Happy, smiling, people

What is human capital and why does it matter?

Human capital, or the value of skills, knowledge, and experience of a person, is critical to realise one's true potential. But the world is lacking behind on this metric.

We sat down with Anu Madgavkar, Partner at McKinsey Global Institute, to find out what we can do to improve human capital to nurture more inclusive, productive, and sustainable societies. Here is an excerpt of our conversation.

World Bank data suggests that nearly 60% of children born today will at best be only half as productive as they could be with complete education and full health. What does this mean for countries and their economies?

The World Bank data measures how far people are from the frontier of human capital potential. Unfortunately, much of the world is still at some distance away from that frontier because they don't have the requisite schooling and health.

By our estimates, about two-thirds of an individual's average wealth or net worth comes from the human capital they possess, which represents a stream of future earnings. You would expect this number may rise proportionately or double and could run into possibly several 100 trillion dollars of value globally.

We have a big window of opportunity here to make things better. What are the main roadblocks to developing human capital?

The three core barriers that we often encounter are access, affordability and quality. Access is determined by the level of incomes and societal attitudes. For example, in many parts of the world, enrollment of girls in higher education is lower than that of boys. That's a society barrier. Affordability is an issue even in advanced economies like the US, where rising cost of education has eaten into incomes and therefore represents a trade-off or a challenge for households. The quality of education and its degree of relevance to future skills is another big challenge.

So there are a variety of barriers. They are complex and derive from family, society, as well as other institutions that surround individuals as they develop their human capital.

Developing human capital is not just the job of government and public sector institutions. Why should private sector companies care about human capital? What can they do about it?

We feel quite strongly that companies or business enterprises, in general, have a large and outsized role in developing human capital. Roughly half of all lifetime earnings of the average individual across countries stems from skills and the human capital they build through their work-life and working years.

So, education is foundational. But skills that you develop or acquire through work are up to half or more of your lifetime earnings. And if you think about the context there, it is all about the organisation or the business enterprise in which most people spend their working years.

You have recently analysed the work histories of more than a million workers in the United States, the UK, Germany, and India from a human capital perspective. What were the key learnings?

We studied the identified work histories of about 4 million individuals who have publicly posted their professional profiles and work journeys online. We found that if you look at their overall lifetime earnings potential, roughly half of that comes from skills that people have not necessarily shown in their first job.

But half of all their earnings were attributable to new skills they developed at work. This is a very large number, and it was consistent. In the US, the UK and Germany, roughly 40 to 45% of lifetime earnings, on average, came from skills acquired during work. The sheer quantum of human capital accumulation that happens at work, I think, was the primary finding of this research.

In lesser-developed countries in Asia and Africa, poor access to education weighs down heavily on human capital development. Is work experience more important in societies of that nature?

People with less education are more reliant on work experience to discover their potential. Somebody like a stonemason or a sous chef in a restaurant or a customer sales representative in a retail store enters the workforce with very few credentials. They're not able to signal their value. They learn a lot and develop their human capital value while they are at work.

It is for this reason that in the four countries we studied, we found that India, which has an average lower educational attainment, has a higher share of work experience. It's as much as 60% relative to the 40- 45% we saw in the UK, the US and Germany. 

Most people switch jobs for more money and better prospects. What does your analysis reveal about this as far as development of human capital being concerned?

This is a very relevant and important question in the context of the great-resignation and the great-attrition we are going through. We found that people do want more money. There's no doubt about that. But that's not the only thing they want. The desire for better and more career development and opportunities for career advancement typically figures in the top three reasons for either leaving, coming back, or considering leaving again.

80% of all the moves in the sample we looked at wasn't a role move within your own organisation, but you typically left your company to join another company. And that's a very large number. It also tells you that there is an opportunity on the table for employers to harness this desire for career development. But they need to make it possible for people to do that within the company. If you can do that, presumably your attrition challenge can be addressed beyond the levers of just compensation and mobile. 

How does one know the true value or realise the full potential of his or her job and how important is it to choose one's jobs carefully?

The importance of work experience in realising your potential or high-quality work experience in realising your potential, cannot be understated. It is quite important for every one of us to think about making choices concerning where we work based on the learning potential the employer can offer in terms of training, mobility, and overall culture and learning.

And it's not just the largest or best-known companies that do well at this. In our sample itself, there are a lot of mid-sized companies that have created these learning opportunities. But individuals need to see and go in search of such experiences.

This conversation has been abridged. To hear the complete conversation, please listen to the podcast

In this episode
Atte Palomäki
Atte Palomäki
Executive Vice President Communications & Branding