An organization's ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage. Jack Welch.

Human Capital Theory (HCT) purports that peoples learning capacity when effectively utilised results in profitability for the individual, organisation and society at large. It underlines or seeks to explain why Human Resource Development (HRD) is beneficial not only for the individual, but for the firm and the macro-economy.

The extent to which firms undertake training is important in establishing the amount of support for human capital theory. During 2001 – 2002, the Australian Bureau of Statistics reported 81% of all Australian employers provided some training for their employees. Of all employers, 79% provided unplanned or on-the-job training while 41% provided structured or specified content training. These statistics are evidence of employers approach in that training is seen as a necessity; but does management d understand the link between training and improved performance outcomes?

Capital is a product that yields returns. Traditionally we associate this with investment funds, land or equipment. Taylorism emerged in the 1890’s and focused on applying science to the engineering process with a view to driving efficiencies by way of increasing productivity by refining processes or reducing inefficiencies via reduced wastage. It was not until the 1950’s that consideration was given that workers contributions could be recognised as capital.

The fundamental principle underpinning HCT is the belief that peoples’ learning capabilities are of comparable value to other resources involved in the production of goods and services (Lucas 1988). There is no doubt that human capital and HRD are inextricably linked as is supported by a number of texts and papers. In understanding HCT, we seek to understand what practical support may be required from areas outside HRD that contributes to the success of this theory? Is HRD sufficient in its own right, in isolation or does it require support from other means and processes?

The author proposes to provide a brief historic overview of ‘human capital’. Research of various academic papers will be undertaken with a view to obtaining evidence that supports the view that training in isolation cannot achieve the human capital outcomes or returns. Lastly a review of the latest available research will be undertaken to ascertain current trends. For this paper HRD and training is viewed as a practice in its own right separate to other human resource factors.

Human Capital and its Origins

The early economists were the first to use the term Human Capital. Schultz (1961) defined Human Capital as the knowledge and skills that people acquire through education and training that yields returns. Denison (1962) further analysed its contribution to economic growth not explained by increases in other capital, labour and productive land.

Economists gave voice to the advantages human capital had on employees as individuals in their own right or as employees of an organisation. Becker (1964) was one of the first to associate human capital with both improved income to the individual and to society in general given the improved productivity as a result of the education. Blaug (1976) presented human capital as the idea the people spend on themselves in diverse ways by purchasing education and training for their own future pecuniary and non pecuniary gains.

Later papers were prepared in support of human capitals effect on society or the macro-economy. Becker et al (1990) defines human capital in the form or a fertility model and argues there is a correlation between family size and the decision to invest. Becker (1993) looked at the economic effects of investments in education on employment and earnings.

Support for Human Capital Theory in Isolation

The increasing level of competition at the macro-economic level has led manager’s searching for ways to improve performance of the business by seeing human resources as representing a source of sustainable competitive advantage (Barney, 1991).

The changing focus to improving Human Capital stems from the proliferation of organisational change programs introduced by enterprises in an attempt to improve their global competitiveness (Hilmer & Donaldson, 1996). HRT stresses the importance of raising individual productivity. Theories of human resource development view training as part of the strategy to increase employee commitment to the organisation (Smith & Hayton, 1999). Not only has this change led to an increase in the provision of training but it has changed the type of training from specific training to general training,raining is seen as a necessity, given general training more aligns with change programs. Specific training is skills which can only be used within the same organisation. This type of training lessens the risk of losing employees as the skills are not transferrable to other organisations. General training is learned skills that can easily be transferred to another organisation, for example interpersonal, team building and problem-solving skills. The definitional clarity of general and specific training has been questioned (Loewenstein and Spletzer, 1999). Most specific training seems to include and amount of general training and vice versa.

Smith et al (2002) in their paper discuss the emergence of high performance workplaces which have adopted lean production methods, total quality management, teamwork and re-engineering of processes. The adoption of these methods appears to be in isolation of other factors although it could be that this paper was silent on this preferring to focus on the associated changes as a result of HRD. The adoption of these methods has equated to improved earnings for the organisations, although identifying the effect of training on earnings is difficult. Investigations by Osterman (1994) and MacDuffie and Kochan (1995) have confirmed that training plays a critical role in the transition to high performance by organisations.

Other findings by Osterman (1995) were related to the type of training, with technical and professional employees selected on their professional experience, where as blue collar workers were chosen on the basis of more generic skills, for example interpersonal skills. This is the first indication of another factor, employee selection. More recent evidence of how important employee selection was came from Job’s (201?) who was quoted as saying, we only employ ‘A’ players, if you start to employ ‘B’ players you then get more ‘B’s’, then C’s or D’s. His preference was to employ the best.

An overall assertion is that trained employees will be more loyal to an organisation because they are learning new things but does it follow that this will result in a lower staff turnover? If specific training lessens the risk of losing employees as the skills are not transferrable to other organisations, then what of those organisations who train more general skills? Levine’s (1993) study of 4,000 employees across more than 80 manufacturing plants in the United States and Japan was used to test these predictions of human capital theory, namely that high levels of training will result in high returns and organisations with high returns will have lower rates of turnover. The conclusions found in neither the United States or Japan did high returns indicate above average levels of training. They also found no correlation between the levels of training and turnover, that is firms with high levels of on-the-job training did not enjoy lower average turnover.

