Human Capital is a measure of the skills, education, capacity and attributes of labour which influence their productive capacity and earning potential.

According to the OECD, human capital is defined as:

“the knowledge, skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in market circumstances”.

  • Individual human capital – the skills and abilities of individual workers
  • Human capital of the economy – The aggregate human capital of an economy, which will be determined by national educational standards.

Factors that determine human capital

  1. Skills and qualifications
  2. Education levels
  3. Work experience
  4. Social skills – communication
  5. Intelligence

How to increase human capital?

1. Specialisation and division of labour. Specialisation allows workers to concentrate on specific tasks and increased specialisation of skills. (Though specialisation can also lead to boring, repetitive jobs and limited skill development of workers.

“The greatest improvement in the productive powers of labour.. seem to have been the effects of the division of labour.” – Adam Smith

2. Education. Basic education to improve literacy and numeracy has an important implication for a basis of human capital.

3. Vocational training. Direct training for skills related to jobs, electrician, plumbing nursing. A skilled profession.

Importance of human capital

  1. Structural unemployment. 
  • Individuals whose human capital is inappropriate for modern employers may struggle to gain employment. 
  • A major issue in modern economies is that rapid deindustrialisation has left many manual workers, struggling to thrive in a very different labour market.
  1. Quality of employment. 
  • In the modern economy, there is increasing divergence between low-skilled, low-paid temporary jobs (gig economy). 
  • High skilled and creative workers have increased opportunities for self-employment or good employment contracts.


Shared by Civil Services Gurukul

For more detail refer Booklet.

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