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Labor economics currently depends on several marketable skills of employees that invest in various spheres of organizational activities. This dimension of human resource management is essential for understanding both the wage system and investment incentives.
The theory of human capital, therefore, states that human resources are represented through a set of “skills, experience, and knowledge have economic value to organizations because they enable it to be productive and adaptable” (Jackson 1995, p. 241).
In this respect, people working in organization become the part of its intellectual capital. The full potential of human capital can be fulfilled only through cooperation with an individual. In order to establish favorable relations with individuals, much spending should be directed in training motivating and retaining human capital.
Managers should be concerned with different human resource management approaches contributing to increasing the value of their human capital.
It should also be stressed that contextual factors, including technology, unions, market conditions, and business approaches are significant because they have a direct impact on the costs linked to alternative methods of HRM practices to enhance the value of the human capital of the organization, as well the value of the anticipated returns.
Applications of Human Capital Theory to HRM Practices
The standard strategy in labor distribution considers human capital as a set of characteristics that contributes to an employees’ productivity.
Human capital, therefore, should rely on efficient methods and techniques that would enhance the intellectual property of an organization. At the same time, there are different views on application of the theory in human resource management practices.
According to Becker’s conception, human capital theory should be regarded in the context of the production process. To enlarge on the issues, the theorist suggests that social capital promotes worker’s productivity in all fields, but to a different extent with regard to the type of organizational activities and situations, a work is involved (Becker 1994).
Within these perspectives, human capital theory is presented as a one-dimensional object and the work labor is considered as a set of knowledge, skills, and experiences which directly affects organization’s production rates (Becker 1994).
The importance of investing into intellectual development is equal to the investment made in technological and material development of an organization.
Human capital theory can also be estimated from various angles and, therefore, it cannot be considered as one-dimensional only. In this respect, theorist Garner agrees with the ideas of multidimensionality of the human capital.
In particular, the scholar believes that such an approach would enhance the correlation between physical and mental abilities of employees.
Gardner’s views human capital through the perspective of multiple intelligences according to which intelligence cannot be regarded as a single ability, but a set of specific modalities, cognitive abilities that allow managers to define in which sphere an employee can contribute most.
It also defines the learning and training programs for the personnel. Such an approach is much more beneficial because it identifies which skills are the most developed among the individuals and which ones are the least developed.
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There is also an assumption that human capital implies the capacity to adjust to situations (Shultz 1972). The supporters of this approach argue that social capital theory is beneficial while dealing with constant changing environments to which employees had to adjust.
Inventing techniques to handling changes also contributes to promotion of intellectual capital, as well as to the overall productivity and performance of an organization.
Finally, human capital can be represented through the ability of employees to cooperate and interact in a corporate environment. Such a perspective entails adherence to the principles established by organizational culture (Bowles and Gintis 1975).
According to this view, the main task of human capital theorist is to provide individuals with right missions and goals that would allow them to achieve their personal goals as well. Finally, human capital theory can focus primarily on the individual capabilities, skills, and experiences beyond the production process.
Person-centered approach, therefore, has acquired recognition due to globalization emphasizing importance of cultural diversity issues.
Thus, organizational activities and intelligence should first be considered independently to define the intellectual potential of employees.
All the above-enumerated applications of human capital theory highlight the necessity of its integration into human resources management practices. The approaches should be considered in combination to grasp a deeper understanding of the theory.
Organizations should pay much attention to the organization’s mission, goals, and objectives that should be oriented on enhancing corporate social responsibility rather than increasing organization’s profitability.
Indeed, focusing on human capital improvement can expand the horizons of marketing approaches because of wider contexts involved into the process. One way or another, workers’ characteristics must be tackled in the workplace.
Moral and Ethical Implications of the Human Capital Theory
Due to the fact that human capital theory relates directly to the analysis of intellectual capital, it also closely correlates with the moral and ethical principles of organizational behavior. In fact, considering ethics in business environment is essential because it contributes tremendously to economic success of an organization.
Human capital management should strongly rely on moral dimensions, which includes such issues as insecurity and risk, along with surveillance and control. Thus, employees often encounter stressful situations because of the responsibilities imposed on them.
Therefore, managers should be able to create an environment that would minimize the stress. According to Koster (2007), “…management seeks for transparent employees in order to select those offering not only outstanding professional abilities and knowledge but also displaying desired behavior, attitudes, motivation, and interests” (p. 5).
Consequently, the contemporary practices in HRM introduce a set of techniques promoting the privacy and autonomy policies for employees, as well as enforcing values and attitudes by means of change programs.
The ethical underpinnings of human capital theory can be interpreted through the prism of gender inequality in the workplace.
In this respect, Peil (2009) argues, “human capital theory, especially as applied to gender inequality, can be interpreted as emphasizing a utilitarian approach to ethics, in which individuals’ subjective assessment of their well-being is not challenged” (p. 92).
In this respect, both minority groups face challenges while pursuing their personal goals in an organization. With regard to the above-presented applications of human capital theory, particularly to the views of Gary Becker, discrimination is among the most serious concerns in the employed environment.
According to Becker, there are two types of discrimination – discrimination in monetary terms and statistical discrimination (Peil 2009).
The latter, according to the theorist, is unethical because it is premised on using characteristics related with groups that replace information about separate individuals (Peil 2009). As a result, managers ignore outdated information, which leads to inadequate generalization.
