Some researchers believe that challenges in measuring human capital may explain the results found in empirical studies that seem to contradict the presumption that increases in human capital should boost productivity. A recent OECD study identifies several shortcomings of the previous measures of human capital used in past research. This method assumes that the lifetime incomes received by individuals are the returns to their investment in education.
As a result, the value of the stock of human capital depends on the rate of return to education, educational attainment and the total educated population within the economy. The returns to the accumulation of human capital could take various forms — for example, in increased labour productivity, more economic output or higher income in the UK.
For the rates of return to education, measures used in previous empirical studies relied on two simplifying assumptions. First, that the returns to education remain constant across countries and over time; and second, that there are constant or diminishing returns to the number of schooling years. Empirical findings do not support either assumption. Average returns to education for the OECD countries have been rising consistently since the s. Although the new quality adjusted measure for human capital has been proposed to reflect these empirical realities, and has obtained encouraging results , there are other methodological weaknesses when applying the approach described above.
The estimates only capture the returns from formal education and training. In addition, some knowledge and skills are specific to particular contexts, networks and organisations. For example, employees who possess strategic positions in firms are better compensated than others, which implies that their social network can also be a component of their human capital. To reflect the multidimensional nature of human capital, statistical agencies across the world have been trying to improve existing measurements.
The ONS has developed an indicator-based framework to complement its stock measure. The indicator-based framework is more effective at capturing other important dimensions of human capital, such as health. Although the current measures of human capital are far from perfect, they can still shed some light on education policies. Six such policies listed in Figure 3 have been tested and found to be associated with human capital measures across all the OECD countries.
All of these have room for improvement on at least one of the six fronts. The UK, for example, could benefit from improving attendance in pre-primary education and decreasing the student-teacher ratio in primary and secondary education see Figure 3.
Thus where firms locate affects the size of agglomeration benefits available in particular areas, which in turn affects the productivity and location choice of other firms. As Quigley notes, both the scale and the variety of activities in particular geographic areas have been found to increase productivity. And the gains may be of several sorts. Spatially concentrated employers may benefit by sharing access to a dense labor market.
If one employee quits, another may be quickly found when many workers live within commuting distance. Firms may also benefit when they can share the cost of publicly provided inputs, especially big-ticket items like infrastructure. Effects of this kind help explain the concentration of high-tech firms in Silicon Valley as well as the concentration of financial services jobs in central business districts around the country.
While agglomeration economies are thought to be important contributors to growth, less is known about the scale over which they operate. Some authors have focused on metropolitan areas, while others have looked at smaller geographic units. One recent paper in the American Economic Review, for example, analyzed aggregate state productivity as a function of employment density.
The authors found that a doubling of their county density index which weights the densest counties most heavily is associated with roughly a 6 percent increase in aggregate state productivity. Together, these studies make a compelling economic case for fostering the development of our densest and most diverse employment centers?
Individual firms will locate where their profits are highest, without regard to the effects that their move has on other firms. The fact that the primary function of state capital investment turns out to be subsidizing the spreading out of jobs thus means that it has the potential to reduce productivity. And a more dispersed employment pattern is closely associated with a more dispersed residential pattern, which also leads to the problems of socioeconomic segregation and costly suburban residential growth.
Thus infrastructure is a seeming contradiction: it is a productive good whose aggregate productivity may be negative. Because it is productive, it draws activities toward it. But because it is primarily placed in low-density areas, it undercuts density and thereby reduces overall productivity.
The real culprit here is not public investment itself, but the political process that puts it where it is least valuable. Reduced national productivity growth makes us all worse off. So even if infrastructure dollars were free, it would be costly to invest them the way we do. Because infrastructure is instead very expensive, it is even more clear that our public investment policies need reform. Indeed, from the point of view of most urban residents, it would be better to burn the money than to spend it the way we do.
Luckily, these are not our only alternatives. But states are not likely to do so, especially because they have substantial revenue sources earmarked for particular kinds of investment.
As an alternative, states might begin to consider more carefully how their investment policies affect the spatial distribution of jobs and whether the patterns that emerge are consistent with their economic growth objectives. States that wish to use their public capital money as part of a strategic economic development effort will direct more resources to central cities and other locales that have high concentrations of jobs and avoid building new projects in the greenfields on the edges of metro areas.
The result will be a more densely developed state, with more moderate growth in the suburbs, lower taxes, and faster economic growth. What Have We Learned?
Related Books. A big question is what role quantitative easing and zero interest rate policies ZIRP have played in encouraging consumption at the expense of saving and investment. Companies have been spending money on short-term investments and share buybacks, rather than investing in long-term capital. One solution, besides better education, training, and research, is to promote capital investment.
And the best way to do that, economists say, is to reform corporate taxation, which should increase investment in manufacturing.
More recently, there have been some signs that the economic crisis and lockdown have actually boosted productivity growth. Since companies from just about every single industry—from restaurants and factories to financial institutions and retail stores—are leaning on technology more than ever, workers are being allowed to focus on "higher-value" tasks.
The work-from-home model, for instance, is becoming a permanent setup for businesses around the world. Productivity is largely determined by the technologies available and management's willingness and know-how to make process improvements. The calculation for productivity is straightforward: divide the outputs by a company by the inputs used to produce that output. The most regularly used input is labor hours, while the output can be measured in units produced or sales.
Sales can also be used as a measure of output. Auto manufacturing giant Toyota offers a prime example of high-end productivity in real life. The company has very humble beginnings but has grown to become one of the largest and most productive car manufacturers in the world. TPS includes a few of the following principles:. In , Toyota had to recall roughly 9 million cars due to pedal entrapment and accelerator issues.
Straying away from its foundational TPS principles were widely blamed for the recalls. Since then, management has refocused on its foundational TPS philosophy.
Of course, a real-world look at productivity wouldn't be complete without talking about Amazon, the world's largest online marketplace. Amazon's fulfillment centers are at the heart of its operation. Employees must work at machine-like efficiency levels in order to track, pack, and sort thousands of orders each day.
However, very few realize just how much Amazon pushes the envelope of productivity. According to a article by The Verge , Amazon fired "hundreds" of employees at a single facility between August and September for failing to meet productivity goals.
Productivity is the level of efficiency in the production process. It's usually expressed as the ratio between aggregate output and aggregate input in the production process. Productivity in the workplace refers simply to how much "work" is done over a specific period of time. Depending on the nature of the company, the output can be measured by things like customers acquired, phone calls made, and, of course, sales gained. Some commonsense ways to increase personal productivity on a daily basis include:.
The concept of productivity is simple: the level of output per unit of input. However, its importance can't be stressed enough. Whether we're coming at it from an economic standpoint, company standpoint, or personal standpoint, being able to measure and track productivity can be crucial to long-term success. The Conference Board. Bureau of Labor Statistics. Financial Analysis. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
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