Why Do People Count So Much? - The Institutions of Human Capital

Director of the Euro-Asia and Comparative Research Centre, Gordon Redding, considers the differences between and among developed and developing nations in the nurturing human capital development. Policies affecting the five fundamentals: general education; technical education and job skilling; interest groups and labour market policies - often differ almost as radically between European states and the US as the former do from emerging markets.

by Gordon Redding
Last Updated: 23 Jul 2013

According to the director of the Euro-Asia and Comparative Research Centre Gordon Redding, the institutions of human capital "provide the matrix in which patterns of economic coordination and control evolve". In this working paper, such institutions are treated in terms of two main dimensions: the nurturing of talent via education and training systems, and the channelling of skilled workers into the economy via labour market structures.

Redding proposes to show some of the extremely varied routes currently taken by both developed and developing nations in acquiring and channelling skills. Although in practice the primary features he explores are inherently interwoven, he divides his analysis into:

· General education

· Technical education and job skilling

· Interest groups

· Labour market policies, including the protection of both employment and unemployment, and wage bargaining abilities

· Types of labour markets

Unsurprisingly, the world's poorer nations also overwhelmingly have the highest illiteracy rates. But significant differences in the role of higher-level education between Germany and Denmark compared to the US - where national policy has very little impact in a highly decentralised educational system - are very telling. A 1983 American commission on excellence in education commented, "if an unfriendly foreign power had attempted to impose on America the mediocre educational performance that exists today, we might well have viewed it as an act of war".

The author also illustrates the enormous differences in approaches to technical education and job skilling in Germany, Japan, France and the US. He goes on to consider an historical account by a leading scholar in the field of how Germany, Japan, the USA and Britain have produced four highly distinctive patterns of skills within their workforces.

Redding then explains in detail how these differences feed forward into the respective management systems - loosely classified as "liberal market" vs. "coordinated market" economies. These discrepancies have naturally had profound affect on the different social systems of production.

His examination of the impact of interest groups in the evolution of human capital in various societies focuses on two main aspects: the forming of a given society's collective knowledge and talent, and the channelling of these into measurable economic benefit.

In his estimation, two processes come into play as labour markets form. These may especially be seen in highly volatile and quickly growing economies, such as China and India today. The first is a ranking process, in which the options inherent to a particular labour market come to be assigned status. As information gradually flows more freely regarding various aspects of working conditions, both buyers and sellers of labour come to think in terms of preferred terms of status and reward. This in turn produces a clearer set of information for the market for use in strategic decision-making.

The second process is essentially one of sorting, involving a closer matching of skills to work roles than in the former process. As Redding explains:

The market will be shaped in its workings also by the parties involved and their relative bargaining power.... In the US, the balance of power lies clearly in favour of management, and it gets the flexibility of employing people which such dominance gives rise to. In Germany and Scandinavia, the balance of power has remained so far with labour, and organisations tend to reflect that, as does also the surrounding system of welfare.

While not suggesting that such societal patterns are by any means permanent, the author labels these "emergent systems" that will be subject to adjustment, especially when the dominant groups are negatively affected. He cites the example of the development of Silicon Valley, where the emergence of new industries was concomitant with the development of quite an extraordinary form of power relationship between management and labour in many top firms.

INSEAD 2005

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