Definition of human capital
Human capital refers to the knowledge and skills of an individual. Putting a monetary value directly on human capital would be an impossible task. However, we commonly measure the value of human capital as the present value of a person’s future wage and salary income. For example, if a person were starting a 45-year career with an initial salary of $40,000, and expected his or her salary to grow at an average annual rate of 3%, then using an 8% rate for the time value of money, this person’s human capital at the start of his or her career will be $705,224. Higher growth rates or lower time value of money rates will produce higher human capital valuations. It is certainly reasonable to identify the human capital of many new college graduates as being worth more than $1m.
As we mature, for most of us our human value will actually initially increase as we acquire more skills and knowledge. However, eventually the reduction in the number of remaining years of work will begin to reduce our human capital value. On the day we retire and give up all future employment, our human value as we normally measure it would become zero. For most people, their human capital is their single most valuable asset. As such, it is extremely important that this asset be protected with such tools as life insurance and disability income insurance.
The abilities to accurately throw a 60-yard pass, write a computer program, and diagnose patient ailments are all examples of human capital.