Human capital is a collection of resources — knowledge, talents, skills, abilities, experience, intelligence, training and judgment — possessed individually and collectively by a community. These resources are the total capacity of the people, which represents a form of wealth that can be directed to accomplish the goals of the nation or state.

Human capital is just as important in the nonprofit sector as it is to businesses and nations, which is why human capital investments such as education and training are a driving force and area of interest for individuals, firms and governments as it is a major factor in generating future growth and prosperity. Colleges and universities are increasingly viewed as engines of local economic development. Conventional approaches to valuing the economic activity generated by colleges and universities often focused on direct employment or expenditure effects, along with a multiplier effect to capture indirect and induced outcomes.

However, the potential influence of colleges and universities goes beyond these standard effects for an important reason. These institutions can help build the knowledge and skills — or human capital — of a region’s people, a critical component of an area’s economic success. A region with higher levels of human capital tends to have greater amounts of economic activity and more rapid economic growth. In addition, its workers tend to be more productive and earn higher wages. The total effect of higher levels of human capital on economic activity is larger than the sum of its parts. The geographic concentration of human capital facilitates what economists refer to as “knowledge spillovers”—the transfer of knowledge and skills from one individual to another.

One such example of a university creating human capital impact is University of Texas at Arlington (UTA) with a campus that spans 420 acres and 110 buildings with more than 180 degree programs, and record spending of $77.7 million on R&D in 2013. UTA improves higher education delivery throughout the state and helps students increase their employability and potential. By facilitating new research and drawing students and visitors to Texas, the university also generates new dollars and opportunities for the state. In the fiscal year 2013, $493.3 million in payroll and operations spending of UTA, together with the spending of its students, visitors, and former students, created $3.4 billion in added state income. This is equal to approximately 0.30 percent of the total gross state product (GSP) of Texas, and is equivalent to creating 52,341 new jobs. The accumulated contribution of former students of UTA currently employed in the state workforce amounted to $2.9 billion in added state income for the Texas economy, which is equivalent to creating 44,460 new jobs. For every dollar that society spent on educations at UTA, Texas communities will receive a cumulative value of $5.80 in benefits.

Texas as a whole spent an estimated $1.3 billion on education at UTA in FY 13. This includes $493.3 million in expenses by UTA, $35 million in student expenses, and $778.6 million in student opportunity costs. In return, the state of Texas will receive an estimate present value of $6.8 million in added state income over the course of the student’s working lives. Texas will also benefit from an estimated $791.7 million in present value social externalities related to reduced crime, lower welfare and reduced unemployment, and increased health and well-being across the state. Health savings include avoided medical costs, lost productivity, and other effects associated with smoking, alcoholism, obesity, mental illness, and drug abuse. Crime savings consists of avoided costs to the justice system. Welfare and unemployment benefits consists of avoided costs due to the reduce reliance on social assistance and unemployment insurance claims.

The amount of human capital in a region is a key determinant of its economic vitality and long-run economic success. As the U.S. economy continues to shift away from manufacturing and the distribution of goods toward the production of knowledge and ideas, the importance of human capital to a region will only grow.

Note: The Economic Modeling for UTA was conducted by EMSI.

Image credit: University of Texas at Arlington