Changes in Human Capital

Abstract

Productivity growth is the main source of increases in economic welfare, as measured by real output per capita, in the long run. In this respect, the recent evolution of euro area productivity growth has been disappointing. In particular, the euro area has experienced a sustained decline in labour productivity growth since the 1980s. Existing analysis of the causes of this decline suggests that lower productivity growth has been due to both a decline in capital deepening and lower total factor productivity (TFP) growth over this time period (see for example Gomez-Salvador et al., 2006). However, the same analysis suggests that over the last ten years, the observed slowdown in capital deepening appears to be linked mainly to stronger employment growth. Robust euro area employment growth in the late 1990’s together with economic policies aimed at encouraging employment of lower skilled workers in many euro area countries may also have resulted in a shift in the composition of the workforce towards workers with lower human capital. If this were the case, the sustained decline in euro area labour productivity growth could, in part, also refl ect a lower contribution of labour quality growth to labour productivity growth. Standard unadjusted measures of labour input used so far in analysing euro area productivity growth ignore changes in human capital – changes in average labour quality – leading to an underestimation of the contribution of the labour input to economic growth. Best practise in the area of productivity measurement suggests instead that changes in labour quality should be taken into account by using a quality-adjusted number of hours actually worked as a measure of labour input (OECD, 2001).