Labour markets, human capital and inequality

NERO meeting, 1 July 2002 - Papers


Meeting of representatives of National Economic Research Organisations
OECD Headquarters, Room 5
Paris, 1 July 2002

Theme: Investment in human capital

List of participants

List of papers

Investment in human capital through post-compulsory education: the impact of government financing
Sveinbjorn Blondal
OECD, Economics Department

Across countries there is a broad consensus that some degree of government involvement is needed in the provision of educational services. All OECD countries seek to ensure that all young people enter working life with a minimum amount of human capital acquired during the years of compulsory education. However, governments are also heavily involved in the financing and delivery of post-compulsory education, i.e. upper-secondary (such as senior high school) and tertiary (such as university) education, where returns may to a larger extent accrue to the individual and where participation is by choice. This element of discretion highlights the importance of incentives, raises certain equity issues and indeed questions about the appropriate role of government in the provision of such education.

This project examines the impact of government involvement on various efficiency and equity aspects of post-compulsory education in the seven largest countries and three of the smaller countries in the OECD area. It provides information about the aggregate total cost of post-compulsory education and documents government involvement in the financing of upper-secondary and tertiary education. It then assesses the impact of government financing on the incentives for young individuals to continue their education beyond compulsory schooling and raises the issue of whether government subsidies to education at this level can be justified by positive externalities. It follows by examining some equity issues related to post-compulsory education and ends by discussing a possible policy option that would advance equity objectives without compromising efficiency goals.

Higher education reform: Getting the incentives right
Erik Canton
CPB Bureau of Economic Policy Analysis (Netherlands)

This study analyses the role of incentives in higher education. It will be shown that economic and non-economic incentives matter, and do affect the behaviour of the people involved. Understanding the impact of incentives is an important step towards a better performance of the higher education sector, not only in terms of efficiency but also with reference to equity and accessibility.

The aim of this project is threefold. First, important economic mechanisms at work in the higher education sector are discussed. Why do people attend higher education? Why, when and how should government intervene in the higher education market with respect to both teaching and research? And what kind of problems could be associated with government intervention? Insights from the economic literature are used to deal with these and other questions.

Second, interesting experiences with higher education policy in other countries are studied: the Australian system of tuition fee payments; the consequences of tuition fee differentiation and student selection in the US; the Danish output-funding model for teaching; the performance-based funding model for academic research in the UK; and the collaboration in scientific research between industry and university in the US. An in-depth treatment of these various cases enables us to evaluate the pros and cons of different higher education policies.

As no-regret policies hardly exist, alternative policies also might have some negative side-effects. Nonetheless, interesting lessons can be drawn from the international experience. The third and final goal is to present options for policymakers in the Netherlands.

Government intervention in the provision and financing of education
Caroline Hoxby
National Bureau of Economic Research (US)

In theory, selecting the right human capital investment for each person is a problem with a relatively straightforward answer. In practice, failures in the capital market for privately funding education investments makes it unlikely that human capital investments will be optimal without government intervention. However, government intervention brings problems of its own, particularly but not exclusively when the government intervenes by being the provider of education. Government intervention in financing education can distort incentives for instance, by giving students an incentive to commence programs that they are unlikely to complete. Government intervention in provision can result in educational institutions that have low productivity and that offer lower quality than students would be willing to pay for.

This presentation starts with the problems that make human capital investment unlikely to be optimal in a wholly private setting, and then discusses the most efficient way for governments to remedy these problems, without introducing unnecessary problems themselves. In particular, I will discuss evidence on the productivity of public schools and how restricting government intervention to financing (programs akin to vouchers) affect productivity and school quality. I will discuss evidence on how public provision (as opposed to financing) of college education affects investment in college education and college quality. I will discuss evidence on how public financing of college education affects decisions to enroll in college, complete college, and choose an appropriate college program. I will discuss low-intervention mechanisms such as government-supported savings programs for human capital investments.

