Human Capital as a factor of growth and employment in a global and knowledge-based economy

1. 1 Human Capital as a factor of growth and employment in a global and knowledge-based economy Radek MALY EU-India Seminar on "Skills Development, Training and Employment" New Delhi, India 27-28 November 2006

2. 2 Human capital: the concept Broad and multifaceted concept encompassing many different types of investment in people Knowledge and skills embodied in people and accumulated through schooling, training and experience that are useful in the production of goods, services and further knowledge Important determinant of productivity both at individual and aggregate levels Let me briefly define the main subject of this presentation HC is a rather complex concept: a result of many different investments in people At the most basic level: nutrition and health care Knowledge + skills � schooling, training, experience � production goods, services, knowledge Consensus that HC is a key determinant of productivity Particularly important in K-B society � fewer routine manual jobs � more jobs require problem solving, communication skills HC at the centre of policy attention for the EU Let me briefly define the main subject of this presentation HC is a rather complex concept: a result of many different investments in people At the most basic level: nutrition and health care Knowledge + skills � schooling, training, experience � production goods, services, knowledge Consensus that HC is a key determinant of productivity Particularly important in K-B society � fewer routine manual jobs � more jobs require problem solving, communication skills HC at the centre of policy attention for the EU

3. 3 Background papers Two key references: de la Fuente A. and A. Ciccone (2003), Human capital in a global and knowledge-based economy � Final report for the European Commission, Directorate-General for Employment and Social Affairs, Luxembourg: Office for Official Publications of the European Communities European Commission (2006), � Human capital, technology and growth�in the EU Member States �, in Employment in Europe 2006 Presentation will refer to two research papers produced for the EC in recent years Angel de la Fuente and Antonio Ciccione in 2003 for the EC � review of both micro and macro evidence on the impact of HC on productivity and employment outcome Second paper � internally produced chapter on HC technology and growth in the most recent issue of the annual Employment in Europe report The focus of this chapter is on links between HC and growth at the aggregate level � main reference for the Macroeconomic part of the presentation Presentation will refer to two research papers produced for the EC in recent years Angel de la Fuente and Antonio Ciccione in 2003 for the EC � review of both micro and macro evidence on the impact of HC on productivity and employment outcome Second paper � internally produced chapter on HC technology and growth in the most recent issue of the annual Employment in Europe report The focus of this chapter is on links between HC and growth at the aggregate level � main reference for the Macroeconomic part of the presentation

4. 4 Outline of the presentation EU policy context Micro approach: HC and labour market outcomes Macro approach: HC and growth Theoretical perspective Empirical evidence: EiE 2006 Some policy implications

5. 5 EU policy context (1/3) 2000 Lisbon Strategy: the EU to become by 2010 �the most dynamic and competitive knowledge-based economy� Mid-term review of the Lisbon Strategy: Europe needs to improve its productivity and employ more people

6. 6 EU policy context (2/3) 2005 revised Lisbon Strategy for Growth and Jobs: strong emphasis on the need to invest more in human capital and R&D This followed reports stressing that one major cause for the slow productivity growth in the EU relative to the US lies in a slow technological progress Slower technological progress due notably to the low investment in R&D and higher education

7. 7 EU policy context (3/3)

8. 8 Micro approach: HC and labour market outcomes (1/3) Education, and more generally human capital, is a primary determinant of: Individual earnings: the pay-off from an additional year of schooling has been estimated at aound 6.5% on average in the EU Labour force participation rates and employment probabilities: High-skilled workers in the EU show the higher employment and participation rates and the lowest unemployment rate

9. 9 Micro approach: HC and labour market outcomes (2/3)

10. 10 Micro approach: HC and labour market outcomes (3/3)

11. 11 Macro approach: HC and growth There is increasing evidence that human capital is a key driver for aggregate productivity and economic growth � � and that human capital can affect productivity and growth through various channels

12. 12 Theoretical perspective (1/3) Two approaches: Standard approach: skilled workers are more productive than non-skilled workers with any given technology Alternative approach: skilled workers are better able to create, absorb and implement new technologies, thereby to generate growth Two main approaches can be used to explain how human capital in the form of education can influence growth A first approach, that we call the standard approach, considers that skilled workers are more productive than non-skilled workers with any given technology A alternative approach considers that skilled workers are better able at creating and absorbing new technologies, thereby at generating growth Two main approaches can be used to explain how human capital in the form of education can influence growth A first approach, that we call the standard approach, considers that skilled workers are more productive than non-skilled workers with any given technology A alternative approach considers that skilled workers are better able at creating and absorbing new technologies, thereby at generating growth

