People matter: Improved productivity via better human capital valuation

After a commission by the Chancellor of the Exchequer, the Office of National Statistics (ONS) has been reviewing how human capital is measured in the UK and its consultation conclusions are now out.

After a commission by the Chancellor of the Exchequer, the Office of National Statistics (ONS) has been reviewing how human capital is measured in the UK and its consultation conclusions are now out. The ONS describes human capital as a measure of the skills, knowledge and experience of an individual or population that can be applied to the economy or to society at large. It is widely recognised as a driver of productivity, and human capital stock is currently measured in monetary terms.

In the Spring Statement 2018, the then Chancellor of the Exchequer asked the ONS to develop a more sophisticated measure of human capital as a driver of productivity. In his first budget speech, the new Chancellor Rishi Sunak put a further stake in the ground for government starting to truly understand the value of human capital to the UK economy. The Chancellor advised “there is a live global debate about what our low interest rate environment means for fiscal strategy, about the case for fiscal policy to play a more active role in stabilising the economy and about the best ways to measure productivity-enhancing investment in the economy, such as human capital, or measuring value on the public balance sheet. So I want to take time to consider these questions over the coming months so that our fiscal framework allows us to make the right long-term decisions for our economic security and prosperity.”

The ONS describes human capital as one of the ‘missing capitals’ in the economy. They advise that alongside social capital and natural capital, human capital covers important elements of society and the natural world that are currently not factored into the calculation of headline GDP. Understanding the value of the workforce to UK plc in fiscal terms, and therefore how to raise that value with targeted investment, may also slowly start to align what is recognised by senior commentators as a badly disjointed current skills, employment, productivity and industrial strategy policy approach.  

Following this latest consultation, the ONS will take forward the work to develop human capital indicators and set out the framework to support this new approach, this will include working with key stakeholders as well as national and international experts. Over the coming years, ONS plan to roll out world leading estimates of the skills and value human capital brings to the economy and society at large. Importantly, ONS are also investigating how to create a skills hierarchy by categorising skills from job descriptions and linking them to salaries to determine the return of those skills on human capital. Additionally, this work may allow ONS to create for government a satellite account of skills supply and demand, and consider new options for collection of data on skills and knowledge.

Energy & Utility Skills and government responders to the ONS consultation call for evidence had already made clear the need for any ONS work to not aim too wide initially, and to make sure that it delivered the type of outputs that would have direct value for informing policy making and driving forward the economy. In considering the wider approach proposed by the ONS, they cautioned on “the limited impact on decision-making from such an approach if the indicators are unable to be monetised.”  

ONS had committed to an ambitious workplan that will try to consider the practical areas people want measured and analysed, and advise they do want to understand the relationship between human capital and the economy, including looking at the relationship between gaining new skills and the impact on happiness and chances of getting a job. They aim to also compare how the UK human capital value fares with international partners.

In a supporting article by John Marais, Deputy Director of Crime, Income & Wealth Division and Public Policy Analysis at the ONS, he advised “Human capital is also very important for understanding how companies can be successful, as a more skilled workforce can be more innovative and productive. For example, we will be looking to measure which skills matter for the labour market, to help understanding of how education provision matches against skills demand.”

ONS conclude that there is a lot of evidence that higher human capital has public benefits beyond increased private returns to businesses and individuals. These include a population more engaged in civil society, one that is healthier and less likely to engage in crime. Ultimately human capital is important for individual people to fulfil their potential in work and society, as well as for the country to help the economy innovate and stay competitive.

Energy & Utility Skills responded formally to the ONS consultation in November 2019, and has been a leading proponent for a more coherent UK approach to understanding the labour market issues that may hinder the UK achieving its social, economic and environmental goals, and then building one strategic plan to connect all of the valuable devolved efforts that are underway. Energy & Utility Skills Chief Executive Nick Ellins commented “We are strong supporters of the Chancellors intention to drive forward the economy through empirical evidence of how to value and grow human capital, and we also welcome all the work the ONS is doing to turn that theory in to practice. The ONS must however resist the urge to deliver a fascinating and complex social project over many years, but miss focusing its initial efforts and funding on giving the nation, Chancellor and government what they need for making vital economic and human capital decisions during a critical moment in our nation’s history.”

“We continue to advocate to UK policy makers the value that would exist in creating one coherent labour market and workforce strategy, in order to make sure the whole nations critical industries are resilient and the most vital policy priorities are delivered. Now is the moment to stop treating skills policy across the UK as an education-based, fragmented and disjointed pursuit with no joined up goals for the economy or society, and create a UK wide labour market strategy that is shared property between the Westminster Cabinet and our devolved nations Minsters. It must focus on workforce resilience at the highest levels and put targeted investment in to those sectors and skills that are critical to keeping our four nations running now and in to the future. Central to that, are those utility industries that provide all our heat, light, power, fresh water, sanitation and waste collection that enable our very society to function”