Human Capital Theory

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The concept of human capital and knowledge management is that people possess skills, experience and knowledge, and therefore have economic value to organizations. These skills, knowledge and experience represent capital because they enhance productivity (Snell and Dean, 1992). Human capital theory postulates that some labor is more productive than other labor simply because more resources have been invested into the training of that labor, in the same manner that a machine that has had more resources invested into it is apt to be more productive (Mueller, 1982). One of the basic tenets of human capital theory is that, like any business investment, an “investment in skill-building would be more profitable and more likely to be undertaken the longer the period over which returns from the investment can accrue” (Mueller, 1982, p. 94). Again, employee retention is important in realizing a full return on investment. Human capital theory includes the length of service in the organization as a proxy for job relevant knowledge or ability. A person’s job relevant knowledge or ability influences that person’s wage, promotional opportunity and/or type of job (Becker, 1975; Hulin & Smith, 1967; Katz, 1978). The understanding of length of service in an organization relates back to Ulrich’s (1998) component of commitment in his definition of intellectual capital. His definition was simply “competence multiplied by commitment” (p. 125), meaning intellectual capital equals the knowledge, skills, and attributes of each individual within an organization multiplied by their willingness to work hard. It will become significantly more important in the years ahead to recognize the commitment of individuals to an organization, as well as the organization’s need to create an environment in which one would be willing to stay (Harris, 2000). Organizations will need to either create an intellectual capital environment where the transmission of knowledge takes place throughout the...
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