Productivity, Human Capital Investment Policy, and Redistribution: Do Government Policies Promote Productivity?

Productivity is an important determinant of national wealth and standards of living.  Scholars have shown that different welfare production regimes (WPRs) pursue distinct human capital formation policies to promote productivity (Boix, 1998; Pontusson, 2005; Iversen and Stephens, 2008).  Human capital investment policies have also been prominent on the European Union’s policy agenda.  Such policies are hoped (1) to promote productivity and economic growth by creating high-skilled labor forces that can adapt to the imperatives of the new knowledge economy and technological advances, and (2) to meet the need to respond to new social risks, such as single-parent families and workers in unstable, precarious employment (Morel et al., 2012).  Terms such as "productive social policy" and "social investment policy" are also used to refer to those policies.

But do governments’ human capital formation policies actually promote the productivity of the economy?  The literature has suggested, for instance, that Nordic social market economies (SMEs) promote productivity by making human capital investments through public education and vocational training.  But whether those policies successfully promote productivity has not yet been scrutinized empirically.  This paper analyzes whether such policies improve multifactor productivity (MFP) in industrial democracies, after briefly presenting a human capital investment explanation for why they should help productivity.  In the explanation, governments can promote human capital investments and productivity by providing public education and training, reducing the costs of skill investments, and increasing their net benefits, with public policy.  I analyze data from 17 OECD countries approximately between 1985 and 2005, to examine the relationships between government policies and MFP growth.

The empirical analysis finds that human capital investment policies—such as family support and education policies—promote productivity.  While such policies with redistributive effects are productivity-enhancing, however, direct redistribution itself (when simply and only measured as poverty reduction through taxes and transfers) lowers MFP growth, once other human capital formation policies are controlled for.  There is also little evidence that active labor market policy (ALMP) helps productivity growth.  Thus, the analysis finds good reason for governments to pursue human capital policies to promote productivity and ultimately standards of living, but they should do so selectively by choosing appropriate policy tools. 

The results are significant because, if trusted, they mean that family support and education policies open a way for governments to promote equality and economic growth at the same time, as family support and education tend to also counter inequality (Pontusson, 2005; Iversen and Stephens, 2008).  Also, at least with regard to family support and education, the results lend some empirical support, for instance, to EU governments’ social investment approach (Morel et al., 2012). 

The empirical analysis also suggests that social democratic governments may potentially boost productivity growth further, over and above the effects of human capital investment spending they tend to actively use.