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Economic Impact of Human Capital

  • Habiba Dalhatu Ibrahim

According to Schultz (1993), the term “human capital” has been defined as a key element in improving a firm assets and employees in order to increase productive as well as sustain competitive advantage. To sustain competitiveness in the organization human capital becomes an instrument used to increase productivity. Human capitals refer to processes that relate to training, education and other professional initiatives in order to increase the levels of knowledge, skills, abilities, values, and social assets of an employee which will lead to the employee’s satisfaction and performance, and eventually on a firm performance. Rastogi (2000) stated that human capital is an important input for organizations especially for employees’ continuous improvement mainly on knowledge, skills, and abilities. Thus, the definition of human capital is referred to as “the knowledge, skills, competencies, and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being” (Organization for Economic Co-Operation and Development or OECD, 2001: 18).” The constantly changing business environment requires firms to strive for superior competitive advantages via dynamic business plans which incorporate creativity and innovativeness. This is essentially important for their long term sustainability. Human resource input plays a significant role in enhancing firms’ competitiveness (Barney, 1995). At a glance, substantial studies were carried out on human capital and their implications on firm performance were widely covered and obviously, human capital enhancement will result in greater competitiveness and performance (Agarwala, 2003; Guthrie et al., 2002). Meantime, there is a significant relationship between innovativeness and firm performance under the human capital philosophy (Lumpkin & Dess, 2005). In relation to this, the definition of firm performance could vary from one and another. Some clear definitions of firm performance in the context of human capital enhancement could be put forward.

Human capital is the stock ofknowledge, habits, social and personality attributes, includingcreativity, embodied in the ability to performlaborso as to produce economic value. Alternatively, Human capital is a collection of resources all the knowledge, talents, skills, abilities, experience, intelligence, training, judgment, and wisdom possessed individually and collectively by individuals in a population. These resources are the total capacity of the people that represents a form of wealth which can be directed to accomplish the goals of the nation or state or a portion thereof, It is an aggregate economic view of the human being acting within economies, which is an attempt to capture the social, biological, cultural and psychological complexity as they interact in explicit or economic transactions.

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Many theories explicitly connect investment in human capital development to education, and the role of human capital in economic development, productivity growth, and innovation has frequently been cited as a justification for government subsidies for education and job skills training.

Human capital has been and is still being criticized in numerous ways; Michael Spenceoffers signaling theory as an alternative to human capital. Pierre Bourdieuoffers a nuanced conceptual alternative to human capital that includes cultural capital, social capital, economic capital, and symbolic capital. These critiques, andother debates, suggest that “human capital” is a reified concept without sufficient explanatory power.

It was assumed in early economic theories, reflecting the context, i.e., the secondary sector of the economy was producing much more than the tertiary sector was able to produce at the time in most countries to be a fungible resource homogeneous, and easily interchangeable, and it was referred to simply as workforce or labor, one of three factors of production(the others being land, and assumed-interchangeable assets of money and physical equipment). Just as land became recognized asnatural capitaland an asset in itself, and human factors of production were raised from this simple mechanistic analysis tohuman capital. In modern technical financial analysis, the term “balanced growth” refers to the goal of equal growth of both aggregate human capabilities and physical assets that produce goods and services.

The assumption that labor or workforces could be easily modeled in aggregate began to be challenged in 1950s when thetertiary sector, which demanded creativity, begun to produce more than thesecondary sectorwas producing at the time in the most developed countries in the world. A measure of the economic value of an employee’s skill set. This measure builds on the basic production input of labor measure where all labor is thought to be equal. The concept of human capital recognizes that not all labor is equal and that the quality of employees can be improved by investing in them.

The education, experience and abilities of an employee have an economic value for employers and for the economy as a whole. In some cases, financial performance measures such as percentage of sales resulting from new products, profitability, capital employed and return on assets (ROA) (Selvarajan et al., 2007; Hsu et al., 2007). Besides, return on investment (ROI), earnings per share (EPS) and net income after tax (NIAT) can also be used as measures of financial performance (Grossman, 2000). Interestingly, researchers also tend to benchmark managerial accounting indicators against the financial measures in six dimension; ‘workers compensation’ (workers’ compensation expenses divided by sales); ‘quality’ (number of errors in production); ‘shrinkage’ (e.g. inventory loss, defects, sales return); ‘productivity’ (payroll expenses divided by output); ‘operating expenses’ (total operating expenses divided by sales) (Wright et al., 2005). On the other hand, firm performance can also be measured using ‘perceived performance approach’ (also referred to as subjective performance measure) where Likert-like scaling is used to measure firm performance from the top management perspectives (Selvarajan, 2007).

