Impact of Human Capital on the Economy

Human capital is one of the foundations of a modern economy.  Without well-educated people working, innovating, and generating wealth, an economy will not grow.  Even if the nation is sitting on top of a massive amount of mineral wealth, without human capital the economy will only grow as far as other nations invest in extracting that wealth.  The critical thing to keep in mind when thinking of human capital’s relationship to the economy is that the relative size and quality of a nation’s workforce determines the baseline for the size and efficiency of the nation’s economy.

America’s workforce was extremely well-adapted to the economic conditions of the mid-20th century.  From the end of WWII to the mid-80s we had one of the most efficient and productive workforces in the world.  Even better, we had a population explosion in the fifties and sixties; because the basic formula for GDP is “production = labor x productivity,” a rapidly increasing and highly productive labor force meant that we could maintain a very healthy growth rate for the rest of the 20th Century.

However, the size of our labor force will never grow at the same rate as it did in the baby-boom generation, and if we ever again want to see sustained growth rates for real GDP much higher than 2% we will need to drastically increase our productivity in order to accommodate our much lower workforce growth rate.  Worse still, our labor force participation rate has been dropping and our workforce has noticeably failed to adapt to the more recent changes in the global economic reality, becoming substantially less competitive with respect to technology and trade.  Our educational system has failed to keep up with the needs of the economy, producing too few high school graduates, lower-quality high school graduates, too few skilled specialists with post-secondary training, and too few college graduates in science, technology, engineering, and math.  This seriously undermines our ability to compete in the global economy.

Threatening demographic trends, a dysfunctional immigration system, an increasing mismatch between the skills needed by the economy and those provided by our educational system, a growing and increasingly unproductive underclass, and a ridiculously expensive and ineffective healthcare system have all combined to distort the nation’s economic performance downwards, and will continue to do so unless we fix the way we deal with human capital within our nation.


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