The development of an improved human capital index for assessing and forecasting national capacity and development

Abstract

Human capital theory is accepted as one of the foundational theories of socioeconomic development. Although, according to founding scholars, any acquired qualities and abilities that help individuals and groups be economically productive can be considered as individual or group human capital, the classical human capital model focuses on schooling and training as the major factors comprising human capital on individual, group, and national levels. Consequently, current human capital measurement tools generally assess only educational attainment on these levels. Because of this overly simplified approach, the present manner in which human capital is commonly measured by national and international entities creates difficulty in accurately assessing the strengths and weaknesses of human capital within and between countries. A major challenge to improvement of human capital variables is identification and availability of data. The factors suggested to have significant impact on human capital are mostly intangible. Collecting such data is cost prohibitive for many developing countries. Consequently, national policy-makers, multinational corporations and international aid organizations use simplified estimates of human capital. The purpose of this dissertation is to construct and validate a more comprehensive human capital index. Study research questions include: 1) What are the significant factors that affect national human capital as revealed in the literature? 2) Can an expanded measure of national human capital be developed to reflect adequate content of HC identified in the literature? 3) What is the preliminary evidence supporting the validity of the newly developed human capital index? This analysis resulted in the formation of a new human capital index, which is expanded due to the incorporation of new variables together with the routinely used education measures. The sample panel data is from 163 countries for the years 2000-2005. Literature content analysis, factor analysis and regression analyses are used to support the exploration of the research questions. The results of the analyses suggest that a human capital model, which includes additional variables together with currently used education variables, predicts the level of national economic development significantly better than the model which includes only education measures. These results have implications for human resource development, corporate human capital management, national education, and international aid policies.