The theory of human capital is rooted from the field of macroeconomic development theory (Schultz, 1993). Becker’s (1993) classic book, Human Capital: A Theoretical and Empirical Analysis with special reference to education, illustrates this domain. Becker argues that there are different kinds of capitals that include schooling, a computer training course, expenditures on medical care. And in fact, lectures on the virtues of punctuality and honesty are capital too. In the true sense, they improve health, raise earnings, or add to a person’s appreciation of literature over a lifetime. Consequently, it is fully in keeping with the capital.

Human capital affects economy in so many different ways like Education, good health longevity are intrinsically valuable outputs. In conventional measures of economic output, health and education’s Contribution is measured essentially by the costs of producing the outcomes, i.e. expenditures on schools and medical facilities. Such a procedure identifies inputs rather than outputs. The valuation of both health and education is difficult as both are goods with attributes different from most types of goods produced in an economy., there are so many reviews rate on education and training based on human capital theory, this mostly relates to rate of return for individual and society in general investment in human capital in the form of education and training, Whilst high incomes may be conducive to health, health cannot be directly purchased like material goods and services. Health and education are often subsidized by the state and in some countries education is compulsory for certain minimum length of times. Many if not most health and education services are produced by the public sector.

Governments play a direct part in providing services very directly linked to human welfare, health outcomes are measured mainly through mortality statistics. Of these, life expectancy at birth is perhaps the most comprehensive, depending as it does on the current age specific mortality rates for all age groups.

Educational indicators are either stock or flow measures, Stock measures of educational indicators include the literacy of the population, the average number of years of education of the population and the extent of educational attainment by level. These measures are appropriate for assessing the accumulated achievement of a country or for estimating the contribution of education to economic performance, flow measures are school enrolment ratios and measure investment in the future capacities of the population. The UNDP has developed a composite indicator, the human development index (HDI), which gives equal weight to three indicators: real GDP per capita (measured at purchasing power parity in constant prices); life expectancy at birth; and educational attainment, measured by adult literacy (two-thirds weight) and combined primary, secondary and tertiary enrolment ratios (one third weight) (see UNDP, 1997, p122 for details).

Life expectancy varies markedly across the continent. Although it is typically around fifty years, in eight countries it exceeds the world average of 63 years, Life expectancy in Africa is more strongly correlated with GDP per capita than either adult literacy rates or gross educational enrolments. However, some countries have very different life expectancy from what one would predict given their incomes. The two least developed African countries (for whom there is data) Rwanda and Sierra Leone are reported to have exceptionally low life expectancies at birth (23 and 34 respectively). Uganda also has a much lower life expectancy than one would predict given its income. Although this partly reflects the legacy of civil war and the onset of AIDS, much can be explained by its relatively low public spending on health. Botswana also has a much lower life expectancy at 52, it is 13 years lower than one would predict given its income. It could perhaps learn from nearby Lesotho, where life expectancy is nine years higher than would be expected from its income alone. Literacy rates vary enormously across the continent from less than 20 percent in Niger and Burkina Faso to over 80 percent in Mauritius, the Seychelles, South Africa and Zimbabwe. School enrolment statistics exhibit almost as much variation. Some countries have achieved almost universal primary education.

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However, Southern African countries (with the exceptions of Angola, Botswana and Mozambique) have noticeably higher enrolment rates than would be expected given their income, whilst many countries bordering the Sahara desert tend to have lower than expected enrolment rates. Gender inequalities also vary considerably across African countries. Inequalities are less marked in countries with high overall rates of literacy and enrolments, but variation persists even controlling for that.

In conclusion, Human capital is a broad concept which identifies human characteristics which can be acquired and which increase income. It is commonly taken to include peoples’ knowledge and skills, acquired partly through education, but can also affects their strength and vitality, which are dependent on their health and nutrition. Human capital has effects in the economy, for example; on health and education as inputs to economic production. This is in contrast to the concept of human development which views health and education as intrinsically valuable outcomes to be placed alongside economic production as measures of human welfare. In understanding how the human capital has effects on the economy as input into development it is necessary to consider the possible connection between human capital, other forms of capital, income and growth. While it is true for every country, for which there is data that more educated people earn more than less educated people and it does not follow that there is a simple relationship between investing in people and countries becoming richer. Human and certain forms of physical capital may be complementary.


Griffin, K. and J.B. Knight (1990) “Human Development and the International Development Strategy for the 1990s”

Knight, J. and Sabot, R. (1990), Education, productivity and inequality: the East African natural experiment,

Oxford: Oxford University Press.

Thomas F. Dernburg and Duncan M. McDougal (1999) “Macroeconomics”.




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