Human capital is an important factor of production, and employing individuals with the right education, experience, skills and training, can improve efficiency, productivity and profitability



Human capital refers to the skills, training, experience, education, knowledge, technical know-how, and competencies contributed by humans to a business.

In other words, human capital can be referred to as the value that is added onto a company by an employee, which can be measured by the employee’s skills and competencies.

Human capital is an important factor of production, and employing individuals with the right education, experience, skills and training, can improve efficiency, productivity and profitability.


  • Define human capital.
  • Explain the factors affecting the efficiency of human capital.
  • Distinguish clearly between human and physical capital.
  • Define brain drain.

Companies can invest in their human capital by offering training and education facilities to its workers. Training and developing employees can help them develop a broader set of skills and abilities and reduce cost of hiring additional employees with necessary skills.

One thing that must be kept in mind is that humans are not equal to one another and that human capital can be developed in many ways to obtain the highest economic value to the firm.


Physical capital refers to assets which themselves have been manufactured and are used for production of other goods and services. in a broader term, physical capital refers to all non-human assets created by humans ant used in the production and manufacturing process. Examples of physical capital include machinery and equipment used directly in production process. Buildings are also classic as physical capital, as long as they are used in business operations.

 Manufacturing plants obi contain all production equipment and facilities, Ware houses that contain finished or work in progress products, and even buildings used for administration, accounting, sales etc are as referred to as physical capital. Vehicles are aim considered physical capital, whether they are used for internal purposes or are used to transport goods to their final retail destination,, as long as the vehicle is used in business operations it becomes physical capital. An important point to note is ran physical and human capital must go hand in for a business to run its operations success;

The right human capital can enhance the value of physical capital and influence the right physical capital, human capital cannot contribute to its full extent. Human capital and physical are both types of capital resources that are essential to the smooth running of any business.\


 Human CapitalPhysical Capital
1They are human assetsThey are non-human assets i.e they are made by man
2They are skills, training, experience, education, knowledge, competencies contributed by humans to a business i.e. they are intangible assets.They are assets which have been manufactured and used in production i.e they are tangible assets.
3Human capital are controlled by themselves (or by humans)They cannot control themselves except by the aid of human beings
4They are labour related assetsThey are related to land, plants, machinery and motor vehicles
5They can appreciate through education training and experienceThey do not appreciate in their value
6They can depreciate through bad health and poor trainingThey can depreciate due to ageing and not by bad health
7It is acquired through formal education, job training, on the job learning and life experiences.They can be acquired through direct purchases or by lease.
8The reward for human capital is wages and salaries.The reward for physical capital is interest
9It has feelings i.e. its consent must be sort before it can be used in production.It has no feelings. Its consent do not need to be sort before it can be used in production.


  1. Human capital is mobile: Human capital is mobile both geographically (from one place to another) and occupationally (from one job to the other)
  2. Human capital has feelings: Human capital cannot be used anyhow as its consent must be sort before it is used in production
  3. Human capital is skillful: Human capital becomes skillful through education and training.
  4. It is a human factor: Human capital is a human factor hence its supply can easily be controlled.
  5. It requires motivation: For human capital to perform efficiently and increase its productivity, it must be motivated in one way or the other.
  6. Human capital is not predictable:  Human capital as a factor of production cannot be easily predicted.

Human capital is not fixed: The supply of human capital unlike not fixed as it varies in quantity and quality.

  • Human capital is perishable: Knowledge can diminish overtime as a result of continued unemployment, under-employment, age and death.
  • Human capital controls other factor her factors of production to make them more meaningful to the society
  • Human capital has initiative: Human capital can act on its own initiative.

As an intangible asset, human capital is the workforce a company employs. Human capital is a combination of employee competencies and their commitment to the organization for which g they work. According to university of Chicago professor, Gary S. Becker, economists may refer to a workforce as “human capital” because their combination of skills, health, values and knowledge sire regarded as an asset.

The following factors affect the efficiency of human capital:
  1. Education: One of the must important factors in the development of human capital is education. When an individual obtains a training or acquires knowledge in a formal education set up, that person is expect to perform very well in the place of work.
  2. Experience: Experience is very important for human capital to be efficient. Highly experienced worker are in position to get jobs than the person without experience. It is often said that one can not buy experience. It can only be acquired over a period of time from where the person has previous worked.
  • Competence: The abilities an individual has and her capability to expand upon them can help her create a positive in human capital. For example, a doctor can gain a level of human capital over training and education, but then develops a greater gain in human cap’ over time with continued a practice experience.
  • Personal attributes: Personal attribute is a factor that can affect the efficiency of human capital. The zeal at which person is willing to learn or acquire knowledge can help such a people be efficiency in the place of work.
  • Social attributes: The social attribute include the condition of work incentives, etc that the company  may offer. Better place of work or g incentives to workers tends to increase the efficiency of human capital.
  • Increased innovation: The ability of an employee to increase innovation an organisation go a long way in efficiency of human capital.
  • Skills: Possession of special skills in job is important for human capita. Acquisition of special skill is a boost human capital development.
  • Training: Even though a person may not have acquire a formal education in order to develop human capital, training some other forms can help such a person to develop or acquire human capital.
  • Health status: Good health status promotes better human capital whereas poor health status do not.

Management accounting is often concerned with die questions of how to model human beings as a capital asset. Human capital is very important for an organizations success. The concept of human capital has relatively more importance in about surplus countries. These counties are naturally endowed with more of labour due to high birth rate under the given climatic condition. The surplus labour in these countries is the human resource available in more abundance than the tangible capital resource. The human resource can be transformed into human capital with effective inputs of education, health and moral values. The transformation of raw human resource into highly productive human resource with these inputs is the process of Human Capital Formation.

The problem of scarcity of tangible capital in the labour surplus countries can be resolved by accelerating the rate of human capital formation with both private and public investment in education and health sectors of their national economics. The tangible financial capital is an effective instrument of promoting economic growth of the nation.

The intangible human capital, on the other hand, is an instrument of promoting comprehensive development of the nation because human capital is directly related to human development, and when there is human development, the qualitative and quantitative progress of the nation is inevitable.