Human Capital: measuring the unmeasurable

1. National Humans Relations
Conference
Menzies Hotel, Dec. 1-2, 2003
Day 2, 9;50-10:30am
Dr David Clark, Ecs., UNSW
Human Capital:
Measuring the unmeasurable
Human Capital:
measuring the unmeasurable
Productivity like love - a many
splendoured thing!
Conjurors calculating: spurious
quantification obscures important
productivity influences
Lessons for organisations
Outline
Some views on economists
An economist is a man who states the obvious in
terms of the incomprehensible. (Alfred Knopf (b.
1892) American Publisher)
“An economist is an expert who will know
tomorrow why the things he predicted yesterday
didn’t happen to today.’ (Laurence J. Peter, Peter’s
Quotations)
“"Economic doctrine ... is not a body of concrete
truth, but an engine for the discovery of concrete
truth ..." (Alfred Marshall, Cambridge economist at
turn of the century).

2. National Humans Relations
Conference
Menzies Hotel, Dec. 1-2, 2003
Day 2, 9;50-10:30am
Dr David Clark, Ecs., UNSW
Human Capital:
Measuring the unmeasurable
Quotes for today!
"All statistics are biased and when economists
use them you should not take them seriously"
(First Class Honours graduate in Sociology,
UNSW).
"Who put the con into econometrics - and into
much spurious quantification in all the social
sciences?" ( Harry Anonymous)
Productivity: definitions
A bit like love - a many splendoured
thing. - ie. can be a product of a variety
of factors
A simple definition: the relationship
between and economy's output and the
inputs required to produce that output.
Causes of productivity rise
complex
Increased investment in plant and
equipment can boost it
But can also be a product of simply more
bangs out of existing investment bucks.
Merely improving work force skills or
extra R&D expenditure not enough. They
have to be applied productively and
profitably.

3. National Humans Relations
Conference
Menzies Hotel, Dec. 1-2, 2003
Day 2, 9;50-10:30am
Dr David Clark, Ecs., UNSW
Human Capital:
Measuring the unmeasurable
Three main measures
of productivity:
Productivity
Labour
productivity
Capital
productivity
Multi-factor
productivity
Labour productivity is defined as
output (Y) per worker or per
worker-hour (L). It is calculated as
(Y/L).
Growth in labour productivity is
calculated as the percentage
change in (Y/L) over time.
Labour productivity
Capital productivity is defined as
output (Y) per unit of capital (K). It is
calculated as (Y/K).
Growth in capital productivity is
calculated as the percentage change
in (Y/K) over time.
Capital productivity

4. National Humans Relations
Conference
Menzies Hotel, Dec. 1-2, 2003
Day 2, 9;50-10:30am
Dr David Clark, Ecs., UNSW
Human Capital:
Measuring the unmeasurableReason? By focusing on a single input to the
production process they ignore the possibility of
substitution of this input for others in response to
relative price changes.
For example, one problem with labour productivity is
that it does not account for the fact that an increase
in (Y/L) could result from a move towards a more
capital intensive production process or increased use
of energy -
However, as measures of technological
progress they are far from optimal
Hence multi-factor productivity
(MFP)
Attempts to divide output by a combination of
all the relevant inputs into the production
process.
It includes technical progress, improvements in
the work force, improvements in management
practices, economies of scale, etc."
" (MFP) is largely a measure of the effect of
improvements in the quality of inputs and how
they are used. ( ABS, 5234.0)
But big measurement problems
Measurement of capital stock especially very
difficult.
eg. value of buildings & plant continually changing
and is not independent of the rate of profit - as
much of modern microeconomics assumes.
And GDP per hour worked figures do not fully
capture the effects on productivity of, for example,
Net airline booking or training programmes.

5. National Humans Relations
Conference
Menzies Hotel, Dec. 1-2, 2003
Day 2, 9;50-10:30am
Dr David Clark, Ecs., UNSW
Human Capital:
Measuring the unmeasurable
Measurement problems cont..
Quality-adjusted measures of labour and capital are
also not generally available
We know the quality of both change over time but
measurement of quality change very difficult. For
example, is an employee B.Comm. or M.Comm.
automatically more productive because they have
received a B. or M. Comm.?
Assuming the answer is yes, by how much has their
productivity increased?
For example, how do we measure the
value of output of an academic?
By the number of fee-paying students they
attract? Enrolment levels may simply be a
product of students' false belief that
course will raise their income - or an
academic showing lots of movies.
If a lecturer doubles the number of
students in a class, are they doubly
productive?
More students =
more salary
supplementation
Services sector productivity very
difficult to measure
Why greater productivity is
important
It is the chief source of growth in real
income per person - ie.
improvements in living standards
It improves export competitiveness
and an economy's ability to compete
against imports
1.
2.

