analysis. Another compounding factor straining healthcare is the higher than anticipated benefit utilization and rising healthcare costs, which, while helping to meet people's healthcare budgets, may continue to drive down profitability for health insurers.

Meanwhile, pharmaceutical companies are feeling varying effects of people becoming increasingly health conscious. Consumers are using more over the counter (OTC) medication and placing more beneficial value on organic health products, such as vitamins and supplements made from natural ingredients, which could impact demand for prescription drugs. 19 “Consumer health in the Philippines 2023,” Euromonitor, October 2023.

Businesses operating in this field may end up benefiting from universal healthcare policies. If initiatives are implemented that integrate healthcare systems, rationalize copayments, attract and retain talent, and incentivize investments, they could potentially help to strengthen healthcare provision and quality.

Businesses may also need to navigate an increasingly complex landscape of diverse health needs, digitization, and price controls. Digital and data transformations are being seen to facilitate improvements in healthcare delivery and access, with leading digital health apps getting more than one million downloads. 20 Google Play Store, September 27, 2023. Digitization may create an opportunity to develop healthcare ecosystems that unify touchpoints along the patient journey and provide offline-to-online care, as well as potentially realizing cost efficiencies.

Consumer and retail

Growth in the retail and wholesale trade and consumer goods sectors is projected to remain stable in 2024, at 4 percent and 5 percent, respectively.

Inflation, however, continues to put consumers under pressure. While inflation rates may fall—predicted to reach 4 percent in 2024—commodity prices may still remain elevated in the near term, a top concern for Filipinos. 21 “IMF raises Philippine growth forecast,” July 26, 2023; “Nomura downgrades Philippines 2024 growth forecast,” September 11, 2023. In response to challenging economic conditions, 92 percent of consumers have changed their shopping behaviors, and approximately 50 percent indicate that they are switching brands or retail providers in seek of promotions and better prices. 22 “Philippines consumer pulse survey, 2023,” McKinsey, November 2023.

Online shopping has become entrenched in Filipino consumers, as they find that they get access to a wider range of products, can compare prices more easily, and can shop with more convenience. For example, a McKinsey Philippines consumer sentiment survey in 2023 found that 80 percent of respondents, on average, use online and omnichannel to purchase footwear, toys, baby supplies, apparel, and accessories. To capture the opportunity that this shift in Filipino consumer preferences brings and to unlock growth in this sector, retail organizations could turn to omnichannel strategies to seamlessly integrate online and offline channels. Businesses may need to explore investments that increase resilience across the supply chain, alongside researching and developing new products that serve emerging consumer preferences, such as that for natural ingredients and sustainable sources.

Manufacturing

Manufacturing is a key contributor to the Philippine economy, contributing approximately 19 percent of GDP in 2022, employing about 7 percent of the country’s labor force, and growing in line with GDP at approximately 6 percent between 2023 and 2024. 23 McKinsey analysis based on input from industry experts.

Some changes could be seen in 2024 that might affect the sector moving forward. The focus toward building resilient supply chains and increasing self-sufficiency is growing. The Philippines also is likely to benefit from increasing regional trade, as well as the emerging trend of nearshoring or onshoring as countries seek to make their supply chains more resilient. With semiconductors driving approximately 45 percent of Philippine exports, the transfer of knowledge and technology, as well as the development of STEM capabilities, could help attract investments into the sector and increase the relevance of the country as a manufacturing hub. 24 McKinsey analysis based on input from industry experts.

To secure growth, public and private sector support could bolster investments in R&D and upskill the labor force. In addition, strategies to attract investment may be integral to the further development of supply chain infrastructure and manufacturing bases. Government programs to enable digital transformation and R&D, along with a strategic approach to upskilling the labor force, could help boost industry innovation in line with Industry 4.0 demand. 25 Industry 4.0 is also referred to as the Fourth Industrial Revolution. Priority products to which manufacturing industries could pivot include more complex, higher value chain electronic components in the semiconductor segment; generic OTC drugs and nature-based pharmaceuticals in the pharmaceutical sector; and, for green industries, products such as EVs, batteries, solar panels, and biomass production.

Information technology business process outsourcing

The information technology business process outsourcing (IT-BPO) sector is on track to reach its long-term targets, with $38 billion in forecast revenues in 2024. 26 Khriscielle Yalao, “WHF flexibility key to achieving growth targets—IBPAP,” Manila Bulletin , January 23, 2024. Emerging innovations in service delivery and work models are being observed, which could drive further growth in the sector.

