DOC02270903

Background paper

EMPLOYMENT, HUMAN CAPITAL AND GROWTH

1.The changing nature of investment

Knowledge related investment increasingly defines the competitive profile of firms and economic systems. This has important consequences for economic growth, employment creation and economic and social cohesion.

Some mutually reinforcing trends explain this development:

  • The increase of the share of services in the economy.
  • The dynamism of technologically advanced sectors and the more rapid obsolescence of products, processes and skills.
  • The increase in the knowledge/information share of the value of production.
  • The highest rates of growth are found in jobs demanding a higher level of education.

Binding these together is the challenge of effectively responding to and promoting economic and social restructuring. Change is a constant feature of all economic life. Restructuring is no longer just about change in traditional industries. It covers all sectors including the growing service industries. Simply reacting to the effects of restructuring is no longer an option. Investing in human capital will be the key to successful restructuring.

2.Main challenges

2.1. Maximising the benefit of investing in people

Sustained increase in living standards depends essentially on employment and productivity growth which, in mature economies, is mainly driven by innovation that expands the range of technological and economic opportunities. A skilled and adaptable labour force is essential to generate innovation and to take advantage of the impact of innovation on new activities and modernising working environments. Yet, investment in knowledge (R&D, education, training, software) is lower in the EU than in the US per head (2.900€ compared to 1.700€ according to an estimate for 1999) and the gap is increasing. Reversing this trend with a cultural change in attitudes to investment in people is essential if the Union is to become the most competitive and dynamic knowledge based economy in the world.

Economic and social restructuring can bring wide ranging benefits to organisations and individuals in terms of more and better jobs and higher productivity and wages. However, without effective policy support, change can also go hand in hand with strains in the labour market and society and a failure to invest adequately in some groups of people. With an increasing premium on skills, polarisation between the knowledge rich and the knowledge poor will put strains on economic and social cohesion. Moreover, access to employer funded training is often limited to those who are already well-qualified. Some groups get locked into the lower end of the labour market. The challenge is to promote the positive benefits offered by the process of restructuring while ensuring it does not have adverse effects on social cohesion. Investment in learning has a vital role to play in this.

2.2Reducing gaps between countries and regions

At country level, OECD and Commission data highlight large differences in education and research and development expenditure. In the 1990s, R&D expenditure relative to GDP ranged from three and a half percent in Sweden (above the US which spent 3.1% of GDP on R&D in 1999) to less than half a percent in Greece. On public education, these two countries were also extreme cases within the EU, spending respectively 6.8% and 3.5% of GDP (1997 data). Spending appears one of the main factors explaining differences in educational performance between countries[1].

Evidence suggests that variability in investment in people within countries is much larger than between them. Educational attainment varies significantly between regions and strongly influences productivity, labour market participation, employment and social cohesion. Not only do regions lagging behind in terms of GDP per head have comparatively lower employment rates, but the gap rose during the 1990s. The relative employment performance of different regions appears to depend strongly on the availability of a skilled, adaptable and innovative workforce. More emphasis on developing the quality of the workforce should help promote sustainable employment. With enlargement of the EU, regional disparities will become even more striking. In particular, the lower proportion of young people with higher level skills in candidate countries will pose a problem for future economic development in the new Member States.

3. Policy responses

From Lisbon to Barcelona European Councils have underlined the importance of increasing investment in education, training and RTD. Political recognition of the value of investing in people is based on clear empirical evidence that investment in people pays off:

For the economy: investment in human capital raises growth both directly and through its impact on technical progress.

For individuals: those with better qualifications earn more, are more likely to participate in the labour force and have better job prospects.

For enterprises : they benefit from a more adaptable workforce better able to boost profitability and competitiveness of the firm.

Evidence suggests that the EU suffers from under-investment in human capital. This requires action from all concerned: individuals, enterprises, social partners and public authorities. An effective policy response will require two broad types of action:

-First, it is for governments to define a framework, provide for quality standards and design incentives for employers and individuals to enhance the volume and quality of private investment in human capital.

-Second, public authorities should review public spending with a view to redirecting it towards human capital accumulation, including research and development.