The human capital should not be regarded as the intellectual property in which monetary and financial investment should be made. Rather, human capital should also be considered a cultural asset of the company which enriches and improves its corporate culture.
Managers should pay particular attention to the encouragement and development of effective network within which employees could enhance their experiences, skills, and abilities. More importantly, they should also feel that their valuable members of the organization.
Accepting human resources as cultural capital contributes indirectly to organizational performance through enlarging organizational values and objectives.
The development of efficient human resources methods should ensures perfectly organized work of individuals who are aware of their roles and responsibilities. Therefore, human capital theory integrates the concept of social capital underlining the importance of cross-cultural understanding and trust among the employees.
Alternatively, lack of cultural understanding and ignorance of ethical norms can lead distrust. In fact, “the more opportunistic people become with their “bounded economic rationality”, the less trustworthy they are”, which contributes to the deployment of corruption and bureaucracy (Werhane and Singer 1999, p. 148).
Therefore, such moral values as trust and respect should become the foundation of an organization.
The productivity of workers is associated with not only their abilities and skills, as well as the amount of investment in their development and learning, but also on their motivation, and aspiration to work.
Managers should recognize the fact that “motivation in turn partly depends on earning because of the effect on an increase in earnings on moral and aspirations” (Becker 1994, p. 57). Therefore, the incentive to develop moral in organization and increase earnings should depend on the same incentives to encourage outside investments.
Therefore, both material and non-material investment into the development of employees can have a positive impact on the organizational development as well.
Despite the assumption that business should not be concerned with ethics, human behavior cannot be adjusted to rational decision making only. In this respect, organizational behavior relies on a set of factors, including social and cultural backgrounds, ethical belief systems, and moral obligations.
In fact, previous considerations on the theory of human capital prove that lack of or poor ethical standards does not contribute to the development of the corruption-free organizational system, as well as to fair cooperation between supervisors and their subordinates.
According to Rose (n. d.), “Ethical business creates a positive environment in which to buy and sell, like corruption, poverty, and lack of respect for the environment generate problems for the business community in the long term” (p. 28).
The excellence of business operations, therefore, is congruent with the success of the developed code of ethical conduct, which highly relevant for today’s globalized business world.
Ethical perspectives of business development are closely associated with the underpinnings of human capital theory. Such a perspective is highly relevant due to the global trends in business community.
This is of particular concern to the development of international standards of ethical codes that should be the guiding principle in an organization.
More importantly, human capital theory significantly contributes to the development of morale because it is connected with exploring human behavior and its influence on human resource management.
Sustainability of Human Capital Theory
Human capital theory has a strong theoretical and empirical foundation because of the growing tendency to apply individual-centered approach while carrying on business. More importantly, the international standards are prone to establishing social welfare as a priority in a corporate world.
In particular, social corporate responsibility provides new perspectives of developing relations between managers and employees because it directly related to the welfare of the entire organization (Ehnert 2009).
In particular, an employee can be considered as an essential stakeholder contributing the development of business. Managers, therefore, should rely on social capital theory while developing new techniques and approaches to treating human resources.
The sustainability of human capital theory also lies in the possibility of considering employees not as a workforce for achieving organizational goals, but also an intellectual asset that should be invested and advanced for the welfare of the business.
Within these perspectives, considering cultural diversity, ethics, and morale should be at the core of organizational development, apart from profitability and productivity (Ehnert 2009). Appreciation of human capital can also allow an organization to take a competitive advantage over other organizations with poor ethical and moral standards.
Sustainable work systems and favorable relations between the employees contribute to the establishment of corporate environment. Applying to human capital theory does not only allow managers to develop a reputable image of an organization but discover new horizons for development.
Therefore, the theory of human capital is a valuable contribution to social resource management techniques. Understanding human capital theory as the study of multiple intelligences can provide new methods of exploring employment and recruitment.
It also enhances retention culture and reduces the turnover within an organization. Finally, human capital theory contributes to integrating efficient methods of measuring employee performance.
Becker, GS 1994, Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, University of Chicago Press, US.
Bowles, S, and Gintis, H 1975, The Problem with Human Capital Theory – A Marxian Critique, American Economic Review, vol. 62, no. 2, 74-82.
Ehnert, I 2009, Sustainable Human Resource Management: A Conceptual and Exploratory Analysis from a Paradox Persuasive, Springer, New York.
Gardner, HE 2006, Multiple Intelligences: New Horizons in Theory and Practice, Basic Books, US.
Jackson, SE 1995, ‘Understanding Human Resource Management in the Context of Organizations and Their Environments’, Annual Reviews of Psychology, vol. 46, pp. 237-264.
Koster, M 2007, Ethics in Human Resource Management, GRIN Verlag, US.
Peil, J 2009, Handbook of Economics and Ethics, Edward Elgar Publishing, US.
Rose, A, n. d., ‘Ethics and Human Resource Management’, Ethics in Business Environment, 27-40. Viewed on http://highered.mcgraw-hill.com/sites/dl/free/0077111028/536508/EHR_C02.pdf
Shultz, TW 1972, Human Capital: Policy Issues and Research Opportunities, University of Chicago, viewed on https://www.nber.org/chapters/c4126.pdf
Werhane, R, and Singer AE 1999, Business Ethics in Theory and Practice: Contributions from Asia and New Zealand. Springer, New York.