Measuring human capital

Recently, the Lisbon Council for Economic Competitiveness and Social Renewal (a Brussels-based think-tank focusing on the EU’s Lisbon Accord to become the premier knowledge economy) released its European Human Capital Index:

Based on a methodology devised by Peer Ederer, director of the Human Capital Project, the study predicts major challenges for key European countries – such as Germany and Italy – that do too little to invest in and develop their human capital. If current trends are not reversed, the study says citizens of Sweden and Ireland (which invest heavily in their human capital) could enjoy a living standard up to twice as high as citizens of Germany and Italy – a trend which would turn the traditional economic hierarchy of Europe on its head.
Specifically, the study measures human capital stock, deployment, utilization and evolution in 13 EU countries, and ranks those countries by their ability to develop their human capital to meet the challenge of globalisation.

The index is made up of four factors:

1) Human Capital Endowment. This figure measures the cost of all types of education and training in a particular country per person active in the labour force (i.e. employed person). Specifically, we look at five different types of learning for each active person: learning on the job, adult education, university, primary and secondary schooling and parental education. The figure is subsequently depreciated to account for obsolescence in the existing knowledge base and some level of forgetting.
2) Human Capital Utilization. This figure looks at how much of a country’s human capital stock is actually deployed. It differs from traditional employment ratios in that it measures human capital as a proportion of the overall population.
3) Human Capital Productivity. This figure measures the productivity of human capital. It is derived by dividing gross domestic product by all of the human capital employed in that country. This diverges from traditional productivity measures, in that the figure takes account of how well educated employed labour is, instead of just how many hours are being worked.
4) Demography and Employment. This figure looks at existing economic, demographic and migratory trends to estimate the number of people who will be employed (or not employed) in the year 2030 in each country.

An interesting finding of the study is how European nations are diverging, rather than converging in their human capital:

If policy makers in Germany and Italy continue ignoring the human capital dimension of today’s policy mix, economic power will inexorably seep from the centre to the periphery, thereby reversing the traditional economic hierarchy that has defined Europe for centuries. Long-term potential economic growth could start to diverge sharply among European nations, with Scandinavia, Netherlands, UK and Austria replacing “old Europe” as the core of the new European economy.

The study represents an innovative new approach to measuring intangibles. For example, it includes informal parental education (the general skills and cultural adaptation that parents teach their children) and informal on-the-job learning in its measure of human capital endowment as well as measures of formal education. These measures may or may not be the best answer to the question of how to measure intangibles. But at the very least they are a stab in the right direction.
Even more important, by crafting new measures, the study has the potential for re-focusing the policy debate on areas in need of attention. The Economist’s Charlemagne column, The brain business, probably had the most telling comment:

The study is also a timely reminder that much European debate on innovation and the “knowledge economy” is woefully inadequate. The next time you hear Europeans talking excitedly about increasing research and development spending, as they will undoubtedly do at next week’s EU summit, remember that such efforts are only a tiny part of the wider task of building and deploying knowledge.

Substitute the word “US” for “European” and the exact same comment can be made about our side of the pond. Maybe the Lisbon Council’s study can be a mechanism for all of us to focus more on the wider task.

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