Human capital: what is it, what benefits does it bring and how is it measured?

Businesses are made up of a set of different kinds of resources, but the people themselves are probably the most valuable.

In this article we will a journey through the characteristics of human capital, its implications and what differentiates it from the rest of the elements that make up each organization, to see what makes it so special.

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What is human capital?

Human capital is the set of people that make up an organization, taking into account the skills, training and degree of efficiency in carrying out the tasks of each of them, since it is what brings quality to work.

Therefore, we would be talking about one of the factors of production, which are generally conceived as three: land, labor and capital, with human capital being a subcategory of the latter. It should not be confused with the work factor, which would be the activity of the tasks itself.

It is a technical definition that has subsequently been simplified to refer to all of the company's human resources. Business psychology, for its part, speaks of human capital as

the value that all the people who make it up bring to the company, since they are the indispensable resource to be able to achieve the objectives established by the organization. When we talk about educational centers, the value falls on the skills, knowledge and, ultimately, the talent that makes the tasks possible.

The conception of the term human capital corresponds to the American economists, Gary Becker and Theodore Schultz, and was developed in the 50s of the twentieth century. In their studies, they concluded that this factor was the one that explained the improvement at the economic level in societies, if we looked at its correlation with the educational level of all its individuals, hence the talk of investing in human capital, as was done with other resources materials.

These investments translate into higher economic growth through two different mechanisms. First, because the company's factors of production become more productive. Second, because by having more qualified personnel, production techniques are improved and therefore both the company becomes more efficient when it comes to obtaining the products or services that they market. Human capital became such an important concept that it has not stopped studying since then.

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Conditional cash transfers

A proof of the importance that human capital has acquired are the conditional cash transfer programs, or conditional transfer of resources (TCM or TCR, respectively). These are programs carried out by many countries in which a series of monetary resources is invested in economically disadvantaged people, in exchange for a series of obligations such as schooling or regular attendance at the medical center.

What is sought with the RER is to increase the value of its human capital in the medium term, getting a generation of more skilled workers, with an education and skills that will allow them to achieve better jobs and therefore provide a differential value that will produce economic growth for himself, for the company in which he works and, by extension, for the nation that initially made such a disbursement, making an investment that finally sees a return.

Conditional cash transfer programs are especially encouraged in Ibero-American countries, being a common measure in most of them. We can also find this mechanism for enhancing human capital in Asian countries, such as the Philippines, Indonesia, Cambodia or Bangladesh, among others. As for Africa, Egypt and Morocco would be the representatives of this policy. In the West it is not so frequent, but there are examples of RER in powers such as the United States or the United Kingdom.

The problem with these programs is that they are very dependent on the budgets made by each administration, so that a turn in the political landscape of a country can drastically end the transfers of conditional resources, As with so many other programs, when there is a change of government towards another with a tendency contrary to the one that had previously. This type of situation reduces the effectiveness of this mechanism and therefore endangers the improvement of human capital.

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Equations

At a technical level, in economics studies, there are a series of formulas to represent human capital and thus be able to analyze it through mathematical calculations.

One of them is the Cobb-Douglas production function. In this equation, human capital is one of the key values ​​to be able to make an estimate of the economic growth that will experience a country in the coming years, so these are extremely complex calculations in which human capital plays a role fundamental.

On the other hand we find the Mincer equation, formulated by Jacob Mincer, another economist. In this case, Mincer created a mathematical expression to be able to estimate the level of income that a population will obtain in depending on the academic level achieved, which explains how the investment in human capital we were talking about works before. And it is that, predictably, a population educated to the highest levels, is going to obtain rewards in the future much higher than another that is not.

Jacob Mincer himself, together with Haim Ofek, studied the effect of the depreciation of human capital, a phenomenon suffered by both this and other factors of production, such as physical capital, which are the materials that a company has and that progressively wear out or remain obsolete. In the case of people something similar happens, since the knowledge acquired at each educational level also shows a depreciation rate as time progresses.

This is due to the effect of forgetting, the updating of the contents in the field of study in which the individual moves, etc. To counteract the effect of this depreciation of human capital, what must be done is to constantly recycle to keep up to date with new technologies and knowledge. Although the effect of age is also an effect that causes depreciation and that, at a certain point, cannot be counteracted.

Indices used to measure it

To measure the human capital of different nations and to be able to make comparisons between them, there are mainly two indices.

The first would be that of the Davos Forum, which each year reports on the value of human capital around the world. The world index is the Global Human Capital Index, or GHCI, and gives a score between 0 and 100 to each of the countries (more than 100 participate in this study). In recent years, the country with the best indicator was Finland, while the worst score was for Mauritania.

On the other hand, we would find the World Bank Human Capital Index, published by this entity for the first time in 2018. To build this index, what is taken into account is the investment relative to the GDP of each country that has been allocated to educational and health services for children and youth. The result obtained is a value that goes from 0 to 1, and what it indicates is the difference (with respect to 1, which would be the total) of the GDP that each country would have to invest in order for both health and education to be ideal.

To understand it better we will use a practical example. In this indicator, the HCI (Human Capital Index), Spain obtained 0.74 in the fiscal year of 2019, occupying, therefore, the 32nd position in the general comparison with the rest of the countries. What this figure means is that Spain would have to invest 26% (obtained by subtracting 0.74 to 1) of the GDP if it wanted youth-oriented health and education services to be the best possible.

Although these are the two main indices, they are not the only ones. For example, we can also find the expected human capital, or expected human capital, an indicator devised by The Lancet, a leading UK medical journal. What this index provides is an estimated life expectancy for human capital, and it has been calculated from 1990 to 2016, for 195 different countries.

As was the case with the GHCI, the nation with the most positive value in recent years has been Finland, providing a figure of 28.4. In contrast, Niger would be the country with the worst rate of all, obtaining only 1.6 years of life expectancy in human capital.

Bibliographic references:

• Chiavenato, I. (2011). Human resources management. The human capital of organizations. Mc Graw Hill.
• Madrigal, B.E. (2009). Human and intellectual capital: its evaluation. Venezuelan Magazine Labor Observatory.
• Sen, A. (1998). Human capital and human capacity. Economics notebooks. Santa Fe de Bogota.
• Serrano, L. (1996). Human capital and productivity indicators. Journal of Applied Economics.
• Villatoro, P. (2005). Conditional cash transfer programs: experiences in Latin America. CEPAL Review.