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Human Capital and Productivity Literature Review March 2013 Human capital and productivity Literature review March 2013 ISBN 978-1-922218-73-5 (online pdf). © Commonwealth of Australia 2013 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to the Department of Industry, Innovation, Science, Research and Tertiary Education, GPO Box 9839, Canberra ACT 2601. Disclaimer: The material contained in this paper has been developed for and by the Australian Workforce and Productivity Agency. The views and recommendations do not necessarily reflect the views of the Australian Government, or indicate its commitment to a particular course of action. The Australian Government and the Australian Workforce and Productivity Agency do not guarantee or accept any legal liability or responsibility for the accuracy, completeness, or usefulness of any information disclosed. The Australia Government recommends that users exercise their own skill and care with respect to their use of this paper and that users carefully evaluate the accuracy, completeness and relevance of the material in the paper for their purposes and where necessary obtain any appropriate professional advice relevant to their particular circumstances. The paper can be accessed at www.awpa.gov.au. Australian Workforce and Productivity Agency | Human capital and productivity literature review 1 Table of Contents Abstract .......................................................................................................................... 3 Executive summary ....................................................................................................... 4 Formal learning and non-certified learning .................................................................................. 4 Foundation skills ........................................................................................................................ 5 Management and leadership skills ............................................................................................. 5 Other benefits of learning .......................................................................................................... 5 Conclusion ................................................................................................................................. 5 1. Introduction ............................................................................................................ 6 Objectives .................................................................................................................................. 6 Scope ......................................................................................................................................... 6 Methodology .............................................................................................................................. 7 Structure .................................................................................................................................... 7 2. Learning and productivity ..................................................................................... 8 Learning and individual outcomes .............................................................................................. 8 Effect on firm performance .......................................................................................................17 Benefits to economy .................................................................................................................21 Relative importance of different levels of education and types of learning ................................24 Marginal versus average return .................................................................................................27 Signalling theory ........................................................................................................................27 3. Foundation skills .................................................................................................. 29 4. Learning and innovation ..................................................................................... 32 5. Leadership and management ............................................................................. 36 6. Other benefits of learning ................................................................................... 41 7. Conclusion ............................................................................................................ 42 Formal learning and non-certified learning .................................................................................42 Foundation skills .......................................................................................................................43 Management and leadership skills ............................................................................................43 Other benefits of learning .........................................................................................................43 General conclusions and recommendations for further research ..............................................43 References ................................................................................................................... 44 Australian Workforce and Productivity Agency | Human capital and productivity literature review 2 Abstract The Australian Workforce and Productivity Agency (the agency) was established to provide the Australian Government with independent advice on a range of matters including improving workforce productivity. The primary means by which policy can improve workforce productivity is by enhancing human capital and by ensuring human capital is allocated efficiently and meets the dynamic needs of the economy. This literature review examines published evidence of links between human capital and productivity. The literature establishes a strong positive association between human capital and productivity for individuals, firms and the economy as a whole. It also suggests: that both flows and stocks of human capital are important to productivity; that higher-level skills become increasingly important as countries develop, requiring firms and labour to adopt increasingly complex technologies or to innovate to further enhance welfare; that foundation skills play a key role in productivity and are more easily developed during an individual’s formative years than in adulthood; and that good management and leaderships skills promote the efficient use of human capital within workplaces, including by ensuring skills are matched to jobs and are complemented by technology. This review also identifies possible areas for further research. These include: research to identify where Australia sits on its learning-growth curve; research addressing how the marginal benefits of additional learning compare to the marginal costs; identifying Australia’s skill needs in the complexity and rapid change of the Asian century; additional research at the firm level, including further examination of the importance of workforce development strategies; and an examination of the unique human capital challenges of particular groups including those of low social economic background, Indigenous Australians, women and older Australians (especially given the ageing population). Industry level studies (directed at industries of strategic importance and in which Australia could develop a comparative advantage) addressing productivity challenges would also provide a useful contribution to the literature and the welfare of Australians. Australian Workforce and Productivity Agency | Human capital and productivity literature review 3 Executive summary It has long been recognised that productivity is the key to long-run economic growth. Increases in productivity allow firms (and by extension the economy) to produce more output with the same quantity of inputs. Traditionally productivity is measured by statistical agencies at the economy level by dividing output by labour inputs (in the case of labour productivity) or labour and capital inputs (in the case of multifactor productivity). There are many potential drivers of productivity including technological change, increases in human capital, microeconomic reforms, trade related reforms, and competition. From this list it is apparent that governments can enhance productivity by promoting efficient markets as well as through fiscal policies. In the case of human capital, governments have a role to play in both respects. The OECD (2001) defines human capital as the knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being. The aspects of human capital that are of most relevance to the Australian Workforce and Productivity are: formal learning (learning leading to a qualification); non-certified learning (on job training, work experience, or other learning not leading to a formal qualification); foundation skills; and management and leadership skills. This paper examines the existing literature on the productivity effects of human capital in the context of each of these relevant subject areas. Formal learning and non-certified learning Numerous studies have examined the association between learning (including formal learning and non-certified learning) and productivity. On balance, the literature tends to find that
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