The importance of human capital

We often hear that there is a ‘skills shortage’ in developed and developing countries alike. Angus Phimister of the Institute for Fiscal Studies looks at what determines an individual’s skills or abilities, and what role economics can play in explaining how this happens

As economists we think of an individual’s level of skill or ability as their level of human capital. Human capital is a term which goes beyond simply being qualified for a job. It encompasses a variety of dimensions including ideas of cognition, like IQ, socio-emotional skills like determination, drive, and motivation, as well as health.

Human capital is important for a variety of reasons, but most prominently as economists we think that someone’s level of human capital will determine what kind of job they can get, and how well they can do that job. Beyond economic outcomes, levels of human capital have important implications for a wide range of outcomes across all aspects of life.