Saturday, March 13, 2010

Human Capital Versus Financial Capital: Which Is More Important?

Several days ago, a close friend forwarded me a very interesting article that appeared in the New York Times on March 5, 2010. The article, written by Paul Sullivan, entitled “Learning How to Hedge Yourself, and Not Just Your Portfolio” poses two (2) key questions. First, “[h]ow much are your working years worth?” Second, “[o]r put another way, what is the impact of joblessness on your financial future?” This article was very thought-provoking.

The article discusses the differences between human capital (i.e. your future job-related earnings) and financial capital (i.e. income received in the future from your financial investments). Sullivan points out that economists have long debated the distinctions between human capital and financial capital. Indeed, Sullivan notes that society has placed very little emphasis on human capital until it is far too late. In view of near 10% unemployment rates in the United States, and a substantial dip in the stock market and investment portfolios, the value of work and future earnings from job-related activities has found new importance.

In his article, Sullivan interviewed Michael Gordon, a vice president at New York Life Insurance, who posed an interesting question—“If the stock market goes down, would your income increase, decrease or not change?” At the moment, if you are doing bankruptcy and corporate work-outs, your income might increase. If you are a stockbroker, at least over the past few years, your income might have decreased. If you are a tenured college professor your income has probably stayed the same and largely remained unchanged.

This article left a major impression in my mind. Tuesday, I had lunch with colleague of mind here at Capital Law School, and a former student we both taught who recently graduated. My former student is a litigator in a large law firm, who at the moment happens to be extremely busy. My former student lamented about the down-turn and lack of work at the law firm for young corporate and transactional associates to undertake. Generally, we talked about the general lack of opportunities for young law school graduates over the next several years. We all agreed that we might see a “lost generation” in many industries, not only in the legal profession, for years to come as a direct result of our poor economy. A great deal of human capital has been lost in our current financial crisis. How much of this human capital will we recover over time? Does human capital recover like the stock market? As you can see, talking and thinking about a "lost generation" the other day got me a little depressed.

Mr. Sullivan’s article in the New York Times made me think about how our society needs to place more value and emphasis on human capital through education and training initiatives. As parents we need to impress upon our children the importance of understanding, developing, and valuing their own human capital. If you have a moment I suggest that you take a look at Mr. Sullivan’s article. Please share your thoughts and impressions. Do you agree, or disagree with Mr. Sullivan’s premise? I look forward to hearing your feedback!


  1. I agree with Mr. Sullivan’s premise that we need more emphasis on developing and sustaining human capital. As seen today, many people are trying to sustain or even get back their human capital allthewhile depleting their financial capital. Although largely tied to the economy being down, had many of us prepared for a “down-turn”, there may have been fewer that were hit so hard financially. I agree also that the two, human and financial capital- must be kept separate as much as possible. Even if one is skilled and has the opportunity to grow in the area of human capital, it could change just as quickly as that of financial capital. But, depending on a person’s situation, I think one can learn to have more control over their human capital where uncertainties occur. This article brings up a great point also about the lost generation we will see throughout many industries, but even in down times and unexpected economic change, there fosters opportunities and growth in new areas. We all just have to adapt to the times and open up new doors to get back in control of our human capital.

  2. I definitely agree with Mr. Sullivan’s article. It makes sense to place capital in alternate investment opportunities since the stock market does fluctuate. However, the problem with graduating students, including law students, is that young U.S. Americans are afraid to be different. If students want to find jobs, they have to dare to be different. Sending resumes and cover letters just is not sufficient in the market graduates are facing. It is going to take much more effort and creativity on the part of young people to nail the jobs they really want. Human capital seems to only be losing value because people have lost hope in their own human capital. Right now it is the survival of the fittest, and leaving yourself as another resume in the stack just will not cut it in today’s economy. Get creative, network and show persistence, then maybe someone can really learn to appreciate your human capital as much as you do!

  3. I thought the comparison of our human capital to stocks and bonds was very helpful for reviewing current and future financial positions and employment opportunities. To ask the question “Are you a stock or a bond” really makes you think about not only the next job, but future jobs and how your financial needs have to be balanced and reevaluated as you age. Older generations will likely pick more stable employment sometimes sacrificing salary for the security, while younger generations might not make those choices. Just a one needs to have a diversified portfolio, it really emphasized to me how much diversification of job skills and areas of practice might be critical for future success. As the markets change, skill diversification will likely be more desirable because individuals will likely be asked to do more with fewer resources.

  4. I also agree with the article. However, developing human capital should be thought about and practiced even when times are good. Hindsight is always 20-20 but those who have diversified their job "portfolios" are likely still employed through the downturn. There are of course certain jobs that are heavily affected by market turns like the post states. I'm sure a corporate interior designer that had been making a lot of money 10 years ago could now be struggling.

    Also I'd like to note that as a law student during this time, I find that I am in a bubble of sorts-separated from the issues unemployment and bankruptcy and living on loans. I don't feel any direct impacts of the economic downturn. However, when it is time to look for a job, I think it will be a factor. It will be important to be creative as Crystal mentioned. Students may have to seek non-traditional jobs and have a diverse background in order to facilitate more opportunities in the future.

  5. It is a shame that this even needs to be discussed. Human captial is always more important than financial captial. The idea of a "jobless recovery" is a misnomer because there can not be such a thing, regardless of what some indicators might suggest. The idea of a lost generation will impact this country for years to come. An economy, especially one based on consumerism such as ours, will have trouble ever fully rebounding if people are left un- and underemployed. Young adults who are graduating and beginning their careers in this downturn will never have some of the opportunities that some of their parents and peers who graduated 10 years ago did. That's a shame.

