Human capital and productivity rise as better educated and healthier young cohorts replace older retiring cohorts, but this growth dividend fades without continued reform. | © Adobe Stock
The future contribution of human capital to economic growth will fade without new reforms. A new spreadsheet-based toolkit, the LTGM-Human Capital extension, helps policymakers design reform scenarios to prevent this decline.
For many developing countries, quiet gains in human capital accumulation have boosted GDP growth in recent years: each new cohort entering the workforce is typically healthier and better educated than their parents, lifting productivity and contributing substantially to long-term per capita growth. But much of this boost reflects reforms from the past — a “human capital dividend” that naturally fades over time. Because human capital reforms take years to affect the economy, choices made today in education and health shape worker productivity a decade or more from now. If students aren’t learning enough or health isn’t improving, average productivity can stagnate, lowering potential growth.
Our new paper shows that without continued reforms, the human capital contribution to growth declines over time. Our companion spreadsheet-based tool, the Long-Term Growth Model — Human Capital Extension (LTGM-HC) helps policymakers assess future human capital growth paths and build reform scenarios to offset the expected decline. Because reforms take time to translate into higher productivity, action today is essential to avoid tomorrow’s slowdown.
Current human capital growth and the slow-motion growth squeeze
Great progress has been made in improving education and health outcomes of people in developing countries. Figure 1 shows that today’s children (y-axis) typically have around four more learning-adjusted years of schooling than their grandparents (x-axis). As these better educated and healthier young cohorts replace older retiring cohorts, average human capital and productivity of the workforce rise. We estimate that current average workforce productivity is growing at almost 1% due to higher human capital (Figure 2).
However, without continued improvements for future cohorts, human capital growth is projected to slow by about 0.15–0.2 percentage points per decade, approaching zero around 2080 when today’s children retire. This scenario, which we call the status quo, is shown in red in Figure 2 and applies in every country due to the dynamics of human capital embedded in each age cohort.
From human capital to GDP
To translate human capital paths into economic outcomes, our paper links human capital projections from the LTGM-HC to growth paths in the World Bank’s standard Long Term Growth Model (LTGM). Over the next 10–20 years, human capital contributes almost 2/3 percentage points to GDP per capita growth (Figure 3A), with medium-run dynamics due to induced physical capital accumulation.
Figure 3: Contribution of Human Capital Accumulation to Global GDP Per Capita
(Gains relative to a counterfactual with no human capital improvements of the workforce)
Locked-in risks
However, in the status quo scenario slowing human capital growth will subtract about half a percentage point from economic growth from 2040–2080 (Figure 3A). Because reforms take time to raise workforce productivity, delaying reforms risks locking in a slow-motion squeeze on growth.
The gains from investing in human capital
Halting the slowdown in growth will require strong reforms and a pivot toward improving learning outcomes (as measured by test scores). With an optimistic path of reforms, at the 75th percentile of those observed historically, countries can completely halt the decline in the human capital contribution to growth (orange lines, Figure 3A). Typical reform speeds (black lines) still yield a slowdown, though at roughly half the rate, because many easy gains in education and health have already been captured.
The long-run GDP gains from investing in human capital are large. Figure 3B plots global GDPPC relative to a path with no workforce human capital growth. By 2100, GDP per capita is 60% higher with optimistic reforms and 45% higher with typical reforms. About two-thirds of these gains reflect the dividend from past reforms (red line).
The LTGM-HC: a new toolkit for human capital simulations at the country level
The LTGM-HC toolkit is designed to help policymakers turn these insights into country specific policies. The tool enables users to build and compare reform scenarios on a consistent basis — for example, weighing the growth payoffs from raising secondary completion versus improving test scores — so that limited resources can be directed to the highest return measures. Building on the Human Capital Index (HCI) framework, the tool tracks three core inputs to workforce quality: (1) pre-tertiary schooling attainment, (2) schooling quality, and (3) health with inbuilt data for over 150 countries. But unlike the HCI, the LTGM-HC produces year-by-year projections of workforce human capital growth to 2100, a key input to any growth model (including the standard LTGM). Users can incorporate COVID-19 school closures, which are available in the toolkit but abstracted from the results presented here. We expect a future version of the tool will incorporate tertiary education, which raises projected human capital growth by about 0.1–0.2 percentage points in general, but does not affect the slowing growth profile.
Key Takeaway
The human capital dividend that has supported recent growth should not be taken for granted. Reforms started today can prevent the expected decline in human capital’s contribution to growth decades from now. Without sustained improvements in learning and health outcomes of children, future growth will slow substantially. Explore scenarios for your country using the LTGM-HC tool, downloadable at: www.worldbank.org/LTGM.
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