6. National Humans Relations
Conference
Menzies Hotel, Dec. 1-2, 2003
Day 2, 9;50-10:30am
Dr David Clark, Ecs., UNSW
Human Capital:
Measuring the unmeasurable
Australian labour productivity: was poor in
comparision with world's best practice
Productivity Commission (1997), Assessing Australia’s Productivity Performance, Ch.6.
Electricity GWh/employee
Telecommunic.
Rail freight
Waterfront (containers)
Waterfront (coal)
Gas supply
Coastal shipping
0 100 200 300 400
Lowest Australian
Highest Australian
Best world practice
Index: 1994 or 1992 figures
Something very important
happened in 1990s
Annual average growth rates, per cent per year
74-75 to
93-94
64-65 to
97-98
93-94 to
97-98
Output 2.6 3.3 4.6
Inputs 1.3 1.9 2.2
Labour 0.4 1 1.4
Capital 3.8 4.4 3.8
Capital-labour
ratio
3.4 3.4 2.4
Labour
productivity
2.1 2.3 3.1
Capital
productivity
-1.2 -1 0.8
Multifactor
productivity
1.2 1.4 2.4
NB: the improvement in overall
productivity in the 1990s
reversed the historical decline
in capital productivity.
This suggests that, rather than
having to accumulate more and
more capital with diminishing
returns in order to promote
growth, the capital stock is
being used more productively
to generate output.
ie further evidence of the
positives of microeconomic
reform
•
•
•
Countries which start out further behind
have greater opportunity to grow
Productivity Commission estimates based on OECD data
* Japan
* Belgium
* AUSTRALIA
* Canada
* USA
* Germany
France
* UK
* Netherlands
* Denmark
* Sweden
1970 level of labour productivity ( GDP, PPP, $US/worker)
400003500040000250002000015000 45000
0
1
2
3
Average annual compound
growth rate, 1970-94
* Finland
Average rate of convergence and catch-up among
the OECD countries, allowing for starting position.
ie. Australia’s rate of
labour productivity growth
was low allowing for its
1970 starting position.

7. National Humans Relations
Conference
Menzies Hotel, Dec. 1-2, 2003
Day 2, 9;50-10:30am
Dr David Clark, Ecs., UNSW
Human Capital:
Measuring the unmeasurable
The key reason why economy healthy
Annual % growth in total factor productivity- rolling average*
ABS 5206.0, 5231.0 and Treasury estimates.
* Rolling average growth rates - six years to the year shown.
2.0
3
1.0
0.0
1970-71 1997-981990-911980-81
NB: The dramatic trend
turnaround in the 1990s,
suggesting microeconomic
reform has had a big impact
But will the
trend continue?
Data gives some clues as to why
productivity growth differed
5.5 yr. growth
cycles, % annual
growth
Labour
productivity
Capital
stock
Labour
hours
worked
Real wages
Multi-factor
productivity
I. Mar 75-Sep 80 2.3 3.5 0.9 2.8 1.4
II. Mar 83-Sep 88 1 3.1 3.6 -0.3 1.2
III. June 91-Dec
96
1.8 2.2 1.8 0.3 1.6
NB: re 1990s
cycle
Data: RBA
Bulletin, May
97
But real wage
growth
restrained
NB:
microeconom
ic reform
having an
impact
Changes which raised Australia's
productivity over past decade
Adoption of more advanced technologies
Greater business involvement in
innovation & R&D
Improvements in employee skills
Organisational change and adoption of
improved management techniques
1.
2.
3.
4.

8. National Humans Relations
Conference
Menzies Hotel, Dec. 1-2, 2003
Day 2, 9;50-10:30am
Dr David Clark, Ecs., UNSW
Human Capital:
Measuring the unmeasurable
Changes which raised Australia's
productivity over past decade
New work arrangements implemented through
enterprise bargaining
Reallocation of resources and greater
specialisation
Greater openness and competition in the
Australian economy and
Changes in the policy environment which cut
businesses’ ability to rely on government
support.
5.
6.
7.
8.
Productivity: main economic benefits
Over the past thirty years, productivity growth has accounted
for around 50% of the expansion in Australia's GDP (growth in
capital, the work force and other resources explain the
remainder).
Productivity growth is estimated to have accounted for around
two thirds of the 80 per cent growth in per capita incomes over
that period.
In the early 1990s the best performing sectors were electricity,
gas and water, and transport, storage and communication.
Over past few years, financial services and retailing and
wholesaling have seen biggest improvements.

