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Economist Theodore Schultz invented the term human capital in the 1960s to reflect the value of our human capacities. He believed human capital was like any other type of capital; He believed that investing on human capital would lead us to a higher production, (Investopedia)
Investopedia defines human capital as a measure of the economic value of an employee's skill set. The concept of human capital recognizes that not all labor is equal and that the quality of employees can be improved by investing in them. The education, experience and abilities of an employee have an economic value for employers and for the economy as a whole. (Investopedia)
Investors Words defines Human Capital as "the set of skills which an employee acquires on the job, through training and experience, and which increase that employee's value in the marketplace." (Investors words) Human capital is a way of defining and categorizing peoples' skills and abilities as used in employment and otherwise contribute to the economy. (wikipedia)
These are definitions that the dictionary on line and investors' words on line give, but in this paper, I will explain human capital and productivity based on Wheelan's concepts, and other sources. I use real people's examples for a better understanding.
Human beings possess qualities, skills, and talents that make them different from other human beings. Skills are considered human capital because they make you unique; they differentiate you and make you better at something than anyone else. There are different types of skills. Some human beings possess scarce skills, or human capital, such as a great education and knowledge at computer programming such as Bill gates, or the ability to be the best at basketball or golf, like Michael Jordan or Tiger Woods.
These people have a huge human capital because they possess skills no one else has, and these scarce skills give them the opportunity and the advantage to become rich. They get paid a lot of money because no one else can do what they do at the high level they do. People invest on human capital, such as education and training, but some human capital is not for anyone to invest on. Some human capital is like a gift, like a talent, and cannot be bought or paid for. The gift that Michael Jordan was born with was the physical and mental skills to be the best basketball player, and he never invested on them, he just worked on them to become better.
Economist study poverty and income inequality to understand who is poor, why is poor, and what can be done about it. The reason why there are rich and poor people is a concept that economist call Human Capital. As Wheelan says on his book, human capital is the sum total of skills embodied within the individual: education, intelligence, charisma, creativity, work experience, entrepreneurial vigor, and any talent at sports, etc. Wheelan says that human capital is what a person would have left if someone took away all of his assets: job, money, home, possessions, etc. (Wheelan, p.99)
Wheelan says that some kinds of talents are in a greater demand that others. There are many rich people in this world that are rich because of certain circumstances that have nothing to do with human capital, such as Queen Elisabeth II, who inherited royal money. Her human capital is very high due to a royal education and life, but if she lost all of her assets, it is likely that she would never become as rich as she is right now because her human capital is not unique. However, there are many other people in this world that are rich due to his/her skills or human capital. These people are uniquely gifted and skilled at something, and that rises up their human capital.
On the other side, if someone like Donald Trump who is rich in assets and human capital lost everything he has, he would probably get back on his feet. The reason is because his human capital is so rich that he would easily get a job somewhere and started working in a new company, and with his human capital, little by little, he would be able to start building his new empire. The price of a certain skill is based on its scarcity, not its social value. People like Donald Trump are rich because they have invested on education, training, which means that they have invested in human capital. Robert Solow said: "There are a lot of good economists, but there is only one Roger Clemens." (Wheelan, p.100)
The human capital that someone posses is untouchable, nontransferable, and will give you more chances to succeed in life. As Wheelan says, "
people are poor in America because they cannot find good jobs. But that is the symptom, not the illness. The underlying problem is a lack of skills, or human capital" (Wheelan, p.101)
Parents who invested in their own human capital will invest in their children's human capital, and these children with better skills will be a contribution to the world as well prepared human beings. Wheelan says; "Human capital is about much more than earning more money. It makes us better parents, more informed voters, more appreciative of art and culture, more able to enjoy the wonderful things that the world offers us."(Wheelan, p.105)
Human Capital is important because it is linked to productivity. Wheelan defines productivity as "the efficiency with which we convert inputs into outputs. In other words, how good we are at making things." (Wheelan, P.107) This means that if we are highly trained to do something, productivity will be high, and the benefits will be greater.
The dictionary on line states that: "Productivity: The efficiency with which output is produced by a given set of inputs. Productivity is generally measured by the ratio of output to input. An increase in the ratio indicates an increase in productivity. Conversely, a decrease in the output/input ratio indicates a decline in productivity."(Dictionary on line)
Investors Words defines Productivity as "The amount of output per unit of input (labor, equipment, and capital). There are many different ways of measuring productivity. For example, in a factory productivity might be measured based on the number of hours it takes to produce a good, while in the service sector productivity might be measured based on the revenue generated by an employee divided by his salary."(Investors words)
As Wheelan says, America is rich because Americans are productive, this means that Americans are good at producing goods are services and they work less and produce more. The GDP, adjusted measure of how much each of us produces, on average, has increased from $4,800 to $31,500. (Wheelan, p.107) Americans produce more than many other countries because they are better educated, healthier, they have better access to capital and technology, and because they have more efficient government institutions, and a better public infrastructure. Productivity growth is what improves our standard of living, and makes us richer. Productivity growth depends on investment; in physical capital, in human capital, in research and development, etc. These investments require that we give up consumption in the present in order to be able to consume more in the future. If I don't spend money now in buying a used car and invest in a master's degree, my future income will be higher. We spend resources now that will become more productive later. (Wheelan, p.108-110)
In conclusion, Wheelan says that a world in which every individual was educated, healthy, and productive would be a world in which every person lived well. (Wheelan, p.115) This theory makes sense because if people were invested on human capital-education, training, creativity- they would have the skills to perform successfully at work, then the productivity would be higher, and the companies would make more money so that they would be able to pay their employees a good salary. In other words, human capital makes us more prepared and skilled for jobs, it makes us richer and healthier, and it helps us to produce more. If we produce more then we can earn more money so that we live better while working less.
Wheelan, Charles "Naked Economics. Undressing the Dismal Science." W.W. Norton $ Company, New York and London. 2002
"Human capital." Wikipedia,the Free Encyclopedia. 20 Oct. 2005. Wikimedia Fundation Inc. 01 Nov. 2005
Johnson, Paul M. "Human Capital." Investopedia.com. 1994. Auburn University. 01 Nov. 2005
Investopedia.com "Human capital"
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"Human Capital And Productivity." 123HelpMe.com. 02 Sep 2014