How Low Human Capital Can Limit Productivity

Improvements. Examples from Turkey and Peru

 XIMENA DEL CARPIO |AUGUST 16, 2018

Comparing two middle-income countries is not unusual, but two that are geographically far
and are apparently different is less common. However, both Turkey and Peru have had the
highest growth in their respective regions in recent years, aspire to become high-income
economies in the next decade, depend on trade. Both countries face downside risks if
structural changes—in the education and training system, and the economy more broadly—
are not made to ensure that contributions to economic growth come from improvements in
productivity. Both countries recognize there is a large gap between their productivity levels
and the global productivity frontier, and both have growing populations that are not
adequately equipped to meet labor market needs, with average productivity levels. Given
these (similar) challenges, both countries have as their development goal, central to their
development agenda, to improve productivity to continue growing in a sustainable manner.
Why is productivity important now? Turkey and Peru would like to benefit ongoing
demographic changes. Both countries see it as an opportunity to accelerate growth. But they
recognize that to benefit from having a young, active and highly productive population certain
reforms and activities are needed. Among them is the improvement of human capital. By
improving the education, skills and abilities of workers, these countries can potentially
improve the productivity of their workers and their economy. A recent article that explores
the link between human capital and economic growth finds that human capital can explain
between 10% and 30% of the differences in per capita income between countries. And the
positive effects of human capital gains are persistent over time which emphasizes its
importance for governments and societies to improve peoples’ quality of life permanently
(intrinsic value), and increase the sustainability of productivity and economic growth
(instrumental value).

What is the situation of human capital? Both countries increased their accumulation of
human capital in the last decade. Both countries have a growing number of people entering
working age. With a population of more than 81 and 32 million people, in Turkey and Peru,
respectively. Both increased their labor force participation rates (Turkey, from 46% in 2006 to
52% in 2017) or maintained a high level (Peru, 73%), during the last decade. Unfortunately,
both countries have relatively high rates of informality (34% in Turkey and 60% in Peru)
indicating that the formal sector can’t absorb a large part of the workforce (for several
reasons, including low human capital).

Despite having a greater participation of people entering the workforce with higher levels of
education than previous generations, Turkey and Peru face challenges in the quality of their
human capital, which limit the growth of productivity. Large segments of young populations
(aged 15) in Turkey and Peru achieve relatively low scores in international assessments.
Approximately 31.2% and 46.7% received the lowest score in the three subjects tested (math,
science and reading), in Turkey and Peru, respectively. The average for the OECD is 13%. Such
low levels of human capital before entering the labor market can have negative effects on the
person's performance once they enter the labor market.

But productive workers must not only have good fundamental skills (acquired in the formal
educational phase), they should also have high-level functional skills (related to work) to be
most productive. Therefore, although educational attainment in the formative years is a key
tool in the development of basic skills, and investments from both countries are correctly
focused there, basic education alone is not enough to develop job related (practical) skills. In
Turkey workers (ages 16-65) have a lower than average competence in literacy, arithmetic,
problem solving using technology. Less than half of adults obtained the lowest levels (Level
1 or less) in literacy and arithmetic sections, respectively; a high share of people compared to
the OECD averages of 19% and 22.7% respectively. In Peru, more than 50% of workers are
over-or-under qualified for their work. And approximately half of employers cite the lack of
competent qualified personnel with relevant cognitive and technical skills as a limiting factor
for their ability to hire workers and to be more productive. Social-emotional skills, such as
work ethic, teamwork, persistence, adaptability, initiative, are also critical skills not easily
found in many aspiring workers. And because skills are formed throughout a person's life
cycle, productive workers require continual learning to acquire new skill and hone practical
skills. Therefore, technical training programs, whether in the classroom, virtual, or at work,
play a fundamental role in retraining workers to remain relevant to changing demands and
be productive.

What steps can these countries take to improve their human capital and productivity? Both
governments should continue to ensure that kids learn basic skills, and that workers have
opportunities to continuously adapt their skills. Both countries should focus on improving the
quality of teachers (e.g. in the initial selection, providing incentives for performance, requiring
regular testing, offering regular training) and pedagogical tools. Quality improvements are
critical for the youngest cohorts who conform large part of the workforce and whose
productivity is essential for the sustainability of economic growth. Making adequate financial
investments remains important in both countries; but such investments should be
accompanied by efforts to ensure cooperation between relevant stakeholders and formation
of public-private partnerships to ensure that formal (and informal) training systems and
policies respond to changing demands.

In the formulation of any strategy to improve human capital one must remember that
although the demand for university graduates in both countries remains high (and growing),
many graduates are unemployed or underemployed. Students/workers often make career
decisions based on limited information, as a result they select fields of study that may be in
low demand (or saturated). This underscores the importance of improving the provision of
school counseling and labor market information (e.g. online information system). The quality
of the content taught (often static content, overvaluing theory and undervaluing practical
training) seldom reflects market demands. This emphasizes the need to improve the
alignment between formal content and practical skills. Much of the creation of new formal
jobs in both countries is driven by the growth of manual occupations or occupations that
require less cognitive skills and are more dependent on physical abilities. This limits the ability
to absorb workers with higher skill levels in new jobs. Various activities and changes are
needed to address this problem, beginning with structural changes in the economy, which
can decrease dependence on jobs with low qualifications in less productive sectors.
Improvements to active labor market programs and job-search and job-placement support
services are also needed to provide better job counseling, facilitate upskilling of workers and
ease (re)entry to the labor market.