Metrics
Measuring Human Capital

This section provides an overview of the methodology used in the construction of the Human Capital Index.

Burgess COMMENTARY

Peter Burgess

Measuring Human Capital

This section provides an overview of the methodology used in the construction of the Human Capital Index.

Key Concepts

There are three guiding concepts underlying the second edition of the Human Capital Index. The first is a focus on learning and employment outcomes, rather than on inputs or enabling environment variables. The goal is to provide a snapshot of where countries stand today with regard to their success or otherwise in developing and deploying their people’s human capital potential across all backgrounds and ages.

The second is a focus on demographics. Whenever possible, the Index takes a generational view and disaggregates indicators according to five distinct age groups, highlighting issues that are unique or particularly crucial for the human capital development of each cohort. The resulting snapshot of where countries stand at each stage of the human capital development life cycle allows for more targeted policy intervention and human resource planning.3

3

The third is that the Human Capital Index holds all countries to the same standard, measuring countries “distance to the ideal” state. By establishing an absolute measure of countries’ performance, the revised edition of the Human Capital Index allows for both intra- and inter-country comparisons year-to-year. Future annual editions of the Report will thus allow countries to track progress and changes in the level of their human capital investment and deployment gaps over time.

Index Structure

Human capital is not a one-dimensional concept and can mean different things to different stakeholders. In the business world, human capital is the economic value of an employee’s set of skills. To a policymaker, human capital is the capacity of the population to drive economic growth. To others it may include tacit knowledge acquired informally through experience, non-cognitive skills, such as inter-personal skills and the physical, emotional and mental health of individuals. The Human Capital Index aims to accommodate this conceptual diversity and takes a holistic approach, while keeping an overall focus on maximizing a nation’s human potential.

The Human Capital Index contains two horizontal themes—Learning and Employment—running across five vertical age group pillars of the Index (Under 15; 15–24; 25–54; 55–64; and 65 and Over). These two cross-cutting themes assess countries’ success in developing people’s skills and competences through learning and in deploying this acquired knowledge through productive employment. Or, expressed negatively, the Index assesses the size of a country’s human capital investment gap and deployment gap.

In total, the Human Capital Index covers 46 indicators. Exactly half of these are the result of disaggregating by age education indicators (primary, secondary and tertiary attainment) and labour market indicators (labour force participation rate, unemployment rate and underemployment rate). These 29 unique concepts are further grouped into seven sub-themes across the two horizontal themes, as illustrated in Table 1.

Values for each of the indicators come from publicly available data originally compiled by international organizations such as the International Labour Organization (ILO); the United Nations Educational, Scientific and Cultural Organization (UNESCO); and the World Health Organization (WHO). In addition to hard data, the Index uses qualitative survey data from the World Economic Forum’s Executive Opinion Survey. While an overview of the Index indicators is provided in Table 1, detailed descriptions, technical definitions and sources are included in the section User’s Guide: How to Read the Country Profiles.

Learning

The first horizontal theme, Learning, contains several sub-themes related to education: Enrolment in education and Quality of education, which impact the future labour force; the educational attainment of those already in the labour force; and workplace learning—the level of opportunity in a country to acquire new skills both through formal on-the-job training as well as through learning-by-doing, tacit knowledge and learning from colleagues. These sub-themes are distributed across the five age group pillars.

Enrolment in education

Social and economic marginalization still denies education to many.4 Access to education for today’s children and youth—the future workforce—is captured using net adjusted enrolment rates for primary school and net enrolment rates for secondary school, as well as through gross tertiary enrolment ratios and a measure of the education gender gap at the secondary enrolment level, for the under 15 and 15–24 age groups. The net enrolment ratios capture all children and youth who are enrolling at the appropriate age for that school level. As young adults in the 15–24 age group with completed basic education face a choice between tertiary studies, acquiring further specialized vocational skills or entering the labour market, the Index includes a measure of enrolment in vocational training programmes, without making a value judgement between these three options in terms of index scoring. Also included is the basic education survival rate, providing a measure of school dropout before the full acquisition of foundational skills.

4 Quality of education

Although enrolment and attainment measures show exposure to learning, they don’t capture the quality of these learning environments and may be incomplete on their own.5 However, internationally standardized outcome measures of education quality—such as the OECD’s PISA test or the TIMMS and PIRLS tests—are available for a limited number of countries only. In the interest of broader country coverage, the Index measures the literacy rate of the 15–24 age group as a simple quality indicator of whether a country’s young people graduating from basic education are functionally literate in reading and writing. It also includes two qualitative indicators from the World Economic Forum’s Executive Opinion Survey on the quality of primary education (Under 15 Age Group pillar) and on how well the education system as a whole meets the needs of a competitive economy (15–24 Age Group pillar), as assessed by a country’s business community.