Having viewed human capital from an individual and organisational level, what value can be placed on this as a macro-economic level? Becker, Murphy and Tamura’s (1990) paper defines human capital in the form of a fertility model concluding that the increase in human capital by poorer families came from having more children against smaller sized well to do families who invested more in education and benefited from more economic growth. Barro and Lee (1993) looked at economic growth as a result of educational attainment using international comparisons across 129 countries. The data used was for those aged 25 and above and their level of schooling ranging from no schooling to attaining higher education and compared this to their countries Gross Domestic Product in support of HCT. These papers make no reference to other factors preferring to rely on training as the sole contributor to human capital.

Human Capital and Other Factors

Identifying the effect of the training on workers’ wages is not always apparent given the variables that exist between workers whom can have different levels of education, occupation or industry experience. If training is carried out at times when new production facilities or plant is made available, understanding the quantitative outcomes between competing or complementary changes can be difficult to quantify. Levin and Kelley (1994) suggest that training can only improve productivity if complimentary inputs exist such as wage incentives and management practices. The paper falls short of defining what type of wage incentives or management practices would support improved productivity but it suggests that training in isolation is insufficient.

From an employee’s perspective Xiao’s (2001) paper considers the benefits of human capital on the individual using surveyed data from employees in Shenzhen, China. It considers this is relation to formal training while employed and training outside of the organisation prior to joining and during employment undertaken upon one’s own volition. His study concludes that obtaining formal education has a significant impact on employers’ hiring decisions and the initial salary. Xiao’s findings also centre around on-the-job training and how this has a positive effect on productivity but does not automatically contribute immediately to annual salary growth. The link that is made between training and increased salary comes via organisational recognised improved job performance. Finally, voluntary adult education training undertaken outside of the organisation does not have an impact on job performance or on salary increases. Xiao’s conclusion is that while voluntary adult education may suit individual expectations, organisations have not yet associated this with salary decisions. Xiao’s paper references salary decisions either as a direct result of training or indirectly through improved productivity. This factor appears co-dependent with training delivered.

An alternate view suggests that HRD does not contribute to Human Capital Theory. This is more an argument as to why it is difficult to quantify what improved outcomes come directly from HRD and those from other inputs. A view put forth by Ployhart and Moliterno (2011) in their paper suggest that the roots of human capital lie at the individual level but that when considering value creation requires an emergence enabling process. My experience has shown that training or HRD at an individual level can be lost if when an employee returns to their units or teams others have not been trained in the same skills or the individuals do not get the opportunity of using the newly acquired skills. If we consider this based upon the type of training then specific skills acquired are more likely to be used than general skills obtained. The complexity or otherwise of the skills or knowledge acquired is another aspect that can result in varying outcomes. The varying view put forward by Ployhart and Moliterno is that improvement in individuals KSA’s does not occur until such time as an emergence enabling state occurs. It is these states or factors that support the emergence of the human capital, not just HRD.

The theory of social capital helping in the creation of human capital has to be considered. Coleman (2000) draws a comparison between the two by asking the question, what is human capital without a plausible and natural sounding social capital, which when lumped together can be used for analysing aggregate productivity. Social Capital refers to the interpersonal relationships and networks that enable the exchange and development of knowledge and is considered an emergence enabling process.

A Treasury paper prepared for the New Zealand Government reviews the principal channels through which human capital affects economic activity and so contributes to economic growth (David & Lopez, 2001). The purpose of the paper was to review how they could increase the level of human capital at a macro-economic level through government stimulus. Government stimulus at the macro-economic level is comparable to wage increases or increments at the individual level evidencing a country’s quest for improved human capital returns. This was supported by an earlier study in Canada. Jerome-Forget (1997) reinforces that education does remain at the core of human capital formation, but questions what is effective in generating desirable educational outcomes. She states that human capital policy must go beyond formal education to; family policy, social policy health and industrial policy.

Modern Day View

A recent study found that 90% of CEO’s will either maintain or increase their training budgets over the next year (O’Connell, 2013). The research showed that business leaders appreciate the value of learning, seeing it as a necessity, not a luxury but only if the programs led to faster, more effective results. Courses need to be more succinct and to the point allowing employees to remain productive and effective in their role. Cost may not be an issue for the CEO, but it will be for Training and Development with a measurable return on investment. The question remains what other factors will be required to achieve the results senior management requires?

Conclusions

Human capital theory was originally proposed in the 1950’s by economists, Schultz, Denison and Becker who was to write further papers on its development. Economists had difficulty explaining growth in terms of other factors or production; this gap becoming known as human capital.

The early research centred on human capital and the extent to which it contributed to improved productivity, pecuniary and non pecuniary returns, improved profit, faster rate of growth, employment and earnings. It considered the level of education from entering the workforce through to formal training received on-the-job and self-dedicated training.

The importance of training as the main factor by which we implement and measure human capital needs further work. One of the limitations is being able to measure the impact of training at all three levels, individual, organisational and macro-economic, simultaneously. The evidence presented in this article indicates that other factors outside of training support human capital outcomes.

It is only in more recent times that research expanded to consider other factors that support this theory, factors that coexist to improve the outcomes. These factors range from individual motivators such as hiring decisions, wage incentives, management practices, and new production or plant facilities. At the macro-economic level social capital and government stimulus are considered as factors impacting the improved productivity or profits that flow from human capital.

The view of modern day CEO’s summarises the current approach to training. There is a need to do more with less; cost is only a factor is its not producing the right outcomes.

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