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Human capital

Human capital is the stock of "knowledge, skills, competencies and attributes embodied in individuals" (OECD, 2001, p.18). It is a combination of a person's inherited characteristics and their education and experience. Human capital was originally used to refer to personal attributes that produce economic value. Behrman and Taubman (1982, p.474), for example, narrowly define human capital as "the stock of economically productive human capabilities". However, human capital can also be defined as the broader personal attributes and capabilities that contribute to a person's happiness and life satisfaction. For example, David & Lopez (2001) distinguish between human capital's tangible (e.g., health, physique, longevity) and intangible (e.g., cognitive and non-cognitive skills) aspects.

The economic importance of human capital - particularly in the sense of cognitive skills[11] - is widely recognised within labour economics and growth theory as one of the key factors underpinning economic production and the employability of individuals (Treasury, 2010e; Hanushek & Woessmann, 2008). Empirical studies confirm that measures of skill account for a significant part of the variance in labour market outcomes between individuals. For example, across developed countries, an extra year of education is associated with increased individual earnings of between 5% and 15% (Krueger & Lindahl, 2000). Moreover, recent OECD evidence (2010g) suggests that reducing the proportion of people without basic skills could add 0.4 percentage points to New Zealand's long run annual GDP growth rate.

Recent economic studies suggest that non-cognitive skills, such as personality and behavioural traits, which are not captured by the traditional cognitive measures of skill, also explain a significant proportion of the variance in individual outcomes (Bowles et al., 2001; Treasury, 2008). The economic literature refers to two main types of non-cognitive skills: i) self-regulatory skills, such as self-discipline and motivation; and ii) interpersonal skills such as communication, ability to work with others and empathy. Non-cognitive skills influence labour market outcomes, both directly and indirectly (through their impact on educational achievement).

Skills, cognitive and non-cognitive, are important for wider wellbeing and for avoiding dysfunction, independent of their effects on earnings and productivity. For example, higher levels of education are associated with higher social and political participation, less exclusion, higher trust and higher social cohesion (Putnam, 2000). Higher skill levels also support the positive exercise of freedom and choice by improving people's ability to make decisions that will benefit them in all areas of life. George Ainslie (2000), for example, discusses the implications of hyperbolic discounting, in which people not only prefer the present to the future, they do so with an extreme preference for more immediate payoffs relative to later payoffs. Ainslie's central idea is that humans have an innate tendency to prefer immediate to delayed rewards, and must use a range of strategies to manage this internal struggle in order to achieve goals with a future focus (such as reading, education, health, saving and positive social interaction). Strategies to manage the internal battle between present and future concerns are learned (although like other skills, different people have different aptitudes), and require effort. Recently published New Zealand research supports these ideas, showing that childhood self-control predicts adult physical health, substance dependence, personal finances and criminal offending, independent of other variables such as intelligence/cognitive skills and social class, and that self-control can be learned (Moffitt et al., 2011).

The flow of personal wellbeing and social benefits from human capital accrue both to the individual receiving the education and to the community in which they live (Treasury, 2001b; WGSSD, 2008). For example, higher levels of education are associated with lower levels of crime (Wolfe & Haveman, 2001). Investment in education also generates economic benefits for people other than the individual making the investment (positive externalities), which provides an economic justification for public investment in education (Sianesi & Van Reenen, 2003).

Skill levels are particularly important from a distributional perspective because of the high transmission of human capital from one generation to the next (Currie & Morretti, 2003). This transmission is sometimes described as a kind of embodied cultural capital that can be passively inherited from the family through the socialisation of culture and traditions (Bourdieu, 1986).

A society's knowledge and capability to use knowledge are critical for the flow of innovation and knowledge, which are important determinants of economic growth (Treasury, 2010i). The OECD (2005, p.7) argues that "in advanced industrial economies, innovation and exploitation of scientific discoveries and new technology have been the principal source of long-run economic growth....In the future, the innovation performance of a country is likely to be even more crucial". Jokob Madsen (2010) found that growth in OECD countries from 1870-2006 has been largely caused by total factor productivity (TFP) growth. TFP growth has in turn been predominantly driven by research and development (R&D), knowledge spillovers, skills, and the interaction between skills and the distance to the technology frontier. For example, Madsen finds permanent positive economic growth effects from increases in R&D and human capital.

In addition to skills, a person's health is integral to their experience of life and ability to contribute to improving overall living standards. Health is an important element in most definitions of wellbeing at both the individual and societal level. Individuals' health underpins productivity, both now and in the future, and it is also a key contributor to their subjective wellbeing (Layard, 2005; OECD, 2010a-d; Holt, 2010; Enright and Scobie, 2010). For example, there is strong evidence that obtaining a job after a period of unemployment is likely to have positive effects on mental health (Jenkins, 2001). Health outcomes are in part determined by the self-regulatory skills described above which assist in balancing the short and long-term costs and benefits of diet and other lifestyle decisions (Heckman, 2008).

Measurements of health should take into account both morbidity - impairment of functioning, which is a measure of quality - and mortality, which is a measure of quantity (Stiglitz et al., 2009). Some measures, such as 'healthy life year expectations' or 'quality adjusted life years' try to combine these two elements (Ministry of Health and Statistics New Zealand, 2009).


  • [11]Human capital has traditionally been assessed using internationally comparable surveys such as the Adult Literacy and Life Skills Survey (ALL) and the Programme for International Student Assessment (PISA), or proxy indicators such as qualification or occupation (Hanushek & Woessmann 2008).
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