The contribution of human capital to economic growth

Traditional growth accounting exercises, which adjust for variations in the age, gender, and educational attainment of the workforce, conclude that changes in human capital contribute only modestly to economic growth. Yet, recent studies have argued that improvements in human capital make a more substantial impact through differences in the quality of education and the importance of human capital in the innovation process. In this study, we explore differences in the generation of human capital in Germany, Japan, and the United States.

The paper focuses on the dissimilarities in their education systems and labor markets as sources of variations in economic outcomes. It also looks at the contributions of innovation to economic growth. In empirical analysis using data from the Luxembourg Income Study, the paper finds that the returns to higher education in Japan is substantially lower than in the United States and Germany. This suggests colleges in Japan may not be providing the type of education most needed for productivity, or that Japanese companies may not be making full use of the educational skills of their employees.

The paper concludes with a brief discussion of the implications for policy. Japan should work with businesses and companies to look at higher education around the world and explore whether college education in Japan is providing young people with the skills they need to be productive at work. Japanese companies should provide more opportunities for female employees to move into senior positions. The paper also notes deficiencies in U.S. K-12 education. Many young people who do not go on to college lack the skills needed to obtain productive jobs.

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This report was funded by a grant from the Japan Productivity Center. The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.