Human Capital Productivity: A New Concept for Productivity Analysis

By Fraumeni, Barbara M. | International Productivity Monitor, Fall 2012 | Go to article overview

Human Capital Productivity: A New Concept for Productivity Analysis


Fraumeni, Barbara M., International Productivity Monitor


MUCH HAS BEEN WRITTEN about labour productivity, but little about human capital productivity which is defined as the ratio between an index of discounted future output and an index of human capital. The two concepts are related, but not the same and have until now not been previously brought together. Labour productivity considers only present or current labour productivity; human capital productivity implicitly considers both present and future labour productivity. The productivity of an individual may change in the future; indeed, the productivity of most individuals notably improves due to education and training, physical capital intensity and multifactor productivity growth. Alternatively, the productivity of an individual may decrease in the future, for example if an individual's skills become obsolete, or they work less due to ill-health; or becomes zero if they decide to retire. For all of these reasons, when human capital productivity changes, labour productivity may not have changed in the same way or may not have changed at all.

A similar present versus present and future differentiation characterizes productive capital stock compared to wealth capital stock. Productive capital stock depends upon the efficiency of today's stock in the present; wealth capital stock depends upon the efficiency of today's capital stock in the present and in the future.

Background: Human Capital

In his seminal article on investment in human capital, Theodore W. Schultz (1961) emphasized the importance of human capital as a contributor to national wealth. The press release announcing his selection as a Nobel prize laureate in economics illustrated the importance of human capital when it stated "Schultz and his students have shown that, for a long time, there has been a considerably higher yield on "human capital" than on physical capital in the American economy" (Nobel Foundation, 1979). Human capital is broadly defined in an OECD publication (Keeley, 2007) as "the knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being." It is clear that human capital is critical to sustainability, productivity, and the current and future health of a country. (2) Accordingly, estimates of human capital and human capital productivity can provide valuable insights to government officials and others involved in policy-making and research.

Human capital varies across countries. The OECD human capital project (Liu, 2011) has generated estimates of human capital for 15 OECD countries using the Jorgenson-Fraumeni methodology (Jorgenson and Fraumeni, 1989, 1992a, and 1992b). A China Center for Labor Force and Human Capital (CHLR) project has done the same for China (Liu et al., forthcoming). Chart 1 shows the ratio of the value of working age human capital, expressed in monetary units, to nominal GDP for these countries and for China for 2006. (3) For most countries, the ratio varies around a fairly narrow band, from 8 to 12. The exceptions are South Korea at 16.3 and China at 18.5.

Chart 2 shows the ratio of the stock of working age human capital to physical capital. Estimates of physical (nonhuman) capital are only available for 10 of the OECD consortium countries and China (Liu, 2011 and Holz, 2006). The rate ranges from a low of around 4 in Italy to a high of around 8 in China.

Discussion

It is considerably more difficult to estimate market human capital productivity than to estimate labour productivity. In any time period, labour productivity can be defined as that period's net output divided by that period's labour input. Labour input can be measured in the current period by the number of workers, hours worked, or an index derived from labour compensation and hours worked. Labour productivity is often the preferred productivity measure as its construction requires much less data than multifactor productivity. …

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