Human Capital Investment and Business Growth

February 24, 2020

One question reigns supreme in the mind of a macroeconomist: “How do we grow an economy?” One question maintains the same status in the mind of an executive: “How do we grow a business?” Research indicates that the answer is the same for both: increase human capital investment.

The Macro Perspective

 

For the last century, the neoclassical growth model and the endogenous growth model competed for dominance in macroeconomic thinking.

Robert Solow and Trevor Swan proposed the neoclassical model in 1956, arguing that technology and productivity are the main drivers of economic advancement. They postulated low returns to increased capital and labor investment, and therefore proposed that the ratios of output, consumption, and capital per worker would eventually reach a “steady state.”

The most famous neoclassical experiment in history was China’s One Child Policy. However, the World Economic Forum asserts that this effort to slow population growth had minimal economic benefit. In fact, the policy may have dampened growth; today, the WEF concludes that “China would have produced more new ideas with an even larger population.”

As a reaction to Solow and Swan, economist Paul Romer proposed the endogenous growth model in the 1980s. He argued that labor and capital exhibit increasing returns, and therefore asserted that human capital investment was indeed important for sustained development.

According to Romer, large and well-trained workforces create synergies, resulting in technological advancement and innovation. Therefore, a nation should encourage sustainable population growth and ensure that workers receive sufficient training for their professions.

On a national level, human capital investment and human ingenuity essential. From the perspective of growing a business, the same conclusion is evident.

The Micro Perspective

 

For decades, executives have asserted that “people are the greatest asset” to any organization. Their intuition is correct. However, assets require consistent and meaningful investment.

Gallup recently surveyed firms with employee engagement levels above 70%. These firms have two main habits that form the bedrock for their efficient human capital: they implement strategic tools proven by metrics, and they use employee engagement purely as a means to an end. In other words, they seek to measure KPIs with respect to their employee engagement initiatives, and they use these initiatives to enact real change. They never engage employees for engagement’s sake.

Human capital investment within a business has countless positive effects.

Of course, workers truly want their employers to invest in their growth. Therefore, developing human capital results in higher employee retention and acquisition—an investment that yields thousands of dollars in savings per employee. Additionally, human capital investment fosters higher engagement, builds trust between managers and employees, creates promotable workers, and encourages employees to invest in the firm’s future.

Millennials and Generation Z workers expect opportunities for career development and advancement from their employers. They also tend to place tremendous weight in a positive company culture. In order to attract young talent, firms must meaningfully invest in their youngest workers.

The future of any economy or business relies upon its people—the source of ingenuity, talent, and passion within any enterprise.

Learn how Qlicket can help you to identify opportunities to invest in your workers.

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