No capital without human capital
What is Human Capital?
Let’s have a look at the words human capital. The words suggest that there is a capital which is human. So does that mean I can buy stocks or shares investing in humans? Not really, but that picture is quite an interesting one.
Human capital is the knowledge, skills and abilities a human possesses. It defines his or her economic value when using theses abilities, skills and knowledge.
The human capital of a person is the present value of a person's future financial income. This is determined through age, expected income and salary increases and job security. The younger you are, the more income you are expected to earn. The more relevant your skill set, the higher your job security and expected income. In a typical setting, your human capital is rather high when you are young as your expected earnings still need to materialize. The older you get, your human capital decreases and your financial capital increases as you materialized your human capital.
Building up and maintaining your human capital is crucial to your future financial capital development.
How do I build human capital?
Human capital is composed of knowledge, skills and abilities. So the question is how do I grow and maintain these factors?
Knowledge is typically developed through education such as school, university, reading books and making use of other resources. For example, according to karrierebibel.de, you earn 28% more when you have a Master’s degree than your peers who have an A Level high school degree. The average salary of a Master’s degree graduate is ca. EUR 56.165 (gross) per year, Bachelor graduates earns ca. EUR 55.585 (gross) per year and specialists with an A Level high school degree earn EUR 43.980 (gross) per year. A Phd graduate on average receives EUR 65.708 (gross) per year. Why this difference? The job market puts a premium on the additional knowledge you gain through education.
When you are young, e.g. you are right out of university, your human capital is usually quite high.
But the value of your human capital depreciates unless you invest in lifelong learning by getting specific professional certificates or attending training relevant to your job. According to studies issued by Oxford University as well as consulting companies such as PwC (PriceWaterhouseCoopers), around 20-30% of the current jobs are going to be automated in the next 5-10 years.
If your job involves repetitive work, is based on rules, needs to be very precise and is time consuming, the likelihood is high that your job is going to be automated.
This affects jobs in the financial sector, administrative type of jobs or production jobs. The only way not to make yourself redundant is to keep up with the skills which are required in the future. But what are the jobs then which are rather safe? Those are jobs which require you to be creative, to be close to your clients or are very unpredictable. For example these are jobs such as artists, scientists, strategists, but also nurses, physicians or plumbers.
Ability is the possibility to know how to bring your knowledge into practice - how to apply it. This is why gaining experience as much and as broad as possible is so important- it helps you maintain your value long-term.
Do not only look into off the jobs certificates or training possibilities, but also keep your eyes open and be curious. The more your learn on the job, the more you know how you can create value.
Warren Buffet, one of the most successful investors, said once: “The more your learn, the more you earn.” I agree 90%, with a remark: “... as long as you learn something you can leverage.”
In the past, if you went to university, this was a good indicator you’d obtain a well paid position. Nowadays, the topics taught in universities are not always up to date but rather provide you with a direction or subject matter expertise. For many rather newer types of jobs, the actual learning happens on the job. It can mean that five years later your job has been completely transformed. In a nutshell - the ability to apply your knowledge in the long-term is the biggest influencing factor for your human capital, not knowledge itself.
Whenever possible, try to engage in job rotations or ask for a possibility to enrich (specializing in your skill set) or enlarge (broaden your skill set) your job - ask for additional tasks (enlargement) or to take on more responsibility and deepen your skills (enrichment).
The important piece is that it is in your very interest to be as up to date as possible in your line of work. This is also in our employer’s interest: you can become more productive through trainings or job rotations in your current job. But only you have a strong interest to create value in the long term (incl. in your future job).
Let’s say you have the knowledge for a certain job and you also have the practical ability to perform a certain task. Skills is the next level. It refers to the actual decision making for picking the best solution: you could solve a problem in three different ways and you also know how to implement those three ways. Skill is then the capability to decide which solution is the best. Skill is developed over time with experience on the job but also while exchanging information with more experienced professionals. This is why networking internally in a company and externally with other professionals is so important. It helps us to gain a different perspective and learn about new topics in your specific field.
Networking is also good for gaining insights into trends and getting to know other players in the market. When networking, you meet professionals at more advanced stages in your career (= potential role models). This can inspire you to plan your career accordingly. Should you want to change jobs in the future, having a network can help tremendously. According to a study by the German Labor market and occupational research Institute (IAB), about 30% of jobs are filled through a personal connection. For management positions, this increases to 70%. Not only is utilizing your personal contacts beneficial for your potential next career step, but it also has an effect on your salary. According to Richard Benton (North Carolina State University), jobs which were referred to you by a personal connection pay a higher salary and are at a higher level within the hierarchy. Networking - apart from the positive effects of being social - actually pays off.
Without an adequate human capital it is very hard to achieve financial capital. Human capital is the current value of your future earnings. Therefore investing in your human capital pays off in the long-term. Staying up to date, learning new things and connecting with other professionals and humans increases your human capital day by day. Learning new things is an investment into your future.
Written by Clara Creitz
Finelles Founder. Coach and Consultant (UBS, Towers Watson).