Human Capital and the Health

The purpose of this literature review is to research existing models of health and productivity management, and investigate the current limitations associated with organisational performance and management methodologies. The advantages and disadvantages of the balance scorecard methodology are investigated through an intensive critique. This exploration aims at strengthening the integration of medical and management science paradigms, therefore setting the stage, in the development of a health and productivity scorecard, targeted for the global workforce.

This epistemological inquiry is formulated within an Aristotelian priority reasoning framework. 2. 1 Human Capital and the Health & Productivity Link 2. 1. 1. Early Thinking in Health & Productivity The link between health and productivity has been recognised for centuries as a cornerstone of a healthy economy (Mills, 1909). Leading economist, Adam Smith, in his book An Inquiry into the Wealth of Nations (1776), was well ahead of his time when he challenged this idea and suggested the concept of healthy employees leading to healthy economies.

In the field of management science, the organisation consists of a set of resources employed in a productive way to generate wealth in the development of the resource – based view of the firm (Penrose, 1959). An example of resources includes the organisation’s buildings and equipment (physical capital), the skills and competencies of its employees, procedures, norms, culture, and values (human capital). This thesis focuses on the human capital strategy of the organisation. 2. 1. 2. Current thinking

Peter Drucker (1997), states that the most important contribution that management needs to make in the twenty first century is to increase the productivity of knowledge-based activities and the knowledge worker. In the twentieth century, the most valuable assets of organizations were its production equipment. But a century later, despite Drucker’s (1997) recommendations, management does not value human capital as much as it values tangible assets such as . machinery, and does not systematically measure it‘s output (i. e.

: productivity). One important observation is that machines depreciate over time, and the only asset that appreciates is human capital (Sullivan, 2005). The employee (human capital) gains value through skills, experiential learning, and knowledge acquisition throughout their career path, which is viewed as appreciation, gaining value as the employee ages. In comparison, machines do not develop, and learn, instead, they age and breakdown. Employee appreciation contributes greatly to the productivity of the organisation.

Even though the value of human capital is not fully reflected on company balance sheets, it may account for about half the gap between a company’s market value (the value of a company based on what investors are willing to pay for the company’s shares & bonds) and book value (value of it’s physical assets) (Berger et al, 2003). 2. 1. 3. Definition of Productivity From a macro economic perspective, productivity is defined as the amount of output per unit of input (labor, equipment, and capital).

There are many different ways of measuring productivity. For example, in a factory, productivity might be measured on the number of hours it takes to produce an item or product, whilst in the service sector productivity might be measured on the revenue generated by an employee, divided by his/her salary . Capital can be defined as cash or goods used to generate income. In other business settings, it can be described as the net worth of a business, i. e. the amount by which its assets exceed its liabilities (Cobb & Douglas,1928).

This can be represented in the the Cobb-Douglas equation of production functions which is widely used to represent the relationship of an output to inputs. It was proposed by Knut Wicksell (1851-1926), and tested against statistical evidence by Paul Douglas and Charles Cobb in 1928. For production, the function is Y = AL? K? Where Y, is the output and presented as a combination of the elements of labour input (human capital), which is represented as L, capital input (physical assets) represented by K.

A, ? and ? , are constants determined by technology. Cobb and Douglas were influenced by statistical evidence that shows that labour and capital shares of total output were constant over time in developed countries. They explained this by statistical fitting least-squares regression of their production function. There is now doubt over whether constancy over time exists <Note: this statement appears to contradict Cobb and Douglas. If so there is need to add some substantiation to the statement>

From a microeconomic or organisational perspective, productivity is measured and categorized in terms of occupational (tools and knowledge of the job), psychosocial (the desire to work), and health related (physical and psychological well being) factors. Human capital as a long term company asset is not typically measured or considered in corporate valuations, nor are the expenses related to ongoing investments in it are separately tracked (Berger at al, 2003). Currently, there is no research that indicates what percentage health related factors play on productivity.