The OECD Programme for International Student Assessment (PISA)
Andreas Schleicher
OECD, PISA programme

The PISA programme aims to assess how far students approaching the end of compulsory education have acquired some of the knowledge and skills that are essential for full participation in society. In a collaborative process, the programme brings together scientific experts from participating (both OECD and non-OECD) countries. PISA focuses on public policy issues and is designed to provide a comparable set of results across a large number of countries.

Analysis will seek to identify key demographic, social, economic and educational determinants of student and school performance. For example, PISA will:

  • relate student performance to the context of instruction;
  • analyse the relationships between student performance and school factors such as the quality of the school's human and material resources or public and private control, funding and decision-making mechanisms;
  • analyse differences in achievement patterns within countries, including information on the proportion of variation in student performance between, rather than within, schools as well as the extent to which schools influence the relationship between students' performance and the economic, social and cultural capital of their families;
  • compare aspects of students' lives such as their attitudes to learning and their life in school and in their family environment.

Enterprise product strategies and human capital formation in Britain
Geoff Mason
National Institute of Economic and Social Research (UK)

In view of widespread beliefs in the importance of workforce skills for improved economic performance, many people in Britain are surprised by continuing evidence of low employer demand for skills. For example, some recent estimates suggest that the numbers of jobs which require no formal qualifications now substantially exceed the numbers of unqualified people in Britain. This paper draws on cross-country comparisons and recent surveys of British employers to argue that:

  • The relatively high incidence of low-skilled employment in Britain reflects the low value-added product (or service) strategies adopted by large numbers of British enterprises
  • The sustainability of product strategies of this kind differs sharply between and within industries
  • For many British enterprises, the importance of human capital formation only becomes apparent as they attempt to respond to competitive market pressures by moving 'upmarket' in terms of product specification and belatedly encounter skill gaps in so doing

In this context the challenge for British policy-makers is to find ways of encouraging enterprises to invest more in workforce skills development than is strictly warranted by their current product strategies.

Migration and human capital: recent Irish experience
Brendan Whelan
ESRI Dublin

Over the last decade, the Irish economy has recorded unusually high levels of growth accompanied by a substantial increase in employment and a reduction in the unemployment rate. Migration has always exerted a strong influence in the Irish labour market, but the nature of the flows and their effects have changed substantially in this recent period. In particular, the selectivity patterns in terms of educational levels have reversed: out-migration is now substantially more selective of the better educated while return migration of persons with enhanced experience and qualifications has helped to avoid bottlenecks in the labour market. The presentation will draw on a number ESRI studies which illustrate the links between migration patterns, employment and levels of human capital.

Supporting economic growth through continuous education and training
Wooseok Ok and Peter Tergeist

One of the main findings of the OECD's Growth project is that human capital is a key engine of economic growth. However, much of the evidence rests on education, while relatively little attention has been devoted to other sources of human capital, notably firm training. Therefore, a follow-up study focusing on the latter issue is being carried out in the Directorate for Education, Employment, Labour and Social Affairs. It consists of two interrelated parts:

  • an empirical analysis of the contribution of continuing education and training to human capital formation and economic growth; and
  • an analysis of policies and institutions to achieve sufficient investment in continuing training and ensure its efficiency and effectiveness.

The main purpose of the presentation will be to discuss preliminary findings on the first theme. It will highlight the channels through which continuous training and education of adult workers may affect economic performance. This includes, first, the extent to which training improves the quality of the labour force. Available evidence suggests that there is a positive correlation between the participation rate in continuous education and training of adult workers and their level of literacy. In particular, continuous education and training seems to prevent or slow down the erosion of literacy skills. Second, continuous education and training contributes to economic growth by enhancing workers' employability and labour market participation -- evidence in support of this effect will be presented as well.

The presentation will also briefly touch upon a range of related policy issues which arise from the intial empirical findings.


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