Human Capital – A new macroeconomic measure with of PISA and PIAAC

Despite its fundamental role in modern economic growth theory, empirical work has struggled to find a satisfactory representation of human capital to explain macroeconomic variables. Traditionally, empirical work has used quantity-based measures (such as mean years of schooling), although there has been increasing recognition of the need to incorporate a ‘quality’ dimension (often based on internationally standardised test scores). However, a problem with this empirical literature is that either quantity and quality components are combined with arbitrary weights (often implicitly imposing identical elasticities) or else they are included separately in estimations, usually with the implausible outcome that one component is dominant and the other completely insignificant. A further weakness of many studies that try to incorporate notions of quality into measures of the human capital stock is that they are based on contemporaneous flow measures that relate to a particular age cohort (most often students tested at age 15), which are unlikely to be representative of the skills of the entire working age population. The current paper seeks to address these weaknesses by constructing a new stock measure of human capital that relies heavily on OECD data from the Programme for International Student Assessment (PISA) and the Programme for the International Assessment of Adult Competencies (PIAAC). Improving macroeconomic measures of human capital is important given the central role that education, training and skills play in economic policy and as a driver of economic performance.

In contrast to the existing literature, the relative weights of each component are not imposed or calibrated but directly estimated. The paper finds that the elasticity of the stock of human capital with respect to the quality of education is three to four times larger than for the quantity of education. The new measure has a strong link to productivity with the potential for productivity gains being much greater from improvements in the quality than quantity component of human capital. The magnitude of these potential gains in MFP is comparable to a similarly standardised improvement in product market regulation, but the effects materialise with much longer lags. The paper demonstrates through the example of pre-primary education, how to simulate the impact of a particular reform to education policy on human capital and productivity.

Chosen excerpts by Job Market Monitor. Read the whole story @  A new macroeconomic measure of human capital exploiting PISA and PIAAC: Linking education policies to productivity | Documents de travail du Département des Affaires économiques de l’OCDE | OECD iLibrary