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The Human Capital Agenda

By Andrew Leigh - posted Thursday, 30 September 2010

The noughties may well be remembered by historians as a terrific decade for gadgets. But when it comes to productivity, Australia has had a disappointing decade. Although we don't yet have all the data, the noughties looks set to record a rate of productivity growth about half as fast as we enjoyed in the nineties.

Since productivity is the key to raising living standards, the challenge for the future is to crack the nut of higher productivity. During the 1980s and 1990s, tariff cuts, competition policy and enterprise bargaining were among the underpinnings of productivity growth.

Today, one of the policies most likely to raise the rate of productivity growth is education reform. Raising the human capital of the workforce is essential if we are to adapt to changes in the labour market. This agenda involves raising the quantity of education - boosting the average number of years of schooling that each person receives.


A higher school leaving age recognises the simple fact that today's school leavers will be in the labour market until the 2060s. Over the next half-century, students who drop out in year 9 are likely to struggle with the advance of technology and the need to keep updating their skills.

As the OECD's Andreas Schleicher puts it: "In 1930, all the coded information for a GM car could be captured in 230 pages. Now a single car involves some 15,000 pages of coded knowledge which workers will need to be able to access, manage, integrate and to evaluate." As electric cars replace petrol vehicles, the job of a mechanic will change substantially.

By 2015 the Government hopes to have 90 per cent of students completing year 12 or an equivalent level of study. Recognising that costs of raising a teenager increases as they get older the Government has committed to increasing the Family Tax Benefit A by up to $4,000 from 1 January 2012 per year for teenagers aged 16 to 18. Supporting students is an investment in our future productivity.

Another part of the quantity agenda is boosting the number of university places. The Government is delivering a critical reform to ensure places in Australian universities will be set based upon student demand from 2012, ensuring every student who has the marks to get into university will have a government funded place.

The other way of boosting human capital is through raising the quality of Australian education. Work by Eric Hanushek (Stanford University) and Ludger Woessmann (University of Munich) demonstrates that countries with higher mathematics and science scores on international tests such as the OECD's PISA exam tend to experience faster rates of economic growth. This implies that if Australia were to increase our scores to the level of Finland, our economy would grow 0.5 percentage points faster in the long-run.

Reforming schools is contentious, but the evidence points clearly towards the benefits of school accountability. As the MySchool website is updated with value-added data and school financial information, it will play a significant role in driving change.


Another reform that will enhance educational outcomes and contribute to the Government's productivity agenda is improving the salary structure of teachers, in order to encourage the most talented young people to become teachers, and create incentives for high-performing teachers to be recognised for their achievements. During the election, Federal Labor promised to implement a performance pay system that will see the top 10 percent of teachers paid rewards worth around $8000 per teacher.

Under the proposal, performance will be based on criteria set out by the Australian Institute of Teaching and School Leadership, including raising student achievement and assisting other teachers.

By boosting the quality of the education system, Labor will increase the level of innovation in the Australian economy, and allow for more rapid diffusion of new technological changes. Creating the incentives for students, teachers and principals to perform at their best would rival the great economic reforms of past decades.

By focusing our reforms agenda on the neediest students, there is another payoff too. Education is a social policy as good as any we've yet developed. Because unemployment is the best predictor of disadvantage, having the skills to do the jobs of the future is essential to staying out of poverty. By raising the performance of schools in low-income neighbourhoods, as well as raising the overall growth rate, education reform will narrow the gap between the rich and the poor.

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This article was first published in the Australian Financial Review on September 28, 2010

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About the Author

Andrew Leigh is the member for Fraser (ACT). Prior to his election in 2010, he was a professor in the Research School of Economics at the Australian National University, and has previously worked as associate to Justice Michael Kirby of the High Court of Australia, a lawyer for Clifford Chance (London), and a researcher for the Progressive Policy Institute (Washington DC). He holds a PhD from Harvard University and has published three books and over 50 journal articles. His books include Disconnected (2010), Battlers and Billionaires (2013) and The Economics of Just About Everything (2014).

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