5 Educational attainment

Included in the Index—across all pillars except the Under 15 Age Group pillar—are three common measures of formal educational attainment. These capture the percentage of the population that has achieved at least primary, (lower) secondary or tertiary education, respectively. A workforce that is highly educated or at least has a solid foundation level of learning is much better prepared to adapt to new technologies, innovate and compete on a global level. Countries that have predominantly a primary level of education only are more likely to be constrained by low levels of income and fewer opportunities for future development for individuals. Noticeably, many lower income countries have made remarkable strides in the past decades, with the result that the educational attainment of their younger age groups is frequently significantly higher than that of their older age groups, nearly drawing level with higher income countries in some cases.

Workplace learning

The final sub-theme of the learning dimension concerns the extent of human capital acquisition in the workplace through learning-by-doing, tacit knowledge, exchange with colleagues as well as through formal on-the-job learning, continued education and staff training. The aspect of formal staff training is covered via survey response data from the World Economic Forum’s Executive Opinion Survey, which—as for the case of the education quality questions—should be treated as an indirect outcome measure of the extent and quality of such training received. The second indicator, Economic complexity, is a measure of the degree of sophistication of a country’s “productive knowledge” as can be empirically observed in the quality of its export products.6 Given that age-disaggregated measures of this concept were not available, the decision was made to place the corresponding indicators within the 25–54 Age Group pillar—a 30-year age band that also encompasses the bulk of the working-age population—and does not imply that these processes are not similarly important for the other age groups.

6 Employment

The second horizontal theme, Employment, captures several dimensions of activity in the workforce: the Economic participation sub-theme measures the extent to which people of all ages and backgrounds are taking part in a country’s labour market; the Skills dimension assesses whether people’s knowledge and education are well-matched to the economic profile of the country as well as the quality of the employment in which people find themselves; while the Vulnerability sub-theme measures the incidence of exploitative employment relations stifling individuals’ long-term potential.

Economic participation

This sub-theme measures how many people are able to participate actively in the workforce as well as how successfully particular sectors of the population are able to contribute—women, youth and older people—those who tend to be particularly inefficiently engaged in labour markets. Included in the Index—across all age group pillars except the Under 15 Age Group pillar—are the respective age group’s labour force participation rate, unemployment rate and underemployment rate. Including both those currently employed as well as people actively looking for work, a country’s labour force participation rate is the broadest measure of the share of its people participating in the labour market. Unemployment rates capture the subset of this group that is currently out of a job but would like to work. The underemployment rate is the share of those currently employed who would be willing and available to work more, thereby contributing their knowledge and experience more fully, and predominantly concerns people in involuntary part-time or fixed-term employment arrangements.

In addition to these three base measures, the Economic participation sub-theme captures a number of key concepts that are particularly common or critical for a specific age group, or a sector of the population within that group. For the 25–54 age group, the Index includes a measure of the gender gap in economic participation, as this remains a critical weakness in most labour markets around the world.7 There is now widespread recognition of the individual and societal returns of increasing female labour force participation and employment rates for a strong and balanced economy. For countries with a shrinking working-age population, accelerating the integration of this well-educated and capable segment of the population is becoming ever more urgent.8 For the 15–24 age group, the Index measures the rate of inactive young people not in employment, education or training (NEET) as well as the incidence of long-term unemployment among youth, as measures of current waste that also have deleterious multiplier effects for the future.

7 8 For both the 55–64 and 65 and over age groups, the Index includes measures of years of life expected to be lived in full health, providing a sense of the quality of life and an individual’s potential to remain active and productive into older age.9 For both these age groups, the Index includes labour force participation as a positive dimension. From a human capital perspective, given their rich knowledge and experience, economies have much to gain from better leveraging the accumulated human capital of this ‘silver’ workforce.10Thanks to recent improvements in health and social welfare systems this increasingly holds true, too, for many parts of the developing world. Unintended disincentives and age-discrimination mean that an increasing number of those who reach retirement age and thus exit the workforce, do so despite having the energy and motivation to stay active and continue to contribute their skills.11However, ill health begins to negatively affect the human capital potential and labour force participation rate of the 55–64 age group in no less than 47% of countries covered by the Index.12The inclusion of the Healthy life years beyond age 65 indicator thus acts as a counter-balance to the participation indicators for situations in which older people remain part of the labour force predominantly due to the absence of a mature pension and social welfare system.

