Question

Human Capital refers to the economic present value of future labour income.

What are the features of Human Capital Risk?

Answer 1

The underlying features of human capital risk are:

• Turnover
• Occupational fraud
• Complacency

Each of the risks mentioned above can potentially undermine the quantum of future labor income and hence the economic present value of the human capital.

Turnover is the ratio of number of workers that have to be replaced in a given period of time to the average number of workers. High turnover leads to costs like separation costs, costs of temporary staffing, training costs and costs of lost productivity.

Occupational fraud is when human capital uses one’s occupation for personal enrichment through deliberate misuse of the organization’s resources. It leads to increased management costs and damage to brand value and business relationships.

Risk of complacency is that human capital becomes self-satisfied and hence it leads to decline in productivity and efficiency in the long run.

So we can say that features of Human Capital risk are that these risks tend to undermine the quantum of future labor income and hence dilute the economic present value of Human Capital. These risks may also increase the volatility with regards to accrual of future labor income.