Human Capital Investment
By Steve Bain
There is no doubt that human capital investment, by which I mean the accumulation of skills and educational attainment, is a vital component of successful economic growth.
A more highly educated and skilled workforce delivers greater levels of productivity and innovation, both of which drive prosperity in an increasingly complex working environment.
However, whilst there is no controversy surrounding the desirability of increased human capital investment as a driver of growth, there are plenty of controversies surrounding the optimal approach to promoting it.
On this page I will give an overview of what the research tells us about the efficacy of various types of initiatives in the western world that have aimed at promote education and skills as a means to raising economic output and the standard of living. I'll start with a categorization of the types of skills and education standards that employers look for in a prospective employee.
Education and skills
Soft skills are the foundation upon which employability is built. It relates to a persons reliability, attitude, dress-code, punctuality, manner and so on. For many people these attributes might be regarded as common sense, but for many reasons it is the lack soft skills that can hold people back - especially in the most deprived communities.
My personal professional experience has equipped with some expertise on this matter, having worked for a team whose sole aim was to improve 'Employment, Skills and Inclusion' outcomes for people who were experiencing long-term unemployment in some of the most deprived communities in the Northwest of England. These were communities that had suffered from decades of decline in heavy industry, manufacturing, mining and other industries.
To give an example of what we were dealing with, consider this example. A colleague had arranged for some interviews to take place one morning for some entry level jobs that had become available. One candidate did not show up for his interview.
Some time later on in the afternoon my colleague received a telephone call from the missing candidate's mother who explained that the reason for the absence was due to this fellow having been out late the night before and had drunk a lot of beer with the result that he was still in bed and would need to rearrange his interview date!
Now, to you and I it might appear immediately obvious that no such rearrangement could ever be agreed under these circumstances, but this sort of thing is simply not understood by people who have grown up in households where no one has ever worked, where school attainment rates are extremely poor, teenage conception rates are sky-high, and truancy, vandalism, petty crime, drug use, and so on is rampant.
Basic skills are the sort of skills that are taught in primary schools i.e. literacy and numeracy skills along with basic Information and Computer Technology skills. These too are increasingly essential in the workplace, and once again it is the most deprived communities in the west that tend to be lacking in these areas.
Vocational training aims to improve the particular skills needed for a given occupation. Training schemes can be run in the workplace itself or in local colleges. The trainee may be someone who is unemployed, or someone who is employed and either being wholly funded or part funded by their employer to undergo the training.
There are different types of vocational training programs that cover a wide range of skills at varying levels form secondary education equivalence right up to post-graduate equivalence.
Academic qualifications include school leavers qualifications at age 16, further education qualifications at pre-university level, and higher education qualifications at Bachelors Degree level all the way up to Doctorate level.
As with vocational training this type of human capital investment may be undertaken by part-time by employed people who are seeking to enhance their job-related skills, but more typically the people engaged in earning these qualifications are doing so on a full-time basis.
The Screening Hypothesis
Whilst research has concluded that human capital investment is a necessary component of optimized economic output growth, there are some serious shortcomings in the analysis of the effects of particular types of projects to promote it.
The screening hypothesis contends that a significant part of the observed benefits to individual who have undertaken courses to build their human capital is not real. The argument here is that it is not so much that courses to build skills and education have raised the productivity of the individual, but rather that employers simply use qualifications as an indicator of who will likely be a high quality employee and who will not.
This point is immediately obvious with regard to academic qualifications which have absolutely nothing to do with the particular job vacancy i.e. a degree in History for someone seeking employment in business consultancy. It turns out that there has been a huge proliferation in recent decades of students gaining higher education qualifications in subjects that have little to no practical relevance for the occupations open to them.
Vocational training is not immune to the screening hypothesis either, with many government created courses that teach out of date skills, non-relevant skills, or people who have no real interest in the skills they are being taught - but attend these courses under threat of losing welfare payments.
Teaching the wrong skills, to the wrong people, is obviously a big problem. Government mandates to artificially increase human capital investment projects are unlikely to yield the same benefits that accrue to self-motivated individuals who seek out opportunities to increase their vocation-related skills. Employers are highly adept at assessing which qualifications have real value, and which job candidates are truly motivated.
The incompetent hand of government has weighed heavily on the systematic degradation of educational standards in the UK for many years. GCSE pass rates (grades at 16 years of age) have risen almost on a yearly basis since the 1980s, and call me a sceptic if you like, but I see little evidence of a better educated or more highly skilled youth in the UK today - quite the reverse in fact. Simply stamping more people with qualification pass rates, and expecting them to be more productive because of it, is the height of stupidity but it appears to be government policy.
None of this is to underscore the true value of real skills and educational qualifications.