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Relationship Between Skills And Economic Growth Economics Essay


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Since the 18th and 19th centuries, Adam Smith and Alfred Marshal respectively were concerned about the influence of investment in human capital on the wealth of nations. Similarly, recent experts as well as international organizations have been attracted by effects of labour force skills on nation's growth performance. However, skills have a considerable importance as one of the major contribution made by human to increased economic growth and it is generally referred by literature as human capital. Furthermore, the contribution of people to economic growth depends on various factors including their skills, knowledge, competence etc. Consequently, quality of human capital is regarded as a crucial for high growth performance of a nation, in contrast, poor human capital, or unskilled labour constrains the growth performance (Hanushek & Woessmann 2009)

Empirical evidence suggests that skilled labour contributes to increasing productivity and output. In turn, productivity is a key source not only for increasing economic growth but also for improving standards of living of a nation. Additionally, quality human capital is a fundamental factor for attracting foreign investment. Thus, skills development systems include education, technical and vocational training, and life learning are central for sustainable productivity, and would result in creation of better jobs as well as increasing job opportunities in a country (ILO 2008).

Generally, most developing countries lack skilled labour, thus, their productivity level as well as growth performance is not sustainable. Therefore, they should adopt the strategy of skills development and learn from industrialized countries experience. In contrast, industrialized countries have better systems of skills development, thus, high growth performance. Moreover, skills development is vital for poverty reduction and exclusion since it promotes competitiveness and employability (ILO 2008).

The purpose of this paper is to provide an overview of relationship between skills and economic growth. In section two it provide definitions and measurement of skills. In section three discusses the empirical evidence, section four describes the importance of skills to economic growth and section five the relationship between skills and economic growth. Section six the brain drain and economic growth followed by the skills and growth performance in South Africa lastly conclusions.

Definition and measurement

The definition of skills has become broader over time. In the past it was used to refer to manual and technical knowhow of the manual work or analytical capacity of scientists and technicians. However, recent definition includes the previous known definition together with customers care, innovative capacity, as well as stress management. The notion of skill also comprises interpersonal capabilities, behaviour, attitude and personal characteristics (Coulombe, Tremblay & Marchand 2004).

Skills development refers to capabilities acquired through all levels of education and training, occurring in formal, non formal and on the job settings, which enables individuals in all areas of the economy to become fully and productively engaged in livelihoods and to have the capacity to adapt their skills to meet the changing demands and opportunities of the economy and labour market (Palmer 2005).

The direct measure of skills such as performance level are very difficult to establish, however, proxy measures used for measuring skills including educational indicators such as years of schooling, education qualifications are more reliable and easy to establish.

Empirical evidence

Solow (1957) demonstrated that the growth of nation's income depends not only on physical capital such as machines but also on the labour force and residual. Denison (1985) also found that in US the increase in education qualifications have increased total output by 16 percent in a period between 1929 and 1982. Similarly, Jorgenson and Stiroh (2000) found that highly educated labour contributed 8.7 percent of total GDP and 12 percent of growth in GDP per worker during the period from 1959 to 1998.

Studies by Lucas (1988) and Barro (1991), found that investment in human capital has a great contribution to economic growth. Their model also suggests that human capital is endogenous and generates continuous growth. Similarly, Azariadis and Drazen (1990) demonstrated that economic development is directly linked to increasing investment to education. In contrast Banerjee and Newman (1995) found that economic growth is due to the distribution of wealth regardless of educational attainments. However, they neglected the effect of educational policy on growth process.

Hanushek and Zhang (2006) analysed the relationship between different measurements of educational attainment in United Stated and Chile and found that cognitive skills has a positive impact on economic growth. Furthermore, they also found that an additional year of education increase income by about 10 percent. Similarly, Hanushek and Kimko (2000) using data from student achievement test in the period from 1960 to 1990, found that the quality education have a statistically significant positive effect on economic growth. Likewise, Barro and Lee (2001) using data from 1970 to 1971 found a significant relationship between quality of education and growth performance, Barro (2001) and Ciccone (2005), also found that both quality and quantity of education are important to economic growth, quality is more significantly more important.

Importance of Skills to Economic Performance

Skilled labour is more innovative and adaptable, more likely to learn easily how to use new technological and sophisticated equipments. It is more autonomous and requires less supervision thus, improving and helping the management. However, all the above mentioned attributes enable the skilled individual to be more productive than unskilled one (Dickens, Sawhill & Tebbs 2006).

Skills development is vital to secure sustainable growth performance and economic development in the environment of technology innovation and globalization. Therefore, nations should realize and recognize the importance of investment in education, training and skills to build knowledge based economy with potential to sustain a stable economic growth. Additionally, skills increase productivity, and attract foreign direct investment since they are considered as raw material in the knowledge based economies and are important determinants of revenue. In a modern globalized economy, changes in technology, liberalisation of the market as well as the flow of foreign direct investment, skills development is essential to keep the growth performance sustainable. Therefore, the importance of skills to growth performance is due to its direct relationship with productivity, innovation, competitiveness as well as attraction of foreign direct investment (Becker 1992).

The relationship between skills and economic growth

In common sense we observe that highly skilled nations are wealthier than poorly skilled. Similarly empirical evidences also found a positive relationship between skills and growth performance. Thus, it improves the standards of leaving of people that is the skilled individuals tend to have better jobs and high wages compared to low unskilled people. Recent studies fund that in the long run investment in education and skills training are as important to economic growth as the investment in machinery and equipment. The study also found that direct measures of skills such as educational qualifications produce better results than using indicators such as years of schooling. Moreover, countries that invest more in human capital will have better growth performance than those without effective development skills programs (Krueger and Lindahl 2001).

