1% increase in Average Literacy Rate Yields 1.5% Increase in GDP :: Measuring the Knowledge Economy

Literacy scores, human capital
and growth across 14 OECD countries

Counting heads

A Breakthrough in Measuring the Knowledge Economy

Economist: 8.26.2004

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.

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It will be 20 years or so before analysts can use these new human-capital indicators to track the long-term effect on growth of having people with more or fewer skills entering work. However, a team of economists at the University of Ottawa, working with Statistics Canada, has found a clever short-cut allowing them to gauge this human-capital effect now*. They use the International Adult Literacy Survey, which tested 16-65-year-olds in the mid-1990s, to estimate the skills of people in 14 countries entering the workforce at different times between 1960 and 1995. This is achieved by looking at tests of different age cohorts. For example, the literacy levels of people aged 52-60 when tested in 1995 are used to estimate the competencies of 17-25-year-olds in 1960, and hence the human-capital investment that had just been made in the course of that cohort's education.

The team identified a clear and significant association between investments in human capital in each period and a country's subsequent growth and labour productivity. Specifically, a rise of 1% in literacy scores relative to the international average is associated with an eventual 2.5% relative rise in labour productivity and a 1.5% rise in GDP per head.  READ MORE >>

* Literacy scores, human capital and growth across 14 OECD countries. By Serge Coulombe, Jean-François Tremblay and Sylvie Marchand. Published by Statistics Canada.