13. 13 Theoretical perspective (2/3) Ideas behind the standard approach: Associated with the neoclassical growth model HC is an ordinary input in the production process, along with physical capital and (raw) labour HC accumulation (e.g. increases in average attainment) increases a country�s productivity (or growth) at constant technology Accumulation of HC necessary to sustain growth on the long run This approach is associated with the neoclassical growth model In this approach, human capital is treated as an ordinary input in the production process, along with physical capital and raw labour The accumulation of human capital in a given country increases its productivity at constant technology Finally, this increase in productivity counterbalances the decreasing returns to physical capital which contributes to sustains growth on a longer period The growth over this period is proportional to the increase in the stock of human capital over the same period Such growth is however not permanent because of decreasing returns to capital. Once a higher level of output is reached, there is no more growth without technological progress. I will come back latter on this point The only solution to maintain growth on the run is to keep on accumulating human capital This approach is associated with the neoclassical growth model In this approach, human capital is treated as an ordinary input in the production process, along with physical capital and raw labour The accumulation of human capital in a given country increases its productivity at constant technology Finally, this increase in productivity counterbalances the decreasing returns to physical capital which contributes to sustains growth on a longer period The growth over this period is proportional to the increase in the stock of human capital over the same period Such growth is however not permanent because of decreasing returns to capital. Once a higher level of output is reached, there is no more growth without technological progress. I will come back latter on this point The only solution to maintain growth on the run is to keep on accumulating human capital

14. 14 Theoretical perspective (3/3) Ideas behind the alternative approach: Associated with the endogenous theory Growth is driven by the stock of HC (e.g. average attainment) generating new technologies domestically absorbing new technologies developed abroad Stock of HC contributes to technological progress Technological progress in turn allows for permanent growth Now, let�s see what are the ideas behind the alternative approach. This approach is associated with endogenous growth theory In this approach, growth is driven by the stock of human capital and not by its accumulation as it is the case in the standard approach Human capital is not an ordinary input in the production process for two reasons On one hand, the stock of human capital influences positively the ability of a country to generate domestically new technologies On the other hand, the stock of human capital affects the ability of a country to absorb new technologies first developed abroad, by countries that are at the forefront of technological development (for instance, the United States) By enhancing the ability of countries to generate and absorb new technologies, human capital contributes to technological progress In turn, technological progress allows for permanent growth As a consequence, human capital influences growth only indirectly because it is not a ordinary factor of production in the production process Now, let�s see what are the ideas behind the alternative approach. This approach is associated with endogenous growth theory In this approach, growth is driven by the stock of human capital and not by its accumulation as it is the case in the standard approach Human capital is not an ordinary input in the production process for two reasons On one hand, the stock of human capital influences positively the ability of a country to generate domestically new technologies On the other hand, the stock of human capital affects the ability of a country to absorb new technologies first developed abroad, by countries that are at the forefront of technological development (for instance, the United States) By enhancing the ability of countries to generate and absorb new technologies, human capital contributes to technological progress In turn, technological progress allows for permanent growth As a consequence, human capital influences growth only indirectly because it is not a ordinary factor of production in the production process

15. 15 Empirical evidence: EiE 2006 (1/4) Choice of the alternative approach: HC essential to jobs requiring adaptation to change and innovation; it has a key role in a knowledge-based economy Assumption that the role of HC is facilitated by promoting adaptable forms of work organisation high levels of autonomy in work task complexity high levels of learning and problem-solving From a policy perspective, distinguishing between these two approaches allows us to better understand the role of human capital in knowledge-driven economies: In the standard approach, human capital influences the productivity of workers whatever their jobs � either routine or innovative Consequently, human capital can increase productivity even without technological progress. Technological progress does not really concern the workers in such approach In the alternative approach, human capital is considered to be quite essential to jobs requiring adoption to change and innovation Such approach gives a key role to human capital in a knowledge-based economy, where economic disequilibria often generated by technical change are incessant From a policy perspective, distinguishing between these two approaches allows us to better understand the role of human capital in knowledge-driven economies: In the standard approach, human capital influences the productivity of workers whatever their jobs � either routine or innovative Consequently, human capital can increase productivity even without technological progress. Technological progress does not really concern the workers in such approach In the alternative approach, human capital is considered to be quite essential to jobs requiring adoption to change and innovation Such approach gives a key role to human capital in a knowledge-based economy, where economic disequilibria often generated by technical change are incessant