These policies must lead to a general upgrading of qualifications to support productivity growth, international competitiveness, the reduction of disparities between regions and social cohesion in the enlarged Union.

3.1. Instruments and incentives to promote investment in people

There are a variety of regulatory tools and incentives enabling governments to co-operate with enterprises and social partners in the promotion of lifelong learning and the development of measures to support greater adaptability. The Commission and the Council have provided guidance on the subject in communications and reports on research and development, lifelong learning, skills and mobility, competitiveness and labour-force participation[2].

Policies should address the whole life cycle with its multiple transitions between learning and work. All people of working age or preparing themselves for the working life are to be borne in mind, and particularly those who experience special difficulties in job search and in accessing the labour market. The employment guidelines for activation of the unemployed and for the reduction in the number of people dropping out of the school system have defined relevant EU targets, to be coupled with those which Member States should set on life long learning and of which they should monitor the achievement.

When proposing joint Government/Social partners' initiatives to retain workers longer in employment, the Council and the Commission gave a priority to access to company training. Such initiatives could build on the joint framework for action for the lifelong development of competence and qualifications agreed by the social partners at EU level and to help retain workers in employment, with special attention to women and older workers.

Various approaches may be combined including:

-learning accounts or vouchers for individuals;

-a system of lifelong learning labels;

-extending the right to compulsory education so that it covers free access to basic skills for all citizens, regardless of age;

-making education systems more responsive to labour market needs;

-strengthening the job matching capacities of Employment Services to facilitate the use of the knowledge and skills acquired from training programmes and other learning activities.

The effectiveness of investment in human capital should also benefit from a better diffusion and use of the research and development results obtained notably thanks to the programmes supported by the Union. Information and communication technologies must become accessible for all and new ICT skills profiles are to be developed. The acquisition of knowledge and skills must be recognised and valued, notably as regards non-formal learning.

3.2. Redirecting public expenditure

In its Communication on Public finances in EMU-2002, the Commission pointed out that Member States can promote growth and employment and enhance the quality of public expenditure by redirecting resources towards physical and human capital accumulation and research and development, in view of their contribution to the goals of the Lisbon strategy. It recalled also the role of the EU budget in complementing Member States' expenditure in these areas. Clear thinking will be needed on the balance between different types of expenditure to support best the shift towards the knowledge society while developing a coherent response to economic and social restructuring.

The Structural Funds, and in particular the European Social Fund, have an important role in bridging the human capital gaps. With €60 billion available in current Structural Funds programmes (2000-2006) from the European Social Fund alone, the Community’s financial contribution to the development of the knowledge society is clear. To achieve the most effective use of the Union's financial resources, a multiplier effect of Union's expenditure must be systematically looked for. This implies a focus on improving and developing systems and structures to lay the conditions for self-sustaining supply of skilled labour so that the challenge of economic and social restructuring can be taken up especially by the countries and regions lagging behind. It is important to take the opportunity offered by the forthcoming mid-term review of the European Social Fund and other Structural Fund programmes to assess the nature and direction of Community investments alongside those of Member States. This discussion is important not just in the context of current beneficiaries of the Structural Funds but in ongoing reflection about how to get the most out of Community funding following enlargement.

4)Conclusion

Individuals, enterprises, regions, and countries which fail to make an effective investment will see their economic fortunes fall behind. However, the nature of the investment needed to sustain economic growth, employment, and social cohesion is changing. The key theme underpinning this paper is the importance of investing in people to promote effective economic and social restructuring. The pace of change taking place now and in the future will require more from Governments, enterprises, individuals, social partners and the Commission to:

-raise the quality and quantity of investment in human resources

-and to bring about a cultural change to promote investment in people over a lifetime.

To achieve both of these aims, policy must take as its point of departure the need to anticipate and promote change in the face of economic and social restructuring.

1

[1]Results of the OECD Programme for International Student Assessment (PISA 2000) concerning reading, mathematical and scientific literacy

[2] See the communications, action plans and reports on lifelong learning (COM(2001)678), science and society (COM(2001)714), skills and mobility (COM(2002)72) and the Joint Report of the Council and the Commission to the European Council on labour-force participation and active ageing.