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Frank Ruscica

"To what extent is economic growth driven by the acquisition of 'human capital'? Many economists have pursued the answer over the past 20 years, but without great success. Despite building and rebuilding elaborate growth models, they have failed to prove that better education and training significantly raises a country's long-term growth. Recently, though, a Canadian team made a breakthrough. It found that, if you measure actual skills rather than educational qualifications, human capital becomes a strong predictor of economic growth.

For individuals, the rewards to education are clear: those with higher qualifications earn, on average, far more over a lifetime than the less qualified. But studies of whole economies over time have found only weak evidence that high or rising completion rates of secondary or university education are associated with stronger growth. The most marked effects, unsurprisingly, show up in comparing more and less developed countries; for countries at similar stages of development, there is no consistent evidence that education makes a difference to growth.

One possibility is simply that human-capital theories are flawed. If education acts as a signalling or sorting device, allocating better-qualified individuals to better jobs rather than improving the overall productive capacity of the population, then individual gains from education need not add up to collective gains. Yet micro-studies of skills and productivity have long shown that acquiring certain defined competencies not only confers advantages on individuals but also raises productivity.

Another explanation is that economists were measuring the wrong thing. Having a high-school diploma or university degree is a weak indicator of whether one has skills that increase productive capacity. Educational qualifications may be relatively easy to measure, but offer only a poor proxy for human capital. What one wants is a direct measure of economically relevant skills. The 1990s saw a step in this direction, with the development of a new form of testing that assesses the extent to which young people and adults in different countries acquired certain key competencies required for work and everyday life. These centre on measures of literacy, understood in the widest sense as the ability to use different kinds of written material to perform real-world tasks of varying complexity. This is the kind of general competency that the micro-studies find to be closely linked to productivity."

The Economist
August 28, 2004

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