What Is Human Capital?

Definition of Human Capital

Human capital recognizes the intangible assets and qualities that improve worker performance and benefit the economy. These qualities cannot be separated from the people who receive or possess them.

In the 1950s and early 1960s, Nobel Prize winners and University of Chicago economists Gary Becker and Theodore Schultz were among those primarily responsible for the development of the theory of human capital. Becker realized the investment in workers was no different than investing in capital equipment, which is another factor of production. Both are assets that yield income and other outputs.

Becker differentiated between general and specific human capital.

• Specific human capital: Training or education that benefits only one company
• General human capital: Training or qualities that benefit the individual at any company

Becker found that companies were more likely to pay for specific human capital while individuals paid for general human capital investments. Firms were less interested in investing in workers who might then be poached by competitors.

Examples of Human Capital

Human capital includes any human quality or value that can improve economic output and productivity.

Because these are intangible assets that cannot be separated from individual workers, quantifying them can be difficult. However, they consistently lead to increased economic performance.

Human capital can include qualities like:

• Education
• Technical or on-the-job training
• Health
• Mental and emotional well-being
• Punctuality
• Problem-solving
• People management
• Communication skills

Investment in these qualities improves the abilities of the labor force. The result is greater output for the economy and higher income for the individual.

Human Capital and Education

Becker's research focused on education. Becker pointed out that the cost of education is an investment that introduced issues of opportunity cost in terms of time and money.

Pursuing an education means that students lost the opportunity to work, travel, or have children. People only pursued an education if the potential income gain was greater than the cost.

Becker’s theory explained how investing in education benefited people, companies, and countries. The majority of the states that spend the most on education also have median household incomes that are higher than the national median, which was $67,521 in 2020, a decrease of 2.9% from the 2019 median of $69,560.

As a region, the Northeast spends by far the most on education. Average per-student spending totaled $21,123 in 2020, compared to $13,535 in the Midwest, $12,802 in the West, and $10,954 in the South.

States with higher education scores generally have higher incomes, although that isn't always the case.

Human Capital and Economic Mobility

Investment in human capital benefits individual workers as well as the economy in which they participate, creating greater earning potential and an increased ability to build wealth. This is particularly true of education.

The average worker with a bachelor's degree earned $1,334 per week in 2021. Weekly income dropped to just $809 for those with just a high school diploma, and it rose to $1,909 for those with a doctoral degree. Those with higher levels of education have a better chance of earning enough income to save and acquire wealth, which is key to economic mobility.

Improved Childhood Education

Families headed by educated parents earn more than those without college degrees. They are likely to either live in wealthier neighborhoods with better schools or can afford private schools.

These children then receive a better education than children of lower-earning parents. As a result, children of better-educated parents have greater earning potential and economic mobility.

The Familial Effect of College

The pursuit of higher education can influence future generations, according to research from the Federal Reserve. While a first-generation college graduate experiences an economic boost, it isn't enough to offset the economic advantage of having a college graduate as a parent.

The Fed study found that an individual's education is strongly related to their parents' education, meaning the more familiar and successful the parents are with higher education, the more likely it is that the adult child has a four-year degree. The Fed, in turn, found that a continuing generation of college graduates is significantly higher for younger generations.