Investing In Human Capital (Guide)

Human capital is a term popularized by Gary Becker, an economist and Nobel Laureate from the University of Chicago, and Jacob Mincer. It is also worth mentioning the contributions of Theodore Schultz to this theory. The human capital theory refers to the stock of knowledge, habits, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value.

Education is an investment in human capital that pays off in terms of higher productivity. There will always be a discussion about whether certain levels of education are worth the investment. The process of continually seeking more education keeps your mind active and working hard, improves your ability to learn anything (cognitive skills), and opens your mind up to new ideas. These are all qualities that can increase your human capital.

If you believe that your job is confined to what happens between 9:00 AM and 5:00 PM, your opportunities for advancement might be similarly limited. However, developing a work ethic in which you expend effort and achieve at levels beyond what is asked of you, you can increase your human capital.

Become a versatile subject matter expert. Learn other people’s functions and how to manage other people to increase your human capital. Explore beyond your industry. When the housing market collapsed, thousands of mortgage brokers were forced out of their jobs. Many of these individuals didn’t have much training in any other industry. 

They had to trade in their six-figure commission-based incomes for low-wage sales training positions or opt to wait for the market to return. With skills in an industry that doesn’t fluctuate due to market cycles or other external forces, you will have a higher human capital than someone whose job will always be a victim of circumstances.

Improve your public speaking and presenting skills. If you are a good speaker or presenter, you’ll be several steps ahead of someone with the same knowledge and technical skills who does not know how to perform in front of an audience. These are add-on skills that increase your human capital.

Cultivate your human network. In order to boost your human capital, you need to focus on the people you know and meet in two ways: breadth and depth. The more people who know you and are familiar with your skills and interest, the more opportunities you will have to seek opportunities. But not only should you expand your network, you should cultivate your most important contacts.

Publish your thoughts. The easiest way to publish your thoughts is through online writing online. Certain methods of doing so can result in growth in human capital. Keeping a journal of your daily activities is not one of these methods, unless you see journaling as a path to increased income. Most of the time, you should write within your field of expertise. 

And you should use the name you would like to be known professionally. As your writing increases in volume and quality, your human capital will increase as well.

Stay healthy. Find time to be physically active and eat healthy foods. While we have stories of heavy smokers and drinkers who live beyond one hundred years, this is not the norm. If you want to increase your human capital, you want to behave in ways that are most likely to extend your life. In particular, you want to prolong the years of life during which you have an ability to earn income. Your health is not always entirely in your control, so you should control as many aspects as possible.

Start early. Whether you’re investing or looking to increase your human capital, you want to have time on your side as much as possible. When it comes to investing, longer time periods smooth out risk and offer opportunities for compounded returns; with human capital, the earlier you start, the more time you will have to earn income. Also, the younger you are, the easier it is to shift gears and start a new career if necessary.

This ability is a significant factor in the measurement of human capital. With an increased human capital, an ability to earn more income regardless of external forces, you are able to take fewer risks with your investments. Conversely, a lower level of human capital might result in unstable or less income over time, necessitating more risk in investments to achieve a higher return.

Human capital is therefore an important part of your total financial value and should be factored in some form in addition to your other financial metrics like net worth, income, expenses, cash flow, and a variety of financial ratios. Such investments provide returns to the individual as well as to the economy as a whole. Individuals benefit from higher earnings, and the economy as a whole benefits from higher productivity.

It is analogous to other forms of capital in that, investments in human capital yield income and other benefits over a long time. 

Human capital theory is concerned with finding ways to measure human capital and the rate of return on investments in human capital, both to the individual and to the economy as a whole.

In the United States, for example, the percentage of laborers and unskilled workers has decreased over time, while the percentage of professionals, managers, executives, and technical workers has increased. These changes during the 20th century indicate that the quality of the labor force has risen. Such a change can be quantified to determine how rapidly the average skill level of the labor force has risen over time.

Studies have shown that investments in human capital are essential for sustaining economic growth over time. The law of diminishing returns suggests that investments in physical capital and land eventually fail to result in economic growth. Yet, countries such as the United States, Japan, and many European nations have sustained economic growth over the past century.

Heavy investment in the training of workers and a better educated labor force are given credit for much of the growth in per capita incomes and economic productivity. A comparison of modern, educated farmers with farmers in traditional economies shows the need for educating workers to help them cope with changing technologies.

While economists have been able to demonstrate a statistical relationship between education and earnings, they have not been able to conclusively show a cause-and-effect relationship. That is, while higher earnings are associated with more education, it has yet to be conclusively shown that more education leads to higher earnings.

The theory that more education is a causative factor in higher earnings has been attacked on two points. One is the ability problem, or the fact that more-highly educated individuals are also likely to have the ability, self-discipline, and motivation that also result in higher earnings. Such individuals tend to do well in the labor market, it is argued, not only because of their education, but because of other abilities.

The concept of human capital can be applied to an individual firm as well as to the economy as a whole. The expertise of a company's employees is often referred to as its intellectual capital. It may include such intellectual assets as patents, processes, management skills, technologies, information systems, and customer knowledge. 

Like human capital, intellectual capital is difficult to measure, and companies that recognize its benefits are seeking ways to manage and codify it. With access to capital and technology tending to level the playing field between companies, human capital has become essential to sustaining a competitive advantage. 

In order to gain the most from investments in human capital, and in recognition of the importance of people processes, companies are linking individual behavior with corporate goals. The strategic approach to human capital focuses on processes such as dialogue and discussion. Strategies to develop human capital within an organization also focus on the future and take a long-term approach.

Every business owner knows that an investment in human capital is important to scale. They must not only hire talented people but also support their individual growth which will ultimately lead to business success. Companies can invest in intellectual capital, just as countries invest in human capital, through training programs and hiring practices. 

Human resources departments can develop a long-term strategy to maximize human capital. Social investment in human capital is a matter of public policy. Examples of policies that tend to increase a country's stock of human capital include using the human capital of both men and women, investing in higher education, supporting dropout prevention programs.

Whether you want to call it human resource, human capital, talent acquisition, or something else; there is no denying that investing in human capital increases personal and economic growth. The benefits of investing in human capital is unparalleled. Knowledge, skills, abilities, and competencies can be learned if they are administered correctly to a specific person. 

The more motivated you are to learn, the more likely is it for you to acquire the information and reflect it in your behavior.

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