Counting Human Capital

Figure 1

Investment in education and training helps form the human capital – the skills and abilities – that is a vital element in assuring economic growth and individual advancement and reducing inequality. It is an important element in combating unemployment and social exclusion. Some of the returns to this investment can be measured; others cannot, though they are no less important.
With economic, social and technological change all calling for constant flexibility and adaptation, governments, organisations, enterprises and individuals alike are increasingly aware of the importance of lifelong learning; similarly, they share a common interest in renewing and increasing the skills base of the population. Tight fiscal constraints in almost all OECD countries compound the importance of efficient investment in education and training – and thus in human capital.This investment encompasses not only the skills and knowledge acquired in the course of formal education. It also includes what is learnt at work, as well as informally in the family and elsewhere, outside organised training. Any assessment of the efficiency of investment in education requires measurement of the returns that it yields. There is no shortage of data on the relationship between formal education and labour-market outcomes for individuals.But information is lacking in other crucial areas of human-capital investment, such as its social impact and the role of training and learning in a variety of environments after formal education. Moreover, the frequently-used operational definition of human capital as ‘skills and knowledge acquired in the course of initial education’ neglects other important aspects, not least non-cognitive or ‘cross-curricular’ abilities that are acquired outside formal settings but are nonetheless relevant to (for example) teamwork, problem-solving and civic responsibility.A recent attempt to address this problem computes direct measures of literacy skills in the adult population. The OECD and Statistics Canada have co-operated in an International Adult Literacy Survey (IALS) to try to measure the incidence of particular work-relevant skills among the adult populations of 12 OECD countries: ‘prose literacy’, ‘document literacy’ and ‘quantitative literacy’.2 In each of the categories, respondents were required to use these skills to perform tasks that simulate situations they are likely to confront in everyday life, such as interpreting information from a medical prescription or a bus timetable. Individuals were placed in different categories according to their abilities: ranging from being able to locate a straightforward piece of information in simple written material to being able to perform complex tasks, combining several pieces of infor mation drawn from written material.Although there is no single cut-off point that defines whether a person is literate or not, the results of IALS show a worrying degree of under-performance in all the countries surveyed. Performance at ‘literacy level’ 3 out of a total of 5 is generally considered necessary in order to avoid difficulties in coping with social and economic life in a modern democratic society. Although those on levels 1 and 2 may be able to read and understand simple materials, they have difficulties with the more complex tasks that are now required of workers and citizens and the skills that they do have are unlikely to be sufficient to allow them to compete effectively in today’s labour market.Typically, between a third and a half of OECD adult populations – many of them in older age-groups – is likely to face substantial literacy problems. As expected, literacy is directly related to attainment in initial education (Figure 1), but there is considerable variation both at the same stage of educational attainment for each country and between countries. That suggests that educational attainment, although closely related to literacy, is not, on its own, a satisfactory proxy measure of human capital.Of the 12 countries surveyed by IALS to date, Sweden emerges as having the highest degrees of literacy and Poland the lowest. And some countries, such as Canada and the United States, show considerably more variation in literacy within the adult population than the others, indicating a more uneven distribution of human capital. Investment in continuing education and training by the adult population gives some idea of the extent to which these countries are addressing their skill deficits. The table provides a comparison of the rates of participation in job-related training for ten of the countries participating in IALS.Some countries with relatively low degrees of literacy show relatively more job-related training – although the differences were much less marked when the average duration of training was estimated rather than its incidence. In all countries, there is a concentration of such investment among younger, economically active, better educated people. Many groups for whom training would bring more immediate benefits are in practice less likely to participate, increasing their vulnerability in the labour market. It seems clear that neither the stock of human capital nor the pattern of investment is well distributed among the adult workforce. FOCUSThe Social and Economic Benefits of Investing in EducationNot all the benefits of investment in human capital can be identified as additional earnings by individuals. A number of studies have found a direct connection between the proportion of the population with a given standard of educational attainment and long-term economic growth (allowing for the impact of physical capital). An OECD analysis estimated that secondary educa-tion had contributed an annual 0.6% to productivity growth in the OECD countries between 1960 and 1985.The evidence of additional economic out-put attributable to education has to be set against the cost of the investment. The World Bank has used cost-benefit analysis to calculate a ‘social’ rate of return to uni-versity education of well over 10% a year between 1960 and 1995 in the OECD countries.2 If such estimates prove robust, they will provide important confirmation that investment in human capital yields large pay-offs for whole economies and not only for individuals.Moreover, the creation of knowledge, skills and abilities relevant to economic acti-vity affects not only performance at work but also social behaviour. There are important social benefits associated with higher educational attainment in terms of better public health, lower crime, the environment, parenting, political and community participation and social cohesion, although there continues to be debate about the direction of causality. There is clear evidence, for example, that better-educated people tend to be healthier, even allowing for the health benefits that they enjoy because of their higher income. Education also appears to lessen the risk of crime through helping to socialise young people who remain in school.
  • Steven Englander and Andrew Gurney, ‘Medium-term Determinants of OECD Productivity’, OECD Economic Studies, No. 22, OECD Publications, Paris, 1994.
  • Alain Mingat and Jee-Peng Tan, The Full Social Returns to Education: Estimates Based on Countries’ Economic Growth Performance, Human Capital Development Papers, World Bank, Washington, DC, 1996.