16. 16 Empirical evidence: EiE 2006 (2/4) Can the level of human capital really explain the technology gap between the EU and US ? Fewer cross-country empirical studies based on the alternative approach Benhabib and Spiegel published in 94 Llevel of human capital proxied by average attainment enhances the ability to create new technologies (rich) and to absorb technologies developed abroad (poor) The study of Benhabib and Spiegel covers a large sample of countries, including industrialised and developing ones Using such large sample, it is normal to see sharp cross-country differences in terms of average years of schooling However, if we consider only the EU countries, in particular the old European Member States, we see that the levels of human capital measured by the years of schooling of the adult population does not differ so much from that of the United States This is for this reason that we argue in the chapter that this is not the level of human capital that can explain the technology gap between the United States and the European Union Fewer cross-country empirical studies based on the alternative approach Benhabib and Spiegel published in 94 Llevel of human capital proxied by average attainment enhances the ability to create new technologies (rich) and to absorb technologies developed abroad (poor) The study of Benhabib and Spiegel covers a large sample of countries, including industrialised and developing ones Using such large sample, it is normal to see sharp cross-country differences in terms of average years of schooling However, if we consider only the EU countries, in particular the old European Member States, we see that the levels of human capital measured by the years of schooling of the adult population does not differ so much from that of the United States This is for this reason that we argue in the chapter that this is not the level of human capital that can explain the technology gap between the United States and the European Union

17. 17 Empirical evidence: EiE 2006 (3/4) And what about the skill structure of the human capital stock ? Instead, we argue in �Employment in Europe 2006� that this is more the skill distribution of the stock of human capital that can explain the US/EU technology gap More precisely, we assume in the chapter that what really matters for technological progress in Europe and in the United States is skilled labour If you have a look at the figure that is displayed on this slide, you see that there is very large differences between the United States and the European countries with regards to the relative size of the stock of skilled human capital Instead, we argue in �Employment in Europe 2006� that this is more the skill distribution of the stock of human capital that can explain the US/EU technology gap More precisely, we assume in the chapter that what really matters for technological progress in Europe and in the United States is skilled labour If you have a look at the figure that is displayed on this slide, you see that there is very large differences between the United States and the European countries with regards to the relative size of the stock of skilled human capital

18. 18 Empirical evidence: EiE 2006 (34/4) An estimation of panel data (1960 � 2000) for 14 EU countries Share of high-skilled labour and use of adaptable forms of work organisation can account for differences in productivity growth among EU countries High-skilled labour important both for technology creation and absorption The impact on technology creation is also greater in countries where the work environment encourages adaptability (e.g. the Netherlands, Denmark, Finland, Sweden, Austria and Germany) In the chapter, we provide empirical evidence of the importance of skilled labour for technology creation and absorption using a sample of 14 European Countries Moreover, we show that the impact of skilled labour on technological progress through technology creation is also greater in countries where the work environment encourages adaptability In our sample, these countries are the Netherlands, Denmark, Finland, Sweden, Austria and Germany In the chapter, we provide empirical evidence of the importance of skilled labour for technology creation and absorption using a sample of 14 European Countries Moreover, we show that the impact of skilled labour on technological progress through technology creation is also greater in countries where the work environment encourages adaptability In our sample, these countries are the Netherlands, Denmark, Finland, Sweden, Austria and Germany

19. 19 Some policy implications Promoting a high-skilled and adaptable workforce Need to have a lifecycle perspective on skill formation. More investment in tertiary education is not the panacea Promoting adaptable work organisations Need to develop lifelong learning. Countries which favours adaptable forms of work organisation are those which promote lifelong learning The policy implications of these empirical results are quite straightforward Firstly, to fuel growth in the European Union, we must promote a high-skilled and adaptable workforce. However, it is important to stress that more investment in tertiary education is not the panacea. We need to have a lifecycle perspective on skill formation. The acquisition of skills is an ongoing process in which skills acquired early on become a crucial input for further learning Secondly, we need to promote the diffusion of adaptable forms of work organisation in Europe to be more responsive to changes in economic conditions. In that respect, it is interesting to note that countries characterised by an adaptable work environment are those which promote lifelong learning Thank you for your attentionThe policy implications of these empirical results are quite straightforward Firstly, to fuel growth in the European Union, we must promote a high-skilled and adaptable workforce. However, it is important to stress that more investment in tertiary education is not the panacea. We need to have a lifecycle perspective on skill formation. The acquisition of skills is an ongoing process in which skills acquired early on become a crucial input for further learning Secondly, we need to promote the diffusion of adaptable forms of work organisation in Europe to be more responsive to changes in economic conditions. In that respect, it is interesting to note that countries characterised by an adaptable work environment are those which promote lifelong learning Thank you for your attention