Human capital, education skills and growth Counting heads, Economics focus Aug 26th 2004, from The Economist print edition): A breakthrough in measuring the knowledge economy Serge Coulombe and Jean-François Tremblay (2005) Public Investment in Skills: Are Canadian Governments Doing Enough? Commentary No 217, C.D.Howe Institute, Toronto

The Economist approach to the problem: Counting heads TO WHAT extent is economic growth driven by the acquisition of “human capital”? Many economists have pursued the answer over the past 20 years, but without great success. Recently, Canadian team made a breakthrough. It found that, if you measure actual skills rather than educational qualifications, human capital becomes a strong predictor of economic growth. Microeconomic (Individual) return clear: those with higher qualifications (education) earn, on average, far more over a lifetime than the less qualified. But macroeconomic effect on growth not clear to. Broad set of countries versus developed countries

Two possible answers to the micro vs macro results 1) Human-capital theories are flawed - signalling or sorting device, Spence, 1973, education simply permit to allocating better-qualified individuals to better jobs. Consequently, individual gains from education need not add up to collective gains. 2) Economists might be measuring the wrong thing: Human capital, being the invention of economists rather than engineers, is a very difficult concept to measure (Coulombe and Tremblay 2005). H=f(S, Q, …), input versus output measures, micro versus cross- country studies.

Main Results form Coulombe Tremblay and Marchand (2004) 14 OECD countries, period, synthetic cohorts Direct measures of human capital based on literacy scores outperform measures based on years of schooling in growth regressions. Overall, human capital indicators based on literacy scores have a positive and significant effect on the transitory growth path, and on the long run levels of GDP per capita and labor productivity. The key economic policy implication: in contrast to most previous findings, human capital accumulation matters for the long run wellbeing of developed nations. Quantitative effect: long-run elasticities of per capita GDP to H (literacy) around 1.5 (Macro-Mincer effect of 5.5% per year of extra schooling) Larger effect for labor productivity: long-run elasticity around d 2, and Macro-mincer effect around 7.6% Share of human capital in national income around 0.46

Other results Female versus male Level 4 and 5 versus mean literacy level Policy considerations (why should government invest in public education

Taken from a Simon Fraser University Exam, October 2005 Consider the following quote: “As a university professor, Jean-François Tremblay is pleased to see Ottawa and the provinces investing in post-secondary education after a 10-year hiatus. But as an economist, he is not convinced that pouring more public money into universities and colleges is the best way to boost Canada’s economic growth. Tremblay and his colleague, Serge Coulombe, who teach economics at the University of Ottawa, have just completed a study for the C.D. Howe Institute, which shows that improving literacy among lower-income citizens would have a greater impact on Canada’s standard of living than producing more highly educated graduates. “While increasing resources in the education system would undoubtedly improve outcomes to some extent, it is not clear that it would be the most cost-effective strategy to generate more skills,” the authors conclude. “Our research — novel because it is based on direct measures of skills rather than the usual crude proxies of educational attainment — strongly suggests that there are potentially large payoffs from investment in less glamorous sectors.” Explain this argument using economic principles. Taken from Economist prefers ABC to PhD by Carol Goar, The Toronto Sun, 17 October 2005.