If you have gone through any social media website of late, you may have realized a shift in how companies do their marketing. It is likely that you saw more and more celebrity posts tagged “Paid partnership with…” These celebrities, you may say, are being paid to do a whole lot of nothing but being famous, well that assumption is wrong. These companies are leveraging a key aspect of economics that is largely overlooked or generalized by many but has gained more and more attraction. What is it you ask? Human capital. Human capital can be termed as the collection of skills, intelligence, abilities, talents, values and wisdom and wealth of experience that a person has and how this all adds up and affects the overall productivity of an individual in any economy. The Human Capital Theory was first put forward in 1960 by Theodore Schultz at his presidential address to the American Economic Association.
What is Human Capital Theory?
Human capital theory is the view of an individual’s potential contribution to the productivity of an economy as the collection of skills, abilities and talents acquired through education and or in training of the individual. The contribution and effect of having human capital became more apparent after the second world war. Many developed countries were able to recover and rebuild their economies much faster than countries where human capital was not developed. It is the case regardless of whether the country lost in the war or not.
Let us take Germany for example. It is arguably one of the most industrially-advanced countries in Europe and in the world despite having lost the war. Japan has a high performing economy despite being the site of the final acts of violence during the second world war. These countries were able to dig themselves out of the trenches after the war because of the wealth of experience that they developed before and during the war.
Human capital hypothesis
The human capital hypothesis has been used by many to try to explain various trends in the industries. These include why older professionals in white-collar jobs earn more than their younger counterparts and why there is a gender pay gap between men and women in different professions. The human capital hypothesis is the analysis of various effects or outcomes that result from the different aspects of human capital, that is, understanding how human capital can influence certain aspects of an organization or an individual’s productivity or decisions based on perceived human capital.
An example of how this is used is in explaining why older professionals earn more. This is because when you hire a person that has been, say an accountant for ten years, he is likely more capable of navigating the various challenges of doing an audit and knowing what to look for and where to look than one who doesn't have as much experience. A younger accountant fresh out of college may have the same qualification, meaning they have the same training, but the lack of experience makes them less efficient in doing the same job. It is because of this disparity on productivity that younger professionals are paid less. In essence, experience is an aspect of human capital and has been used to explain the pay gaps.
The other area where the human capital hypothesis is used is in the pay gap between the genders. To use this hypothesis, it is first assumed that human beings make rational decisions and use logic to do so. This implies that an individual’s actions are made with full understanding of the consequences. The human capital hypothesis according to author G.S. Becker in his book “Human Capital and Poverty Alleviation (1995)” theorized that women have a vested interest to put in less effort at work.
To understand this, he states that a woman with children has a vested interest in focusing on raising her children and their overall care than putting in effort at work. On the other hand, men are more likely to be the breadwinners for the family and hence, are less involved in the more intensive household duties and more invested in their work. This is why they tend to earn more.
It is no mystery why this hypothesis has attracted a lot of criticism from various schools of thought. First, it assumes that gender roles are as a result of personal choices of individuals and seeks to explain them away with simple biological differences. Secondly, it ignores the problems of cultural appropriation of these roles and the social factors involved in making the said decisions. One of the many aspects of the human capital theory is that individuals and their productivity are influenced in part by their experiences on which social and cultural factors have a lot of influence.
This hypothesis is holding up less and less over time as the justifications for this gap are tougher to explain when women are getting more and more empowered both with education and training and shifting social and cultural views.
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The hypothesis, also, in this regard fails to explain why some women who are more independent than their domestic counterparts still earn less than their male colleagues at the same level. The more career-oriented women, of course, earn more than those who choose to adopt more feminine roles in society.
The human capital hypothesis is also used to try to explain various other nuances of economics by aiming at the various components of human capital and the outcomes of these factors being as they are. Occupational self-selection can be one of the many ways the hypothesis is used. Explaining why some demographics may lean toward a certain occupation or why STEM is a more male-dominated industry. Other areas where the hypothesis can be applied include the study of the rates of layoffs and quitting of employees, the likelihood of entrepreneurial success and the evaluation of the effects of human capital on the performance of an organization.
Human capital development theory
Human capital development theory seeks to explain that to increase productivity of individuals, necessary changes that will improve the different aspects of human capital have to be made. This includes factors such as creating a better working environment to spark more creativity among employees or furthering the education of individuals. Overlooking the foregone cost of time taken to train whereas one could be earning income with their current skills or the cost of the training, the higher pay after attaining higher qualification is a fair trade-off. Human capital development theory has been refined over the years as more scientists look deeper into human capital. There is a constant shift in how human capital is looked at, with each change in perspective, we get newer ways in which human capital can be developed.
Initially, human capital was looked at as the knowledge and skills an individual has and this has changed considerably over time. Given this point of view, the development of human capital was simply achieved by furthering the education and training of individuals. Over time, work experience and aptitude became the principal focus of human capital analysis and thus, developing these attributes was the development of human capital, and individuals that had a better aptitude and more work experience were more “valuable”. Slowly, human capital has become more human in the sense that it is looked at in a more individual way.
Personal aspects such as creativity, innovative capacity, risk management ability and attitude towards risk, entrepreneurial ability and other tangible qualities are seen to influence human capital. The influence of education throughout these changes remains as it has become more of an enabler of these qualities of human capital rather than the metric for human capital.
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Human capital theory of migration
Over the years, more educated individuals have been moved to more urban locations and this has had a positive impact on productivity despite being seen as not influencing income as much. This is the case for internal migration. Immigration, on the other hand, is influenced differently by human capital. Highly trained individuals move to more developed countries from their home countries which are mostly emerging economies. These individuals offer more human capital and thus, are more likely to gain employment in their destination countries at higher incomes. The same individuals are also better-equipped to further their skills and use them to their full potential.
Human capital migration is influenced by various aspects of society, for example, the desire for a better quality of life will make a graduate seek opportunities abroad. This desire is born of the exposure and knowledge of the better possibility brought about by the move being feasible as a result of the same training.
The Human capital theory is the consideration of human capital as a factor of production that is central to all industries in one way or the other. Changing industry trends simply change the perception of human capital as seen by current advertising leveraging celebrity for brand recognition or the more let-loose office set-ups that start-ups adapt. The Human capital theory is used mainly in human resource management in the ever-changing industrial environment to ensure that the various factors that are influenced by human capital are all kept at the best performance levels. Organizations and governments are constantly looking for new ways of developing, managing, maintaining and retaining human capital using the results of studies around human capital theory.
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