What Is Human Capital?

Definition, Examples & Impact of Human Capital

College students sitting at tiered desks in a lecture hall.
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Human capital is the economic value of the abilities and qualities of labor that influence productivity, such as education. Investing in these qualities produces greater economic output.

The investments are called human capital because workers aren't separate from these assets. In a corporation, it is called talent management and is under the human resources department.

What Is 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 created 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.

Types 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 included time as well as 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 research was limited in that it focused much on the education of white men, rather than diverse groups of people.

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 in 2019 was $65,712.

States With Top Education Spending, FY 2018
State Education Spending Per Pupil Median Household Income
New York $24,040 $67,844
District of Columbia $22,759 $85,203
Connecticut $20,635 $76,348
New Jersey $20,021 $81,740
Vermont $19,340 $60,782
Alaska $17,726 $74,346
Massachusetts $17,058 $79,835
New Hampshire $16,893 $74,991
Pennsylvania $16,395 $60,905
Wyoming $16,224 $61,584
Rhode Island $16,121 $64,340
Data from U.S Census Bureau: U.S. School System Spending Per Pupil by Region; 2018 Median Household Income in the United States

States with higher education scores generally also have higher incomes.

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.

A Federal Reserve study found that in 2019, the median family income of those with a college degree was $95,700 as compared to $45,800 for families with just a high school degree. This gives them 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. 

Upward Mobility Effect of College

Higher education improves the upward-mobility effect when a child is born into a family without a college degree. Once the child earns a diploma, the entire family becomes wealthier.

A Federal Reserve study found that a child earning a college degree can boost family wealth by 20 spots in the rankings. Families in which both the parents and child graduated college improved by only 11 spots in the rankings.

By contrast, lacking a college degree can create a downward-mobility effect.

Children with college-educated parents who didn't graduate college fell 18 places in rankings in wealth. Children whose parents didn't graduate from college fell 10 places in rankings in wealth.

Education Investment in the United States

The United States does not invest in human capital like education at the same level that other developed countries do.

Between 2012 and 2017, U.S. public spending on education increased by around 10%. This was slightly higher than the average for all countries surveyed although other developed countries increased spending even more.

U.S. investment in higher education is also falling behind that of other countries. Among Americans aged 25-34, only 50% have a college-level education. That's lower than in nine other countries, such as South Korea and Ireland where 70% of young people are college-educated. 

One reason for lower education investment is that higher education in the U.S. is more expensive than in many other countries. The average annual cost of tuition, fees, room, and board for a four-year public college for the 2020-2021 school year was $22,180 for state residents and $38,640 for out-of-state students.

As a result, children from families that are already wealthy are more likely to attend college. This decreases economic mobility in the United States by limiting who receives a college education. It also limits the increases in human capital, which in turn limits economic growth.

Key Takeaways

  • Human capital is the economic value of the abilities and qualities of labor that influence productivity. These are qualities like education, health, and on-the-job training. Human capital is intangible but cannot be separated from workers.
  • Education is one of the most important elements of human capital, leading to increased economic output, higher individual income, and increased economic mobility for families.
  • In the United States, limited investment in education plus the costs of higher education result in limited economic mobility and stagnating growth in human capital. This in turn limits the potential for economic growth.