Human capital is the economic value that an employee provides to an employer. The assessment of this value is related to the body of skill, knowledge, and experience that the employee possesses. Factors such as formal education and participation in ongoing training related to the workplace also help to enhance the value that the employee has.
As one of the basic factors of production, human capital is essential to the operation of just about any type of business. Employing individuals who have the necessary expertise, judgment, and ability to function within their assigned roles allows the business to operate at maximum efficiency. This, in turn, increases the potential of earning a profit and remaining successful. A failure to identify individuals with the necessary combination of skills, experience, and education can undermine the efforts of even the most well-organized company.
Businesses often make investments in their employees. Just as a company may invest in new technology to enhance its internal communication processes, the business can identify employees who demonstrate an aptitude for needed skills and arrange for those workers to receive professional instruction. This allows the company to have access to a wider skill set without the need to hire additional people. At the same time, the business helps to raise the economic value of each of those individuals.
One example of how an individual acquires more capital is the professional athlete. Often, the athlete begins the process of preparing for a career in sports by learning the basics of the sport, receiving instruction in specific strategies related to participating in an actual sporting event, and ultimately gains experience by playing that sport. Assuming the combination of knowledge, talent, and experience are sufficient, the athlete is offered the opportunity to play professionally, where he or she gains additional experience. All through this process, the economic worth of that athlete increases, resulting in a higher value to whomever ultimately employs the athlete.
Human capital is a form of value that should be understood only in economic terms. Worth of this type does not include consideration of the value of the individual to the family, community, or other aspects of his or her social network. The focus is strictly on the skills, knowledge, and experience that the person possesses, and how much those assets are worth to a given employer. For this reason, individuals should not base their total worth in terms of this value alone.