What is Human Capital?

Human capital theory grew out of attempts to explain differences in income among individuals. Human capital is the accumulation of prior investments in education, on-the-job training, health and other factors that increase productivity (McConnell, et al. 2013, p. 588) Human capital deals with the qualitative aspects of labor. The basic idea is that the more human capital a person has, the more productive they are, and the more they contribute at the margin. Markets for investment in human capital differ from markets for physical capital (machines) in that human capital is rented, not sold. Human capital belongs to each individual human being and you sell your labor services, but not yourself. This is the reason that most investment in schooling is usually made by the individual or their families and not businesses. Loans or investments in human capital (school loans) are often considered risky because there is no physical collateral and no financial collateral.

The rising college wage premium has raised the importance of attaining higher education for future earning power, which, because of rising tuition and "capital market imperfections" (restricting access of families with modest means to credit and loans, offset only somewhat by grants and scholarships), has ratcheted up the demand on the part of citizens for relief and subsidization. Think how much more inequality would be growing without the public sector picking up more of the tab.

One vital form of human capital investment is in higher education which both provides general knowledge and creates general skills, some of which you may not even be consciously aware. Examples of such general skills include self-direction, punctuality, meeting deadlines, time management, research methods, report-writing, public speaking, note-taking, typing, Internet searching, juggling demands, and "people-skills" such as teamwork, leadership, and last but not least, asynchronous communication. These skills can be applied at almost any job, occupation, industry, or workplace that you enter. In addition, higher education may help you develop new skills that are specific to a given occupation, such as accounting, counseling, computer programming, teaching, market analysis, lab work, nursing, to name a few.

Whether or not it is their initial goal, individuals enter or stay in school, including college, or trade programs, because it is hoped that it will increase their future earning power. Indeed, studies of the impact of education on individuals' earnings find that on average, each additional year of education bestows on individuals an identifiable, future monetary gain. Just attending college, without having completed a degree, produces a payoff in the form of a higher stream of lifetime earnings.