Changes in Human Capital: Implications for Productivity Growth in the Euro Area

The euro area has experienced a sustained decline in labour productivity growth since the 1980s. In the economic literature this phenomenon is commonly explained by a decline in capital deepening and lower total factor productivity (TFP) growth. However, the decline in labour productivity growth might partly also reflect a lower contribution of labour quality growth. We present evidence of changes in human capital in a number of euro area countries based on a fixed-weight index for labour quality growth for both the employed population and the labour force. We then evaluate the significance of these changes for recent developments in productivity growth. Our findings suggest that euro area labour quality has indeed moderated towards the end of the 1990’s, but the impact on labour productivity growth is small compared to the overall decline in capital deepening and total factor productivity growth.