Skill productivity and innovation

Economic theories on growth emphasize that improved skills and qualification of the labour force improves growth performance the living standards. Thus, the relationship between skills productivity and innovation is that economic growth and productivity are dependent on knowledge and human capital. (Leitch 2006) For example, the government of UK identified that skill improvement is one of the key sources of increased growth rate, since improved skills leads to increase in economic growth rate through increase in the rate of productivity and employment. In contrast, poor skills not only constrain productivity, innovation and investment but it also hinders the increase in employment rate (Leitch 2006).

"In the 21st Century, our natural resource is our people - and their potential is both untapped and vast. Skills will unlock that potential. The prize for our country will be enormous - higher productivity, the creation of wealth…Without increased skills, we would condemn ourselves to a lingering decline in competitiveness, diminishing economic growth and a bleaker future for all" (Leitch 2006)

Therefore, it is clear that in the countries with poor skills, high productivity and growth are unattainable.

Skills and wages

Education and skills have a substantial positive effect on wages. In contrast, low educated and unskilled labour are exposed to declining real wages and job losses. Therefore, wage difference between skilled and unskilled labours has been increasing in recent years (Tan 2006). According to the department of economics Oxford University (2007), in industrialised countries, people with completed tertiary education earn high wages compared to those with lower levels of education. Consequently, the majority of the employed people have high skills qualifications thus, earning high wages as well as high productivity. From the above mentioned, it is clear that high skilled labour is strongly associated with high wages and productivity. This is driven by the harmonization between globalization including rapid increase technological innovation and foreign direct investment and demand for skilled labour which in turn increased productivity and wages. Moreover, in a global economic environment, skilled labour supply is critical to take advantage of technological advancements and to allow for sustainable economic growth.

Skilled labour demand

Skilled labours are critical to sustain the process of globalization and development given that the economies are becoming knowledge based. Therefore, an economy would require effective skills development program so that it will be able to compete in a globalised economy. However, in order to secure long term economic growth, some countries have already taken a step forward in promoting skills development through investment in their human capital formation in fields such as biotechnology, engineering and information technology. In addition, the economy is also shifting from manufacturing to service economy. Thus, the technological innovations will require increasing the demand for skilled labour to meet the rapid innovations so as to increase productivity and competitiveness of the country (Tan 2006).

Brain drain and economic growth

Brain drain is "the massive migration of people endowed with skills and high level of human capital" (Lucas 1988). Given that there is no perfect trade off between skilled and unskilled labour and the fact that education and skills have a long term positive impact on economic growth of a country a massive migration of skilled labour force will impact negatively on the economic growth of the country of emigration (Pritchett 2001). Similarly, the modern growth literature also emphasises the significant negative effect of brain drain on the source country and therefore a positive impact of migration of human capital formation. In contrast the migration of skilled labour will benefit the hosting country (Barro 2001).

Generally, the developing countries, with poor growth performance have poor returns to education, thus, there is no incentive for people to acquire education which in turn is key factor to economic growth. Therefore, countries with high returns to education and opened to migration would attract educated labour from those countries, and therefore, boosting their growth performance (Hanushek and Kimko 2000).

Skills and Growth performance in South Africa

The effect of unskilled labours supply has adversely affects the economic growth in South Africa. Like most African countries South Africa faces a serious skills shortage so as reach and maintain a sustainable growth rate. According to Kamp (2009) upgrading the skills base is a key factor to increase job creation as well as economic growth. He advocates that an increase in the growth performance is dependent on increased productivity and in turn increase productivity depend on improved skill base. Additionally, the demand for skilled labour has increased worldwide including in South Africa, since it is facing a shortage of human capital it becomes a constrained to increase economic growth of the country (South Africa.info 2009).

South Africa to reach and sustain a growth rate of 6 percent, among other interventions, massive investment in human capital is critical factor. Therefore, the Joint Initiative for Priority Skills Acquisition (JIPSA) was established with a core role to identify clusters of skills and propose intervention measures in order reduce the skills shortage and recommends solutions.

According to Bhorat, Meyer & Mlatsheni (2002), South Africa apart from suffering from shortage of labour force due to educational discrimination during the apartheid era it also faces the problem of high brain drain. They estimate that 13% of professionals leave the country every year. However, white skilled labour are the majority of the migrant labour though black also have a tendency to leave as a result of rising living standards taxation and security. Thus, for the country to have a sustainable economic growth, it needs to set policy framework that would increase capital formation as well as attract skilled labour.


Although analysts found it difficult to measure skills directly they based they findings using indirect measures of skills such as education. They clearly demonstrated that human capital is a key factor contributor in economic growth. Thus, individuals with lower levels of education are less skilled and contribute less to the economic growth, whereas individuals with high levels of education have more knowledge and are more skilled contributing therefore significantly to economic growth of a country.

Recent studied demonstrated that skills not only contributed positively to economic growth, but to increased quality labour market and improves the standards of living of the society in general since skilled labour would tend to have quality jobs and high wages compared to unskilled labour. Therefore, countries are urged to engage in human development programs so that they increase the quality of the labour force and guarantee a sustainable economic growth.

Returns to high skilled labour tend to be high in industrialized countries such as US and Canada etc. where the demand for skilled labour is also high. Thus, high skilled labour from developing countries would tend to migrate to those countries in order to benefit from the high wages offered. Therefore, the emigrant countries will be lefts disadvantaged that is the productivity and the growth rate of those countries is likely to reduce since they will be left with lower skilled labour.

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