Working papers published by IMAD ISSN: 1318-1920 ... - UMAR

An analysis of past and future GDP growth in Slovenia
Growth in GDP and inputs in the past
Working paper 3/2004
IMAD
17
to 6%. This is not particularly high in a market economy. For comparison, the EU-
15 and EU-25 had average unemployment rates of 8% and 9% in 2002, respectively.
Furthermore, the rise in unemployment can only explain part of the drop in
employment, gross participation also fell.
2.3. Human capital
Another determinant of output growth is the growth in the skills of employees.
Below we consider three different indicators for the average skill level of employees:
i) average years of schooling; ii) average wages relative to the unskilled; and iii) a
CES-composite of the skills of low- and high-skilled workers. We first consider
these indicators separately, then discuss how developments in these indicators
compare to each other, and end with a brief discussion of the pros and cons of one
indicator compared to another.
2.3.1. Average years of schooling
Over the 1993-2002 period the average number of years of schooling increased
from 11.0 to 11.6 years. 10 This implies an average absolute change of 0.07 years
of schooling per annum, or an annual increase of 0.5 percent. For comparison,
over the 1990-1998 period the average number of years of schooling in the EU-15
increased from 10.0 to 10.8 years. 11 This implies an average annual absolute
change of 0.1, or an annual increase of 1 percent. Hence, considering the growth
in the average years of schooling Slovenia did worse than the average of the EU-
15.
How do we get from average years of schooling to the impact on output? For this
we use the transformation of Hall and Jones (1999). The average skill index of a
worker at time t, H(t), is given by
The increase in
average years of
schooling during
the 1990s was
lower in Slovenia
than in the EU-
15.
H ( t)
= e
è
θ ( s(
t))
,
where (.) is a piece-wise linear function of the average years of schooling s(t)
at time t. Motivated by micro-level studies on the returns to education Hall and
Jones (1999) come to the following specification for è(.). 12 For s(t) smaller or
equal to 4 years è(.) = 0.134 s(t), for s(t) in between 4 and 8 years è(.)
=
0.134*4 + 0.101 (s(t) - 4), and for s(t) bigger than 8 years è(.) = 0.134*4 +
0.101*4 + 0.068 (s(t) - 8). Hence, although more years of schooling make an
individual more productive, the returns to additional years of schooling fall with the
years of schooling already accumulated. Using this transformation, we find that
the average annual growth in the human capital index over the period 1993-2002
was 0.4%. 13
10
Source: IMAD.
11
Source: Own calculations using data reported in Table 2.1 in OECD (2003).
12
See Psacharopoulos (1995) for an excellent introduction to the literature on returns to education.
13
Note that the growth in the average years of schooling may understate the actual growth in the human capital index when we believe
that part of the skills acquired during the socialist time became obsolete during the transition, leaving a lower effective initial stock
of human capital.