Table

  • Jere R. Behrman and Nevzer Stacey (eds.), The Social Benefits of Education, The University of Michigan Press, Ann Arbor, 1997.
 Measuring ReturnsInvestment in human capital accounts for at least 10% of national income in most OECD countries when account is taken of public and private spending on initial education as well as spending by individuals and enterprises on post-school training. Expenditure on such a scale raises important policy issues about what volume of spending is appropriate, how resources should be allocated between different types of investment in human capital (early childhood education, for example, as opposed to higher education), and how the cost is distributed (between companies, individuals or public authorities), including its incidence on those who receive the most benefits.These questions cannot be answered without reference to the total returns – monetary and non-monetary – to investment in different types of human capital and how they compare with investment in physical capital. But rates of return of investment in human capital are generally measured in a very restrictive way, by comparing the additional earnings from employment of better-educated individuals to the additional social cost of investing in more education. Based on data from household-income surveys for 18 countries, Figure 2 shows some estimates of rates of return for women from upper-secondary and higher education.These show that, typically, for every extra dollar spent on university-standard education compared with spending on upper-secondary, the additional stream of earnings over a lifetime represents the equivalent of an annual rate of return of between 10 and 15%. The returns tend to be higher in the case of upper-secondary graduates than for university graduates (the same pattern holds for both women and men), reflecting the higher costs of university education. Even though university education incurs a premium in terms of above-average earnings over the life-cycle over what would be earned after upper-secondary schooling, the relative expense of completing a university degree negates some of the additional benefit to individuals.These estimates can be compared with published data on rates of return to business capital. On the whole, returns to spending on education compare favourably (Figure 2). Returns to investment in upper-secondary education tend on average to be roughly equivalent to returns to business capital; returns to higher education tend to be slightly less, although the differences are relatively small. These estimates of returns to education nonetheless have to be qualified because they:
  • take no account of the wider social and macro-economic benefits of initial education
  • do not take into account the impact of informal learning, job-experience and work-based training in the course of a working lifetime
  • are based on assumptions about growth in earnings of different educational groups and cannot provide a forecast of how future earnings will evolve.
Knowing more about how investments of time and money in human capital yield social and economic benefits is becoming increasingly important. Discovering what types of investment in human-capital give the biggest returns is also a pressing concern. It is important to situate investment in human capital in a broad tutional and social context. Moreover, the inter-relationships between human and social capital has to be better understood and measured.Quantifying information about human-capital investment is very difficult: many of the benefits go beyond additional employment or earnings for individuals and bring unmeasurable returns in the form of social cohesion. To date, of course, the ment of human capital has been strongly conditioned by what is technically possible, focusing analysis on the benefits of initial educational ment to individuals, rather than on the more complex ships between life-time development of skills and the multiple advantages they confer to individuals and to society. Priority now has to be given to the ment of more direct measures of different types of skills and the role of learning in the workplace, as well as the measurement of the social and economic impact of human-capital investment in sustaining development and reducing inequality. References
  • Human Capital Investment – An International Comparison, 1998
  • Education Policy Analysis, 1997
  • OECD Economic Outlook, No. 61, 1997
  • Literacy Skills for a Knowledge Society – Further Results from the International Adult Literacy attain-Survey, 1997
  • Education and Equity in OECD Countries, 1997 David Istance, ‘Education and Social Exclusion’, relation-The OECD Observer, No. 208, October/November 1997
  • Nabeel Alsalam and Ron Conley, ‘The Rate of Return to Education: A Proposal for an Indicator’, in Education and Employment, 1995
  • A. Steven Englander and Andrew Gurney, ‘Medium-term develop-Determinants of OECD Productivity’, OECD Economic Studies, No. 22, 1994.
©OECD Observer No 212 June/July 1998


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