9. National Humans Relations
Conference
Menzies Hotel, Dec. 1-2, 2003
Day 2, 9;50-10:30am
Dr David Clark, Ecs., UNSW
Human Capital:
Measuring the unmeasurable
Type of benefit varies greatly
(Average, 1984-5 to 1994-95)
Industry Commission (1997) Assessing
Australia's Productivity Performance
2.2
1
-1.8
-2.2
-1
1.8
-0.1
1.8
-0.2
-0.2
-1.8
-0.3
Transport,
Manufacturing
Retail trade
0 1 2 3-1-2-3
Productivity Price benefit Wages Profits The bars represent the annual
percentage growth rates for each
sector compared to the average for
the market sector (for multifactor
productivity ) or the economy-wide
average (for the other variables).
For example, the price difference is
measured as the percentage growth in
Australian prices less the percentage
growth in the sector’s price. Thus,
where a sector’s growth in prices is
less than the Australian average
growth in prices, consumers have
gained more benefit.
Similarly, the bigger the figure for
relative wage growth, the greater the
wage benefit for employees in that
sector
storage &
communication
Messages for organisations: I
Labour productivity and capital productivity measures
can hide more than they show.
The most dramatic effects on productivity in history -
from the IT revolution - are simply not captured by
such measures.
Multi-factor productivity not only impossible to
measure it also impossible to predict.
In 1995 Bill Gates published his The Way Ahead - and
it contained only a passing reference to the Internet!
Messages for organisations: II
Measurement of inputs relatively easy -
measuring the quality of the outputs is a lot
more difficult.
eg. Can measure hours which go into
writing a business plan or requirements
document but their quality?
Such exercises are like measuring the
quality of saying "Good'ay" to someone.

10. National Humans Relations
Conference
Menzies Hotel, Dec. 1-2, 2003
Day 2, 9;50-10:30am
Dr David Clark, Ecs., UNSW
Human Capital:
Measuring the unmeasurable
Messages for organisations: III
What gets measured are only the measurables -
while the unmeasurables get ignored.
Smart economists are very aware of this - greed,
ignorance and stupidity drive all markets but
what units of measurement can one use with
them?
Eg. How do you measure rigour of a document or
business plan? 150 sub-headings does not
guarantee quality.
Messages for organisations: IV
The longer the CV, the poorer the applicant. The gaudier the
gown, the lower the Uni. quality.
Decline in Uni standards, particularly for postgraduate
degrees. Result: employers are increasingly doing their own
testing and assessment.
Beware business and similar degrees which have usually
been awarded by persons with either no business
experience or who have been failures in the real world.
Employers know very well that paper qualifications are no
guide to actual productivity on the job. Nor do good
interview skills guarantee the best candidate.
Messages for organisations: V
Productivity needs good rising - not falling - morale.
But most organisations suffering falling morale among
troops as more and more generals pay themselves
bigger and bigger salary & package differentials.
Armies of consultants, purportedly measuring
productivity and using gobbley-gook terms from a Uni
textbook will do nothing to reverse this growing
problem,
Morale surveys are also a poor measure of morale, if
staff are suspicious of the survey's anonymity.

11. National Humans Relations
Conference
Menzies Hotel, Dec. 1-2, 2003
Day 2, 9;50-10:30am
Dr David Clark, Ecs., UNSW
Human Capital:
Measuring the unmeasurable
The "bullshit baffles brains" productivity
measures mean everything and the organisation
cheeses are maggot-ridden.
Who moved my cheese management
philosophies fool only the dopiest staff.
Keep you hands off my cheese will be the next
best seller! (Interestingly, his cheese book on
teenagers sold far fewer copies)
In sum:
Finally a maxim worth remembering
to help you deal with other, less
worldly social scientists
The difference between
theory and practice is that:
in theory there is no
difference between theory
and practice.
Some recent useful publications on
Australian productivity change
Most useful net site: www.pc.gov.au
Two recent PC studies of particular interest to Conference
attendees:
Australia's Service Sector: A study in Diversity, Productivity
Commission Staff Research Paper, March 2002
Productivity and the Structure of Employment,
Productivity Commission Staff Research Paper,
July 1999