HUMAN CAPITAL

Human capital is widely accepted as a key driver of productivity growth. In Australian MFP statistics, the impact of human capital is captured by accounting for compositional changes in the work force due to factors such as changes in educational attainment and workforce experience. As more knowledgeable and skilful workers join the work force, the overall productive capacity of labour is enhanced. The quality adjusted labour input indicator recognises the heterogeneity among workers in terms of their productivity and provides a more accurate measure of labour input used in production.

The ABS publishes aggregate productivity measures based on both an hours worked and quality adjusted hours worked basis. The latter index proxies quality change through two components: educational attainment and years of potential work experience. The trend in the Australian labour market is towards becoming more skilled and more qualified. Consequently, the quality adjusted labour input index provides an indication of the overall quality change of the labour force in Australia.

Between 1998-99 and 2008-09, the hours worked index of labour inputs increased on average by 1.4% a year, whereas the quality adjusted hours worked index increased by 1.6% a year. This indicates there was an overall improvement in the quality of Australia's workforce during this time, increasing the contribution of labour inputs to growth, and therefore decreasing measured labour and multifactor productivity estimates. The result is that between 1998-99 and 2008-09, the annual average multifactor productivity improvement was 0.1% when adjusted to take into account labour quality, and 0.2% when no adjustment for labour quality was made.