Urenio Watch Watch: Knowledge Economy

The European Human Capital Index

copyright The EconomistA recent study by two European think tanks – the Lisbon Council and Deutschland Denken – sought to classify the European countries by measuring the knowledge capital and the increase or decrease in knowledge capital in those countries.

Specifically, the study measures human capital stock, deployment, utilisation and evolution in 13 EU countries, and ranks those countries by their ability to develop their human capital to meet the challenge of globalisation. Peer-reviewed by numerous authorities on generational accounting, this new ranking is expected to make a great contribution to informing policy making and public opinion in years to come.

Based on a methodology devised by Peer Ederer, director of the Human Capital Project, the study predicts major challenges for key European countries – such as Germany and Italy – that do too little to invest in and develop their human capital. If current trends are not reversed, the study says citizens of Sweden and Ireland (which invest heavily in their human capital) could enjoy a living standard up to twice as high as citizens of Germany and Italy – a trend which would turn the traditional economic hierarchy of Europe on its head.

Measurement Methodology – Results

In order to measure the development of human capital in Europe, the Lisbon Council and Deutschland Denken! have created the European Human Capital Index: a one-of-its kind ranking of 13 European Union member states. The index looks at countries’ ability to develop and deploy their human capital. It defines human capital as the cost of formal and informal education expressed in euros and multiplied by the number of people living in each country. Then it accounts for some depreciation, deducting value due to the fact that some knowledge will become obsolete and that people will forget some of what they learn. It also adjusts for ongoing demographic developments, provisioning for the loss of human capital due to declining populations and shifting employment patterns across the EU countries.

Specifically, the index identifies and defines four types of human capital and analyses the way they collectively contribute to the wealth of European citizens:

1) Human Capital Endowment.
This figure measures the cost of all types of education and training in a particular country per person active in the labour force (i.e. employed person). Specifically, the index looks at five different types of learning for each active person: learning on the job, adult education, university, primary and secondary schooling and parental education. The figure is subsequently depreciated to account for obsolescence in the existing knowledge base and some level of forgetting.
2) Human Capital Utilisation.
This figure looks at how much of a country’s human capital stock is actually deployed. It differs from traditional employment ratios in that it measures human capital as a proportion of the overall population.
3) Human Capital Productivity.
This figure measures the productivity of human capital. It is derived by dividing gross domestic product by all of the human capital employed in that country. This diverges from traditional productivity measures, in that the figure takes account of how well educated employed labour is, instead of just how many hours are being worked.
4) Demography and Employment.
This figure looks at existing economic, demographic and migratory trends to estimate the number of people who will be employed (or not employed) in the year 2030 in each country.

The researchers chose these four components to be measured for the European Human Capital Index because they each represent one aspect of how human capital contributes to the generation of economic activity. To compile the ranking, the researchers scored 13 EU countries in each of these four areas. Then, they compiled the four scores into a single composite score, giving each country a relative rank within Europe for its ability to develop and deploy its existing human capital. The result, which is available in Table 1, displays the relative level of human capital in those countries today, drawing partly on past and current trends in managing human capital as well as the demographic trends. In that way, it not only reflects today’s situation, but also takes account of those countries’ ability to improve the quality and quantity of their human capital in the future.

Table 1: The European Human Capital Index
Sweden tops the European Human Capital Index in 2006, while Germany and the Mediterranean countries mark the bottom. Four is the best possible score; 52 is the worst.