Unit 4 Macro: Human Capital and Economic Growth

In A2 macroeconomics the underlying causes of economic growth and development and constraints on both of these are covered in more depth. One of the concepts students might be familiar with is that of human capital.

I have always summarised the idea of human capital as being a measure of the overall quality of the human input available to produce goods and services in an economy. The ONS have published a new study on the value of human capital in the UK and they draw on a definition given by the OECD

Human capital is “the knowledge, skills, competencies embodied in individuals that facilitate the creation of personal, social and economic well-being.”

Investing in knowledge skills and competencies will lead to an accumulation of human capital. Some of this investment takes place informally (for example in the home or informal learning using social media and other online resources) whereas other human capital investment flows from formal channels such as education (early years, primary, secondary, tertiary, higher education, lifelong learning) and in the workplace through employer-based training.

When human capital in an economy is strong:

1/ There ought to be positive spillover effects on labour productivity / output per person which contributes to higher trend economic growth

2/ A higher skilled and more flexible labour force will be better able to adjust to changing technologies and changing patterns of demand leading to lower levels of structural employment

3/ Better human capital ought to lead to higher wages and higher expected lifetime earnings (providing that people are being paid fairly their contribution to economic value) and improved incentives to find work and reduced dependence on the welfare system.

4/ Stronger knowledge and skills will promote invention and innovation - two further ingredients of long-term growth. Little wonder that there remains a global war for talent among countries seeking to attract the brighest students and workers

5/ If more people have the skills, qualifications and competencies to remain active in an ever-changing economy, this ought to support progress in combatting high levels of relative poverty and social exclusion.

Recession and human capital

Has the recession and weak recovery led to a reduction in human capital in the UK economy. Many economists are deeply worried about the damaging effects of rising long-term unemployment and economic inactivity leading to hysteresis effects and a lower underlying growth rate.

Evidence for a deterioration in human capital comes from a new study published by the Office for National Statistics. It finds that the UK’s human capital dropped by £130bn to £17.12 trillion in 2010, after steadily growing since 2001. The average human capital per working age person was £428,500 in 2010, a decrease of £5,370 on the 2009 figure

Finding out more

A discussion of the latest estimates for human capital in the UK economy can be found at Diane Coyle’s excellent blog - here is the link

Other reading:

Guardian: Wellbeing analysis reveals ‘human capital’ drop for first time in decade

Independent: Hamish McRae: Ailing European businesses that are being rescued by Asian enterprise

Unit 2 Macro: Evaluation on Supply-Side Policies [21 May 2012]
Unit 2 Macro: Migration and the UK Economy [20 May 2012]
Unit 2 Macro: The Importance of Productivity [20 May 2012]
Unit 2 Macro: Measuring Unemployment in the UK [20 May 2012]
Q&A: What do we need to know about output gaps? [20 May 2012]
Unit 2 Macro: The Output Gap [20 May 2012]
Revision notes on unemployment [20 May 2012]
Unit 2 Macro: Revision Notes on Supply-side Policies [10 May 2012]
Unit 3 Micro: Innovation in Markets [10 May 2012]
Unit 2 Macro: Unemployment Glossary [5 May 2012]
Competition authorities doing more harm than good? [1 May 2012]
Unit 2 Macro: Skills Shortages Hold Back Recovery [12 Apr 2012]
Unit 4 Macro: Productivity Improvements in China [3 Apr 2012]
Unit 4 Macro: Unemployment Scarring Effects [2 Apr 2012]
Blanchflower calls for more action to address youth jobless crisis [28 Mar 2012]
Unit 2 Macro: Seasonal and Structural Unemployment [15 Mar 2012]
Unit 1 Micro - Labour Migration and the Economy [5 Mar 2012]
Unit 2 Macro: Can China Stay Competitive [25 Jan 2012]
Unit 2 Macro: Living below the Breadline [19 Jan 2012]
Unit 2 Macro: Videos on Productivity [17 Jan 2012]
Where is the UK Economy? National Output [22 Nov 2011]
Unit 2 Macro: A Prezi on Unemployment Policies [16 Nov 2011]
Unit 2 Macro: Video Clips on Unemployment [6 Nov 2011]
UK Unemployment in October 2011 [12 Oct 2011]
Unit 4 Macro: IMF Flags up Risks of Double Dip [20 Sep 2011]
AS Macro Key Term: Supply-Side Policies [25 May 2011]
AS Macro Key Term: Trend Growth [23 May 2011]
Poor human capital in Portugal [25 Mar 2011]
AS Macro Revision: Investment Spending [12 Mar 2011]
Youth Unemployment in the UK [24 Jan 2011]
Revision: Consequences of Unemployment [1 Jan 2011]
After the recession: thoughts on the growth potential of the United Kingdom [15 Nov 2010]
Apprenticeships for a Silver Generation [6 Oct 2010]
Video resources on UK economic growth [6 Oct 2010]
A2 Macro - Economic Growth Charts [21 Sep 2010]
Hysteresis in the US Economy [21 Sep 2010]
81 million young workers unemployed in 2009 [12 Aug 2010]
A selection of revision notes on supply side policies [1 Jun 2010]
Warnings of hysteresis for the EU economy [29 May 2010]
What the poverty figures show [25 May 2010]
Revision Presentation - Supply-Side Indicators for the UK Economy [14 Mar 2010]
Revision Presentation - UK Unemployment in 2010 (AS Econ) [6 Jan 2010]
The permanent scars of recession [26 Nov 2009]
David Blanchflower on Unemployment Policies [8 Nov 2009]
Human and social capital and pathways to prosperity [14 Oct 2009]
Managing a global business in turbulent times [23 Sep 2009]
Hysteresis [1 Sep 2009]
Businesses call for youth jobs subsidy [26 Aug 2009]
Q&A: What is the productivity gap? [1 Jun 2009]
Corus Steel and the Multiplier Effect [10 May 2009]
Revision: Trend Growth [5 May 2009]
Skills crisis in curry restaurants [31 Mar 2009]
Blanchflower on Unemployment Strategies [2 Mar 2009]
Retracing the Road to Wigan Pier [1 Mar 2009]
Supply-Side Indicators for the UK [15 Feb 2009]
Apprenticeships and Economic Performance [29 Dec 2008]
Globalisation and the skills bias of world trade [8 Aug 2008]
TUC calls for minimum wage for apprentices [8 Aug 2008]
Deep Very Deep [20 Jul 2008]
Youth unemployment in the UK [11 Jul 2008]
US human capital in decline? [10 Jul 2008]
Chart of the Day: Unfilled Vacancies [2 Apr 2008]

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