BIZTIPS - November 30, 2008

by Art Hill

BIZ TIPS: It is Time to Invest in Human Capital

November 30, 2008
Headlines shout about turmoil in capital markets.  Banks, brokers, and insurance giants pass along the pain from years of speculation.  But well-managed companies view recession as a time to invest for the next upturn.  They buy new equipment, install advanced automation, secure new assets at bargain prices.  Individuals buy stock in solid companies when prices are at historic lows.

There’s another type of recessionary capital investment that’s sometimes overlooked: human capital.  An idea traced to Adam Smith in the 18th century, human capital is generally regarded as just as important an economic driver as financial capital.  In fact, assigning a financial value to an individual’s skills and experience, or “human asset accounting,” is a hot topic among financial and business management experts.

This value is easy to understand when you consider the impact of intellectual property (trade secrets, patents, proprietary designs) on a company’s profitability.  If a patent for a miracle drug is worth millions of dollars, the asset value of the scientist that invented it may be many times greater.

Unfortunately, some companies still consider skill growth an expense, not an asset.  They cut training to improve their “bottom line.”  But properly accounted for as an asset, "Human capital is the knowledge and skills people acquire through education and training. This capital is a direct investment with yielded returns" (Shultz, 1961).

These returns are documented in a survey of over 3,000 firms where “firms that made large investments in employee development subsequently outperformed the stock market.” (L. Bassai, “Human Capital Investments and Firm Performance”).

Students understand this by investing in themselves.  Increased enrollment at Oregon’s public colleges and universities during the current recession means higher earning potential during the recovery.  If students understand the dollar value of human asset development, why don’t company owners and financial markets?
A recent round of grants to companies for workforce training should help.  Information is available through community colleges and their workforce partners. The grants tap into Oregon’s Employer Workforce Training Fund and have been used in our region to fund tens of thousands of dollars of specialized training.  Details are available through your Small Business Development Center.

One day we will see human capital appear as a standard entry on company balance sheets.  Until then, individual students and company owners will continue to invest in skill development simply because it results in higher earnings, revenue, and profitability.  With the financial incentives available, there’s no time like the present to get started.

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