Productivity and Skills – Sectoral skills explain more than school attainment

The key source of modern economic growth is productivity growth which is ultimately determined by technological progress. Innovation and technological progress are driven by people’s knowledge and skills which, in turn, are fostered by education and by research and development activities (R&D). Education – by equipping individuals with knowledge and skills – enables workers to use more efficiently existing technologies as well as to generate new ideas and, as a result, to stimulate innovation and technical change. Similarly, research and development activities deliberately aim at increasing the stock of knowledge and ideas and finding new solutions.

From the seminal works of Barro and Mankiw, Romer, and Weil, empirical research on the relationship between human capital, productivity and growth has expanded tremendously. Most empirical research has measured education through input-variables – namely through school attainment or school enrolment rather than through output-variables able to capture the actual knowledge and skills that education provides to individuals. This has led to some quite contrasting results on the role of human capital on productivity and growth. In recent years, a few studies – by making use of internationally comparable tests to assess students’ cognitive skills – have started to measure human capital through educational outcome indicators. Hanushek and Woessmann found that the cross-country variation in GDP per capita growth that can be explained by human capital rises drastically when the country average of test scores are taken as a regressor instead of the country average years of schooling. However, to the best of our knowledge, no study has yet computed and used the average cognitive skills that the workforce in each sector of the economy has, i.e. a more precise measure of the human capital that is actually available in each sector.

We focus on human capital measured by skills and analyse its relationship with R&D investments and productivity across 12 OECD economies and 17 industries. We compute a measure of sectoral human capital defined as the average cognitive skills of the workforce in each country-sector combination. The variation in labour productivity that can be explained by human capital is remarkably large when measured by the sectoral skills, whereas it appears statistically insignificant when measured by the sectoral school attainment. This suggests that using measures of sectoral cognitive skills can represent a major step forward in any future sectoral growth accounting exercise.

Figure 2. Correlation between sectoral average cognitive skills (numeracy) and sectoral labour productivity. Average sectoral numeracy skills (on a scale 0–500) and average sectoral labour productivity (value added per worker in thousand USD at constant 1995 prices). Each shade represents one sector of activity. Source: Own calculations based on the OECD Survey of Adult Skills PIAAC (2013) and on WIOD data (2013).

Chosen excerpts by Job Market Monitor. Read the whole story at Sectoral cognitive skills, R&D, and productivity: a cross-country cross-sector analysis: Education Economics: Vol 27, No 1