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Unit 4 Macro: Human Capital and Economic Growth

Geoff Riley

23rd December 2011

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.

Human Capital in the UK

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

Human Capital by Qualification

Human Capital Data

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

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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