Human capital shallowing

Economists use the term capital deepening to describe an increase in the amount of capital per worker in the economy. Joao Paulo Pessoa and John Van Reenen argued that the UK’s fall in productivity was due to its opposite, capital shallowing. In other words, falling wages allow firms to substitute people for capital and the capital per worker falls.

But do these concepts apply to human capital? I recently came across the ONS Human Capital Estimates, released a few months ago. The ONS has a methodology for calculating the stock of human capital in the UK. This involves making an assessment people’s of earnings, skills and qualifications then using it to calculate lifetime labour income. This, taken together, gives a value for the UK’s stock of human capital. (I have tried to summarise an entire paper with a few sentences. The full explanation is here.)

According to the ONS calculations, human capital per worker increased during the early 2000s, until just before the recession when it began to fall. It is now lower than it was in 2004.

Screen Shot 2015-12-11 at 12.27.59

This might strike you as a bit odd.

Take the ONS’s definition of human capital:

Human capital is a measure of individuals’ skills, knowledge, abilities, social attributes, personality and health attributes1. These factors enable individuals to work, and therefore produce something of economic value.

In terms of education level and people in high skill roles, the UK has one of the highest proportions in Europe and it has increased over the last decade or so.

Screen Shot 2015-03-04 at 08.21.02

Source: Growth Through People, UKCES, February 2015

According to the ONS classification, the percentage of the workforce in high skill jobs has increased steadily since 2001 while the proportion in medium and low skill jobs has declined. this shift has been particularly pronounced in the professional occupations, producing the cocktail glass effect.

Emp & Self Emp Region Apr-Jun 2008

Source: ONS Labour Market Statistics, EMP09

When it comes to the stock of skills and qualifications, then, it’s hard to argue that the UK has less now than it did a decade ago. The problem comes when you try to put a value on it. The only way you can do that is by looking at earnings. If earnings fall, then the value of human capital must fall. Over the past few years, even the rise in the workforce’s skills and qualifications hasn’t been enough to offset it.

The UK might have a more highly qualified workforce with more people in skilled jobs but employers are not valuing that as highly as they once did. Even jobs that once paid well have seen their earnings fall. Wages in all occupational categories are, in real terms, lower than they were in the early 2000s. There has been pay polarisation in the high skill categories, with a few professional and managerial workers seeing pay increases but many others sliding down the pay hierarchy.

Median hourly wage by occupation (RPIJ-adjusted to April 2015 prices)

Screen Shot 2015-12-11 at 16.32.51

Source: Resolution Foundation

Our workforce might look more skilled but the value our labour market puts on those skills has gone down. The UK’s human capital shallowing, the fall in the value of human capital per head, is the result of the low market value of its skills. It’s another feature of that high-skill, low wage recovery.

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2 Responses to Human capital shallowing

  1. duncan brown says:

    Saratoga had some interesting data when I was there showing that US firms paid more but added over 50 cents for every pay dollar compared to 10 cents in the UK. Presumably Osborne thinks the NLW will force firms down the added value route, but they need decent management and reward systems to deliver on this.

  2. Alex says:

    This seems circular. What is (part of) the cause of our productivity crisis and therefore wage crisis? Human capital shallowing. But only in terms of how our capital is actually valued. But what is another way of saying employers are valuing what workers have to offer less? Another way of saying that is with wage restraint. So the evidence for the wage crisis is… there’s a wage crisis?

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