How to Invest in Your Human Capital

Nathalie Olds

Invest in Your Human Capital

Your skills, your knowledge, your defining characteristics: everything that makes you you. This collection of intangibles is what employers attempt to discern as they move you through a selection process. They need to find out if you’re the person who fits the position, the person who is right for the job. Economists refer to this ‘collection of intangibles’ as human capital, and it’s only over the last fifty years that its true value has emerged.

The Idea

The term human capital first emerged in the 1950s and was popularized at the OECD’s first conference in 1961: the Policy Conference on Economic Growth and Investment in Education. It was not until the 1980s, however, that human capital theory became grounded in data thanks to the development of endogenous growth models.

You’ll recall from the last education post that production (sometimes measured by GDP) depends on two factors (capital and labour) and an exogenous x factor known as technical progress or knowledge. But what if that x factor could be determined within the model? That’s the question economists like Paul Romer, Robert Lucas, and Robert Barro answered by developing endogenous growth models. The rate of technical progress is an output of endogenous growth models, and the importance human capital can now be quantified.

The Data

Unfortunately, initial attempts at quantification showed that indicators of human capital such as educational attainment (measured by number of years of education, for instance) were only weakly related to national economic growth. Why?

  1. Inconsistent standards. Educational standards varied widely from country to country and even within a country. People with a high school diploma had a wide variety of knowledge and skills; a level of educational attainment meant different things in different places, and so the measure was highly imprecise.
  2. Disconnects between skills needed and skills taught. You may have an advanced degree, but does that mean you have the skills required to succeed as a member of the work force? The skill sets certain overlap, but they’re not an exact match. More on this a little later.
  3. Requirement of lifelong learning. Human capital encompasses more than an initial period of formal education. To succeed in an increasingly global economy, you must continue to learn and develop your skills. (Yes, even in the 1980s this was the case.)

These problems persist today. In some respects they are now less pronounced, but measures of human capital have evolved as well. The end result is that, empirically, increasing your human capital makes you more productive and allows you to command a higher wage.

Education’s Contribution to Human Capital

Education matters for a variety of reasons, one of which is to increase the likelihood of personal economic success. But so many young professionals with tertiary degrees are finding it difficult to get a job in the current economic climate. Some have had to accept work in jobs outside of their field. Why? If formal education alone isn’t the answer, what is?

As mentioned above, there is a disconnect between the outcomes of formal education and the set of skills, knowledge, etc. needed in the work force. Tertiary professional programmes such as nursing, engineering, and teaching prepare you for a particular career; graduation requirements are often developed or approved by professional boards who know what it takes to succeed in their field. Is it any wonder these programmes usually require some hands on project or on the job training? Or that graduates in these fields have less difficulty transitioning from school to work?

Other tertiary programmes are more general. Most programmes do not prepare you for a particular career, though many of the skills these programmes teach are useful for employees to have. Primary and secondary education are even less focused on job-related skills. Their focus is mostly on the knowledge and skills needed to function in society: the three R’s – reading, riting, and rithmetic.

Life Long Learning 

Should schools be focused on providing only those skills deemed important for the workforce? Absolutely not. As previously noted, lifelong learning is crucial for continuing economic success. Schools need to find the right balance between teaching job-related skills and developing lifelong learning capabilities. This balance is likely to change over time as students progress from primary to secondary to tertiary education and beyond.

Outside of a handful of professional programmes, schooling is unlikely to prepare you as adequately for the working world as you might hope. It addresses some aspects of human capital while ignoring others. In order to prepare yourself for work – and attract potential employers – you’ll have to go a little further.

Human Capital, Economics, and You

So what kind of human capital should you invest in? It depends on what you want to do. Being able to shoe a horse isn’t the best resume builder if you plan to become an investment banker. Figure out where your interests lie and start talking to people in that field. They’ll know exactly what their own education did – and didn’t – accomplish.

Employers want to know that you can show up on time and get things done. Can you think in practical terms on deadline? Can you made the right time/quality tradeoffs? Can you work with and under others? Employers don’t want you to say ‘yes’, they want you to point to a specific example and explain how you accomplished these things. Critical thinking and problem solving are also important to most employers, and building a wealth of varied experience will only enhance these skills.

Here are just a few ways to invest in your human capital:

  • Get some work or volunteer experience, even if it’s outside of your field.
  • Maintain a blog. Communication is a skill everyone needs, and documenting personal projects or opinions will provide concrete examples for potential employers.
  • Read as much as possible about your chosen field from both academic and non-academic sources.
  • Find out what types of software are in common usage in your chosen field and learn them.

Looking for a good investment? Skip the house: invest in your human capital.