The Well-being of Nations Chapter 2 The Evidence on Human Capital

Introduction Changing economic and social conditions have given knowledge and skills – human capital – an increasingly central role in the economic success of nations and individuals. Information and communications technology, globalisation of economic activity and the trend towards greater personal responsibility have all changed the demand for learning. The key role of competence and knowledge in stimulating economic growth has been widely recognised by economists and others. The non-economic returns to learning, in the form of enhanced personal well-being is viewed by many as being as important as the impact on labour market earnings and economic growth. These personal and social goals of learning are not necessarily inconsistent with the goal of promoting economic performance.

What do we mean by human capital? Human capital is defined by individually possessed knowledge and skills The knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being. Lundvall and Johnson (1994) classify knowledge into four categories: 1. Know-what: refers to knowledge about “facts”. 2. Know-why: refers to knowledge about principles and laws in nature, human mind and society. 3. Know-how: refers to skills (i.e. ability to do something). 4. Know-who: involves the social ability to co-operate and communicate with different kinds of people and experts.

Human capital is developed in the contexts of: Learning, within family and early childcare settings. Formal education and training including early childhood, school-based compulsory education, post-compulsory vocational or general education, tertiary education, public labour market training, adult education, etc. Workplace training as well as informed learning at work through specific activities such as research and innovation or participation in various professional networks. Informal learning “on-the-job” and in daily living and civic participation

How do we measure human capital? Qualification measures are a simple but weak proxy for human capital. Educational credentials are a simple and readily measured proxy for skills and competence. Education and qualification do not reflect human capital obtained through informal training or through experience Different educational credentials can be difficult to compare. The alternative approach is to use questionnaire tests of student achievement or adult skills. They measure only some aspects of skill and competence and are subject to survey and test limitations. Single-index measures of human capital need to be complemented with more specific measures based on direct measurement of knowledge and skills in organisations.

How is human capital developed? Investment in skills takes place in many different settings and stages of the lifecycle Human capital formation takes place not only in formal education or training programs, but also in informal interaction with others as well as through self-reflection and self-directed learning.

Public Spending on Education and Policies Public spending on education at all levels has been increasing in OECD countries over recent years, reflecting both increased participation as well as increased spending per student in real terms – often linked to reductions in school class sizes. The evidence suggests that spending does matter to learning outcomes but to a limited degree, and the efficiency of spending is very much tied to how teaching practices, school organisation and parental support combine with increased funding for education. An important conclusion from much of the empirical work is that, in general, increased spending through expansion in educational participation may provide better returns than increased spending per student grade-year.

Adult Education Demand for job-related training tends to be highest among young to mid-life workers and among those with higher than average levels of education. Much adult learning is informal and experiential with daily living and working, making observation and measurement complex. It is difficult to observe and measure what makes for effective, high-quality informal learning. In the case of job-related training, programs that meet the needs of individual learners and provide skills and knowledge related to the labour market are best developed in partnership with learners, providers and employers. Formal, classroom or instruction-led settings may not guarantee effective learning outcomes since the context for learning is different and a greater range of customized treatments are called for. Moving to less formal and less job-related types of learning, a very wide range of experiences and settings are possible. Identifying adult interests and not just adult skill deficiencies is important.

How is human capital distributed? Economic inequality goes hand in hand with inequality in educational access and adult literacy. The OECD International Adult Literacy Survey (OECD and Statistics Canada, 2000) shows: Large differences in the overall level of literacy across countries. Large pockets of low skill, even in countries with high levels of educational attainment. A strong link between levels of literacy and outcomes in terms of labour market, civic participation and social outcomes.

Changing demand for human capital Mismatches between the demand and supply of human capital may be considered in different ways. Levels of educational attainment (specified by type or level), or skills in the labour force may be poorly matched with labour market demand. “Qualifications inflation” occurs when employers systematically upgrade the education requirements of jobs without a corresponding increase in skill content. Many labour market analysts find evidence for what they call over-education both in Europe and the United States, with a possible increase over time in Europe. Analysis of job and skill mismatches using data from the International Adult Literacy Survey (IALS) in the United Kingdom suggests that for any given level of education, not only lower levels of skill but under-utilisation of skills carries a penalty in terms of lower earnings in the labour market. Canadian university graduates with low levels of literacy skills were far more likely to experience job-education mismatch than other university graduates.

What is the impact of human capital on economic well-being? Human capital has a positive impact on earning 1. The micro-level evidence Education is positively correlated with employment and earnings. Independently of qualifications, adult literacy has a strong impact on earnings. 2. The macro-level evidence There are many difficulties in accounting for the role of human capital in Growth. With the development of so-called “new growth” models, the role of education and learning in generating new technology and innovation received more emphasis. Particularly in the link between higher education and applied research and development. In summary, recent research suggests a favorable impact of human capital on conomic growth.

What is the impact of human capital on all aspects of human well-being? Positive social impacts of education outweigh negative impacts The indirect impact of education on economic growth via social benefits may be as large as the direct impacts. Better educated people tend to be healthier Higher levels of education are associated with a lower probability of receiving social transfer benefits. Educated people pass on some of the education benefits to their children Education improves labour market search and produces more efficient consumers Education is also correlated with lower Crime There is a growing literature on the relationship between education and subjective well-being and happiness.