9 10 11 12 Skills

The Skills sub-theme relies on a number of proxy variables to assess the quality of jobs in a country and how well the country is able to translate the educational attainment and learning of its people into productive employment at the appropriate skill level across occupations. For the 25–54 age group, the bulk of those in the workforce, the Index measures the share of the population that is employed in high-skilled as well as at least medium-skilled occupations in addition to the perceived ease of finding skilled employees as indicated by responses to the World Economic Forum’s Executive Opinion Survey. Here the Index makes a choice to reward high- and medium-skilled work that enhances a country’s ability to build, deploy and retain a diversified pool of talent that is among the key driving forces of growth while improving the income outlook for individuals.

For the 15–24 age group that is about to enter the workforce or has recently done so, the Index measures countries’ shortcomings in leveraging young people’s skills in the jobs they’ve been trained for (overeducation) as well as countries’ shortcomings in equipping young people with the skills needed for the roles they are performing (undereducation). In assessing this degree of “skills mismatch”, or the quality of skills utilization, it is important to understand that it is more than a discrepancy between labour market needs and particular skill levels as measured by formal qualifications. Skills mismatches can also arise when, irrespective of the level of qualifications individuals hold, fields of study do not match those demanded by employers. For example, employers in many countries point to shortages linked to too few young people studying science, technology, engineering or mathematics, and thus report skill shortages in specific professions. A broad base of skills is particularly important in ensuring a country’s resilience and adaptability in the face of the exponential technological and economic changes underway.13 The Index thus includes an assessment of the skill diversity of its recent graduates as a proxy for the range of expertise available to a country.

13 Vulnerability

The final dimension of the Employment theme concerns the vulnerability of a country’s young population to exploitation, as measured by the incidence of child labour. In addition to its immediate impact, child labour stifles the health, education and long-term human capital development potential of the children involved. While other forms of exploitative employment relations—often referred to as “modern slavery”14—are equally relevant, little reliable data exists on these and they frequently occur in combination with child labour.

14 Standardizing data

A reference point scale has been used to convert the values of the raw data into a common metric. Each indicator is assigned a logical minimum and maximum value and all raw data points are then expressed as the gap towards attainment of the ideal value, on a scale from 0 to 100. As many of the concepts measured by the Human Capital Index are expressed as percentage rates for the corresponding age group, their “distance to the ideal” can be clearly defined and takes on intuitive minimum and maximum values. For example, the Primary enrolment rate indicator has a logical maximum value of 100% and a higher score reflects a more desirable situation.

A number of indicators, such as those derived from the World Economic Forum’s Executive Opinion Survey, are originally measured on a different scale. These data points are converted to their standardized score based on the following formula:

formula1

On the other hand, for a number of indicators, such as Unemployment rate or Incidence of child labour, the logical ideal value corresponds to 0%. All rankings on the Human Capital Index have been directionally oriented towards a score of 100 as the best possible outcome and performance, meaning that indicators for which a lower value reflects a more desirable situation are converted to their “distance to the ideal” score using the following alternative formula:

fomula2

The only measure used in the Index that does not have a logical maximum value is the Healthy life expectancy indicator, which appears in both the 55–64 and 65 and Over Age Group pillars. The reasoning behind this indicator is twofold. For the 55–64 age group, it is a measure of whether individuals in this age group can expect to live through these years in continued good health. Accordingly, every country passing the threshold of achieving 65 years of healthy life expectancy at birth is deemed to have reached the ideal. For the 65 and over age group, the highest-ranked country in the sample is allocated the maximum score of 100, with other countries scored on the distance to this frontier.

The final scores can be roughly interpreted as a percentage, reflecting the degree to which human capital has been optimized in a given country.15There are a number of limitations to this approach to standardization. The logical minimum and maximum values assigned to each indicator are independent of the spread of the range of indicator values, so an indicator that has a higher value range will have a greater impact on the country’s overall Index score relative to an indicator that has a lower value range. For example, the primary education attainment rate in the 15–24 Age Group pillar ranges from 41% to 100% compared to the labour force participation rate, which ranges from 18% to 80%. Given that a country’s Age Group pillar score is calculated based on the simple unweighted average of these indicators (see next section), the Primary education attainment rate indicator score will have a larger overall influence on the Age Group pillar score.16This is exacerbated if a country’s labour force participation rate data are missing. While recognizing this limitation, the approach of standardizing against a reference was found to be the most technically sound given the Index’s choice of indicators and overall purpose, particularly as it enables countries’ progress to be tracked year on year, independently as well as relative to the performance of other countries.17

15 16 17

Weighting

Once all underlying data is converted to a standardized score, a country’s score on a given Age Group pillar is determined by the simple unweighted average of all available scores within that pillar. As a second step, a country’s score on the overall Human Capital Index is a weighted average of the five Age Group pillar scores. The weights assigned to each Age Group pillar correspond to the percentage share of the respective age group in the global population distribution in 2015, based on the population-weighted world average of all countries. The resulting weights for each Age Group pillar are shown in Table 2.

