Human capital is the collective term for the quality and quantity of a nation’s workforce – how many people there are who can work, and how well they can work and/or contribute to the nation and its economy. To look at quantity, we can examine demographic trends to see how many people are entering and leaving the workforce and find the ratio of workers to non-workers. Measuring “quality” is a bit more difficult, since qualitative measurements are by definition fuzzier than demographic statistics.
The average number of years of education in the labor force is often used to estimate how productive a nation’s labor force will be, but that clearly ignores differences in the effectiveness of different educational systems as well as mismatches between the skills learned and the skills needed. Other factors that can severely impair national productivity if they aren’t addressed are poor health (and a lack of access to healthcare services) and pervasive poverty. Sick workers are less productive and much more likely to drop out of the labor force early, taking their skills with them. Poverty degrades both health and skills, which further worsens the poverty situation, creating a persistent drain on the nation’s human capital. We’ll be looking at all of these factors and how they interact.
Human capital is one of the keys to national prosperity. Without a large, healthy, educated, and productive work force, a nation’s economy is just not going to be able to add enough value to really thrive in a global economy. In many respects, it’s more important for economic growth than physical capital, as a lack of natural resources can be overcome with sufficient productivity, and infrastructure can be built given a productive economy. However, human capital isn’t worth nearly as much if social factors prevent it from being applied efficiently, so social capital is crucial to maintaining and utilizing human capital.
The simplest short-term measure of human capital is economic productivity: GDP divided by the total number of workers in the workforce. But that figure can be thrown off by structural problems, bad laws and regulations, and physical limitations. A landlocked country with poor roads, few resources, and a rigid and cumbersome government will need far higher levels of human capital to hit a level of economic productivity that would come easily in a country in more fortunate circumstances.
So, by “human capital“ we mean what’s behind the productivity numbers: how good is the match between the size, health, energy, and range of skills in the labor force as a whole and the needs of the economy? Finding that balance was one of the biggest reasons why the U.S. became an economic superpower in the 20th century: for two centuries we did a better job of developing our human capital than any other large nation. Likewise, one of the biggest reasons that we now feel like we’re slipping backward and becoming less competitive is that we’re no longer doing as well as other countries in creating and maintaining a highly skilled and competitive labor force.