The industry continues to outperform headcount and revenue targets, shaping its position as a country leader for employment and services. 27 McKinsey analysis based in input from industry experts. Demand from global companies for offshoring is expected to increase, due to cost containment strategies and preference for Philippine IT-BPO providers. New work setups continue to emerge, ranging from remote-first to office-first, which could translate to potential net benefits. These include a 10 to 30 percent increase in employee retention; a three- to four-hour reduction in commute times; an increase in enabled talent of 350,000; and a potential reduction in greenhouse gas emissions of 1.4 to 1.5 million tons of CO 2 per year. 28 McKinsey analysis based in input from industry experts. It is becoming increasingly more important that the IT-BPO sector adapts to new technologies as businesses begin to harness automation and generative AI (gen AI) to unlock productivity.

Talent and technology are clear areas where growth in this sector can be unlocked. The growing complexity of offshoring requirements necessitates building a proper talent hub to help bridge employee gaps and better match local talent to employers’ needs. Businesses in the industry could explore developing facilities and digital infrastructure to enable industry expansion outside the metros, especially in future “digital cities” nationwide. Introducing new service areas could capture latent demand from existing clients with evolving needs as well as unserved clients. BPO centers could explore the potential of offering higher-value services by cultivating technology-focused capabilities, such as using gen AI to unlock revenue, deliver sales excellence, and reduce general administrative costs.

Sustainability

The Philippines is considered to be the fourth most vulnerable country to climate change in the world as, due to its geographic location, the country has a higher risk of exposure to natural disasters, such as rising sea levels. 29 “The Philippines has been ranked the fourth most vulnerable country to climate change,” Global Climate Risk Index, January 2021. Approximately $3.2 billion, on average, in economic loss could occur annually because of natural disasters over the next five decades, translating to up to 7 to 8 percent of the country’s nominal GDP. 30 “The Philippines has been ranked the fourth most vulnerable country to climate change,” Global Climate Risk Index, January 2021.

The Philippines could capitalize on five green growth opportunities to operate in global value chains and catalyze growth for the nation:

• Renewable energy: The country could aim to generate 50 percent of its energy from renewables by 2040, building on its high renewable energy potential and the declining cost of producing renewable energy.
• Solar photovoltaic (PV) manufacturing: More than a twofold increase in annual output from 2023 to 2030 could be achieved, enabled by lower production costs.
• Battery production: The Philippines could aim for a $1.5 billion domestic market by 2030, capitalizing on its vast nickel reserves (the second largest globally). 31 “MineSpans,” McKinsey, November 2023.
• Electric mobility: Electric vehicles could account for 15 percent of the country’s vehicle sales by 2030 (from less than 1 percent currently), driven by incentives, local distribution, and charging infrastructure. 32 McKinsey analysis based on input from industry experts.
• Nature-based solutions: The country’s largely untapped total abatement potential could reach up to 200 to 300 metric tons of CO 2 , enabled by its biodiversity and strong demand.

The Philippine economy: Three scenarios for growth

Having grown faster than other economies in Southeast Asia in 2023 to end the year with 5.6 percent growth, the Philippines can expect a similarly healthy growth outlook for 2024. Based on our analysis, there are three potential scenarios for the country’s growth. 33 McKinsey analysis in partnership with Oxford Economics.

Slower growth: The first scenario projects GDP growth of 4.8 percent if there are challenging conditions—such as declining trade and accelerated inflation—which could keep key policy rates high at about 6.5 percent and dampen private consumption, leading to slower long-term growth.

Soft landing: The second scenario projects GDP growth of 5.2 percent if inflation moderates and global conditions turn out to be largely favorable due to a stable investment environment and regional trade demand.

Accelerated growth: In the third scenario, GDP growth is projected to reach 6.1 percent if inflation slows and public policies accommodate aspects such as loosening key policy rates and offering incentive programs to boost productivity.

Focusing on factors that could unlock growth in its seven critical sectors and themes, while adapting to the macro-economic scenario that plays out, would allow the Philippines to materialize its growth potential in 2024 and take steps towards achieving longer-term, sustainable economic growth.

Jon Canto is a partner in McKinsey’s Manila office, where Frauke Renz is an associate partner, and Vicah Villanueva is a consultant.

The authors wish to thank Charlene Chua, Charlie del Rosario, Ryan delos Reyes, Debadrita Dhara, Evelyn C. Fong, Krzysztof Kwiatkowski, Frances Lee, Aaron Ong, and Liane Tan for their contributions to this article.

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