There are more literature on the effect of occupational and psychosocial factors. But once we apply the theory of causation and assume that if a workers’ health is affected, occupational and psychosocial factors will also be compromised. In this situation health is an investment which allows workers to do their jobs better. In this sense, health can be viewed as a multiplier or it maximizes both occupational and psychosocial aspects of productivity. 2. 1. 4. The Human Capital Following Becker, the human capital literature often distinguishes between “specific” and “general” human capital.

Specific human capital refers to skills or knowledge that is useful only to a single employer or industry, whereas general human capital such as literacy is useful to all employers. Economists view specific human capital as inherently risky, since a firm’s closure or industry decline for example, lead to skills that cannot be transferred. Becker’s book entitled Human Capital, published in 1964, became a standard reference for many years. In this view, human capital is similar to “physical means of production,” e. g.

, factories and machines; one can invest in human capital through education, training, medical treatment and one’s outputs depend partly on the rate of return on the human capital one owns. Thus, human capital is a means of production into which additional investment yields additional output. Human capital though is substitutable but not transferable like land, labor, or fixed capital. Researchers define human capital as the value of the workforce to a company. As with any asset its value may change over time depending upon market conditions and investments made in it (Berger et al, 2003).

As seen in Figure 1, employee productivity is dependent upon a number of characteristics intrinsic to the employee which include general and specific knowledge relevant to the company, skills, health and well being, and employee outlook and attitude. The attributes of the firm or employer is manifested in its management effectiveness and efficiency in using its capital assets, workforce and training programs. Operational Definition of Human Capital Figure 1 : Illustrates the interdependence between the firm and employee.

This relationship reflects a mutual goal of maximising workforce productivity and financial gain, showing that the factors are mutually influenced. ( Berger et al,2003) 2. 1. 5. Determinants of Workforce Health Status The major determining factors with respect to workforce health status, include the occupational environment (workplace safety and ergonomics), and employee health status (clinical conditions, acute and chronic), personal behaviours, lifestyles and habits (smoking, obesity, fitness), as well as prosperity and well-being (corporate culture, the interrelationship of socioeconomic status and health).

Optimising the occupational environment is a responsibility of an organisation. The next two factors are largely related to employee characteristics, although they may be impacted by the company, e. g. provision of complex case management for chronic diseases or health promotion programs. Prosperity is largely related to company wages and benefits, whereas an individual’s sense of well-being is related to a variety of factors, including his or her health status, socioeconomic status, and sense of accomplishment associated with his or her work.

This sense of accomplishment is responsive to various aspects of corporate culture, including rewards, recognition, and employee buy-in to the organisation’s mission and vision (Berger et al, 2003). This model is based on the concept of systems thinking which investigates the integrated relationships of culture, process, politics and design within an organisation. Understanding the interrelationships of the firm and the employee (Figure 1), human capital investment provides a basis for the underlying theoretical basis of the conceptual model of Health and Productivity Management (HPM) (Figure 2).

No gold standard exists for workforce productivity. Given the limitations of available data and the evolving state-of-the-art measures of workforce productivity, it should not be surprising that workforce productivity management remains more of an art than a science (Berger et al, 2003). 2. 1. 6. Role of Senior Management Senior management can engage in a variety of activities to support human capital. A comparative discussion of an organisation’s physical capital and its human capital highlights the parallelism with strategic financial investment decisions to optimise asset use (Burton et al, 2001).

Investment in physical capital includes the purchase, maintenance, and replacement costs, as well as the costs of inefficient use of or idle capital. Likewise, human capital requires investments in recruiting and training; retention, including wages, incentives, and benefits; and in maintaining operating capacity such as optimizing workforce health status by health promotion, disability and return-to-work programs, and health care benefits (Kessler at al, 2004). To optimize its physical capital, a company accumulates investments over time and engage in activities to enhance the production efficiency of the unit.