  6. Professor Grant,

    I too was very taken by Mr. Sullivan's article and this emphasis on human capital. It is an idea that certainly has been overlooked in the past several months as many have focused upon financial capital and the future of the financial market.

    Some aspects about human capital and how one calculates it, however, seem to trouble me. What happens when human capital gets devalued - either systematically or non-systematically? Or, more broadly, what is the bigger picture surrounding human capital?

    For the former law student of yours who now has a job, what happens when starting salaries for his class members and those of the classes below him are cut? It is not to say that those salaries won't go up over their career - as I am certain they shall - but the newly established starting salary may stay considerably lower than it was three years ago regardless of the financial market's eventual rebound. (Note the interest due on their college and law school loans won't suddenly become considerably less.) What happens for the Ph.D. candidates who will soon go on the job market if universities decide do away with tenure in favor of more adjuncts as a part of the long-terms cost saving restructuring of universities?

    In both of these instances I am focusing upon the health of the companies and industries and how doing something to better the health and preserve the longevity of the industry may affect the human capital. Think of it like going on a diet. You begin by restricting your calorie intake. At first this is a change you notice - perhaps you balk at replacing ice cream with apples. After a period of adjustment, however, your body gets used to this new, lower calorie intake; this becomes the new normal. It is a leaner and fitter company.

    I guess what I am getting at here is that I don't think it is as simple as thinking about what jobs are positively or negatively impacted by financial fluctuations and how that relates to one's human capital, but what jobs themselves are reshaped by down- and up-turns in the financial market.

    Yes, you are more than correct in asserting that as parents we need to impress upon our children the importance of understanding, developing, and valuing their own human capital. But human capital is still tied to the market place, and we can't quite predict what the stable, well paying jobs of our children's future shall be.

  7. This post and Mr. Sullivan's article were both very interesting. I agree that human capital is very important to economic stability and measures should be taken to develop human capital. Further, I agree that society as a whole can take steps to develop human capital by teaching children its value. The nation's recent financial crisis has demonstrated that human capital is crucial to a healthy economic system. Financial capital is important, but it cannot take the place of human capital. I also believe that human capital will be vital to solving our nation's current financial problems.

  8. In this day and age human capital by far outweighs financial capital. Mr. Sullivan described financial capital as being "affected regardless of your job," and human capital as the "link to the health of your company and to the health of the industry it’s in." We must all re-evaluate how to increase our human capital. With that being said, we must strive to cast our nets wider, as opposed to deeper, as many have done in the past. We must become more versatile in an effort to be more marketable. An employer or industry would prefer to be more self sufficient or rely on less individuals in an effort to conserve assets and increase profits. This is personally beneficial because it could ensure that you have a higher value or rather more "human capital." We must not focus on just one trade or skill because in the event that the skill becomes obsolete as times change, you become less needed. We must build the ability to take on several skills and flexibility to try different things. If your human capital is extremely valuable the financial capital in your trade or the economic status of the country cannot effect you in such a detrimental manner because you have prepared yourself to be available for more options and opportunities. There is no need to limit oneself.

  9. Generally, law students consume ridiculously large amounts of debt to earn a law degree. With this in mind, can young attorneys, who are struggling to gain meaningful employment in the legal field, reasonably afford to assume any financial risk when unemployment is so high and jobs are so scarce? In that context, maybe taking a chance to be different by developing areas not originally considered at the inception of law school is the key to avoiding becoming another resume in an unread pile within a law firm’s HR folder.

  10. Colleen Kerins St. Thomas UniversityApril 5, 2010 at 7:39 PM

    With the recent developments with the health care bill, it seems fitting that the United States take a closer look at the value of human capital. Education, health, and job training and development are the future of our nation and hopefully be able to rescue our economy. It is not only necessary that our stock markets bounce back, but also it is imperative that this country's overall investment in education, job development, and overall well being be at the forefront of our development and rebound plans. We as a nation need to be able to differentiate ourselves from the rest of the world to remain sustainable, and we need to not neglect our most valuable resource- our people and their progress and development.

  11. Kyle Sheehan

    The simple fact is that America's education system is not that good. Putting political issues aside, there are tons of things that this country spends its tax dollars on that are not near as important as education. I would venture to say that if a system was put into place where the majority of our tax dollars were spent to enhance schools, increase teacher salaries, and provide for better technical training programs, that there would be no where near half the debate that currently goes on in regards to our taxpayer spending. If our hard earned money that the government takes for purposes of taxes was put into a system that makes the next generation of Americans that much smarter and that much more advanced in comparison to the rest of the world, most taxpayer's wouldn't gripe, I know that I certainly wouldn't.

  12. Human capital is a facet of business that is routinely taken for granted by economists, yet maintains it standing as the cornerstone to this nation's financial stability. The intangibles that human resources offer are limitless, as employee management and training remain at the very core of all business. Business is created by humans for humans, so when individuals are not developed to their potential, a business runs inefficiently. We are currently in an era where a person's job may be their most powerful asset, so the intention to maximize the efforts of the individual should be reciprocal. However, this concerns me personally, because with the maximization of human capital that is already within a firm, it may lead individuals who are starting to look for jobs in a saturated market, i.e. law students, out in the cold.