What does ‘human capital’ mean?

Human capital is a way of describing the value of our skills, talent, and manpower to the economy. ‘Capital’ is usually used to describe some kind of investment that can be used to make money – the term ‘human capital’ sees people as, basically, just that.

To understand human capital, it helps to think of people almost as ‘mini-factories’. No factory is able to produce anything without machines, and investing in better machines enables the factory to produce more stuff at a better quality.¹

Similarly in order for workers to produce stuff they must have human capital, which is basically any skill or attribute that enables you to do your job. Maybe it’s an engineering degree, or construction experience, or maybe it’s a set of social skills that helps you communicate with others. And just like a factory can invest in new machines, you can invest in your human capital through education, training and experience, making you a more productive and efficient worker.

Human capital is a useful concept because it allows us to measure how educated, skilled and creative workers in the economy are. And because improving your human capital makes you a more productive worker, it helps to explain why countries which invest in education and training tend to become more productive economies overall.² Increases in an individual’s human capital set them apart from other workers and could mean higher wages; but at the same time, if everyone in an economy increases their human capital, wages might initially go down as skills became less unusual, but productivity of the economy as a whole would go up, which could improve wages and well being on the whole.

But not everyone likes this idea of calling our skills ‘human capital’, particularly because they’re worried that it’ll skew the way we think about education, only valuing it if it makes us more productive workers. A lot of our current university education doesn’t really focus on making workers more productive – it’s about showing your work ethic and intelligence – signalling to employers your ability to work hard, rather than selling them a set of skills you’ve already got.³

Thinking about ourselves as producers of human capital could take us down a dangerous route of only valuing the things in ourselves we’re able to sell for money. Obviously this isn’t what economists are implying – but it’s important to remember the limitations of the concept before using it too widely!