The intuition behind the applied weighting scheme is that the benefits for an economy as a whole are maximized when all of the country’s people are equally enabled to reach their full potential at the present time. We aim to provide a comparative assessment of the overall state of countries’ human capital investment and deployment performance calibrated so as to represent each individual within a country as equally as possible. We thus chose a weighting scheme that is proportional to the global average demographic structure across the five age group categories.18

18 Moreover, by focusing on the situation today the Index consciously avoids introducing a dimension of value-judgements around the possible impacts of future population dynamics.19 While the population diagrams included in the Report’s Country Profiles aim to familiarize the reader and call visual attention to the critical importance of such demographic dynamics, the Index does not take a prescriptive stance about them in its scoring method. 19

Missing data

To be included in the Index indicators must have available data for at least half (50%) of the sample countries and countries must have data for at least two thirds (65%) of each of the Age Group pillars’ indicators. This means a country must have data for at least:


4 out of 6 indicators in the Under 15 Age Group pillar
8 out of 14 indicators in the 15–24 Age Group pillar20 20
8 out of 12 indicators in the 25–54 Age Group pillar
5 out of 7 indicators in the 55–64 Age Group pillar
5 out of 7 indicators in the 65 and Over Age Group pillar

Data older than 10 years was considered to be of insufficient relevance for the Index. In general, the Human Capital Index does not impute missing data, with the exception of the Incidence of child labour and Youth literacy rate indicators for the following countries: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Estonia, Finland, France, Germany, Iceland, Ireland, Italy, Japan, Korea, Rep., Latvia, Lithuania, Luxembourg, Malta, Netherlands, New Zealand, Norway, Poland, Slovak Republic, Slovenia, Singapore, Spain, Sweden, Switzerland, United Kingdom and the United States. Most developed countries no longer report literacy rates or collect data on child labour and, as a result, are missing regular data for these indicators. The Index applies a 1% and 100% value, respectively, for these indicators, in line with available data for comparable high-income, developed countries in the sample. In addition, gross primary and/or secondary school enrolment rates (capped at a value of 99% where applicable), instead of unavailable net rates, were used for the following countries: Austria, Canada, China, Czech Republic, Nigeria and the Slovak Republic. In each case, this was undertaken in order to enable the country to meet the minimum coverage criteria for inclusion in the Index.

Comparison to the first edition

Since the release of the first edition of the Index in 2013, much thoughtful feedback has been received.21 To build on the insights of the first edition and further deepen the analysis, the underlying model of the Index has been thoroughly revised and a number of methodological refinements have been made as outlined above. The main changes from the first edition are as follows. 21

The first edition’s four original pillars of Education, Employment, Health and Enabling Environment have been replaced by five vertical age bands, selected to capture the major phases in an individual’s human capital development lifecycle and countries’ demographic structure: Under 15; 15–24; 25–54; 55–64; and 65 and Over. The population diagrams shown in the Country Profiles have been fundamentally re-designed to align with these age bands and provide additional visual information on the core index.

Countries are assessed on a concise set of outcome indicators related to the horizontal themes of Learning and Employment. To avoid a conflation of input and outcome variables, measures that were previously included on an Enabling Environment dimension are no longer included in the Index and have in part been moved to the additional information section from the core index. The Health dimension has been collapsed into the single, analytically powerful concept of ‘Health-adjusted life expectancy’ (HALE).22 22

To standardize the data, a z-score transformation was used in the first edition. While this enabled the relative distribution of the data to be preserved, measuring country’s performance in relation to the mean of the dataset, it resulted in country’s scores not being comparable from year to year. Additionally, z-scores are unfamiliar to many. In an attempt to address a number of these issues, data in the revised edition is standardized using ideal reference points as outlined above.

To arrive at a country’s overall score and rank, the first edition assigned an equal weight of 25% to each of its four thematic pillars. In line with the second edition’s refined demographic approach—and in order to count each individual’s contribution to a country’s overall human capital performance equally—a country’s overall score and rank on the Index is now arrived at by weighting the country’s average performance in each age group by the percentage share of the respective age group in the world’s global population distribution. Country coverage

The Index covers 124 countries. The terms country, economy and nation as used in this report do not in all cases refer to a territorial entity that is a state as understood by international law and practice. The term covers well-defined, geographically self-contained economic areas that may not be states but for which statistical data are maintained on a separate and independent basis.