To optimise its human capital, a company invests in efforts to increase employee morale and dedication, as well as engages in the provision of an appropriate and safe environment, and access to the right equipment (Berger at al, 2003). Management is charged with optimising human capital effectiveness by setting a vision and the mission of the organisation, as well as inspiring employee dedication to this vision (Kaplan & Norton,1992). Most companies have benefits and human resource departments which are tasked with building and retaining human capital.

However, because this is usually considered as cost expressed in the current period, these departments are engaged primarily with keeping costs down (Loeppke et al, 2003). Occupational health is charged with maintenance and restoration of human capital through health promotion programs and disability management, whilst the benefits department is charged with incentive and benefit design; all of which are also under cost containment pressures. No one is charged with integrating these efforts to maximise the value of the asset, or tracking the effect of different strategies on workforce productivity or employee retention ( Kessler et al, 2004).

2. 1. 7. Organizational Culture and Employee Health Another model, albeit a conceptual one, has been introduced by O’Donnell (2000). He describes the fundamental relationships between the qualitative and quantitative dimensions of organisational culture and employee health enhancing programs (Figure 2). These dimensions at the qualitative level include modifiable health risks, desire and motivation to want to perform at work, absenteeism, and presenteeism (loss of performance due to health problems while actively being at work).

These two qualitative dimensions are then related to the quantitative dimensions, namely profit, productivity and human performance. This model clearly demonstrates how having a health and productivity management program based on developing a health conscious and productive corporate culture as well as a comprehensive health promotion program companywide can directly affect the profits of an organisation. Conceptual Model of Health & Productivity Management Organizational Climate and Health Related Programs Modifiable Risks, Physical & Emotional Absenteeism

Lifestyle, Ability and desire to Presenteeism Work- life balance work Profit Productivity Human Performance Figure 2. A conceptual model of health and productivity (O’Donnell, 2000). The workforce in the developed world is changing rapidly due to demographics which show an aging (soon to be in high demand) workforce. Another factor is the high technological advances that have changed the nature of work.

As Drucker (1997) predicted, societies are moving toward knowledge-based economies that rely heavily on the creativity, mental stamina, and intellectual capacity of workers. Health, as capital, can be clearly appreciated in large information technology corporations such as Intel, Microsoft and Apple. These companies have less physical assets (occupational productivity) and rely greatly on the human knowledge assets (health and psychosocial productivity) so that the health status and functional level of their employees is an essential consideration in investment.

Interestingly, these companies are the ones with high market capital in the stock market compared with high physical assets companies such as Chevron and General Motors (Sullivan, 2005). 2. 1. 8. The Effective Workforce Equation In comparison, to the previous productivity models, the Effective Workforce model originates from a continuous quality management perspective. This model infers that productivity can be reflected through the kaizen approach, which is based on incremental continuous improvement (Imai, 1985).

In this paradigm, human productivity can be defined as an effective workforce that seeks and finds ways to continuously improve themselves and the operations for which they are responsible. Human productivity is the product of an effective workforce (EWF), which can be presented in an equation form (Imai, 1995). 2. 1. 9. Productivity Losses and Healthcare When assessing the true cost of productivity losses associated with health care, organisations focus mainly on direct costs as primarily associated with medical insurance benefits, disability payments, and worker’s compensation losses.

These direct costs are more than likely to represent only a small fraction of what employers actually spend to keep their employees healthy on the job (Edington & Burton, 2003). These indirect costs include costs of poor health, such as replacement of workers, overtime premiums, productivity losses related to absences, short and long term disability, and presenteeism. Presenteeism is the term used to describe the productivity losses while a worker is on the job, i. e.

completing usual work tasks despite having either a physical, mental or psychosocial condition. This term refers to the diminished “on the job performance” due to impairment by health risk factors or health problems. Graph 1, illustrates how the total health and productivity burden is increased significantly when indirect costs of poor health are factored in. Many organisations are not aware of these indirect costs and how it affects the bottom line (Edington & Burton 2003).

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