Study shows human capital as main driver of Brazil’s economic growth
Human capital grew by 2.2% a year in Brazil between 1995 and 2023, according to a new study by Fundação Getulio Vargas’ Brazilian Institute of Economics (FGV IBRE). Researchers developed Brazil’s first human capital index based on a long period of time and aligned with the country’s circumstances. They found that human capital was the main factor responsible for Brazil’s GDP growth in the period in question.
To arrive at their results, the researchers cross-referenced data from the National Household Sampling Survey (PNAD) and Continuous National Household Sampling Survey (PNADC), produced by Brazil’s national statistics agency, IBGE, which contain information on Brazilians’ pay and education.
Researcher Janaína Feijó, one of the authors of the study, explains that human capital characterizes the way people accumulate knowledge and skills, and to develop this index, the researchers analyzed the impact of schooling and professional experience on the pay of Brazilian workers.
“It is very difficult to measure human capital and it has always been a challenge for economists to materialize it. In Brazil, there is a gap in human capital indexes, because although there are some international organizations that measure this indicator, they leave out some specific characteristics of each country’s economy,” says Feijó, adding that Brazil has undergone major changes in schooling over the last few decades. She says that the aim of the new Human Capital Index is to analyze the impact of these changes on the qualification of the Brazilian workforce.
Fernando Veloso, an FGV IBRE researcher and the coordinator of the Regis Bonelli Productivity Observatory, says that the study took into account not only the increased access to education in the country, but also the professional experience and hours worked of employed Brazilians. “We calculated the impact of schooling and experience on workers’ pay, extracting a productivity indicator that combines schooling and experience, putting this data together to build the human capital index,” he says.
Breakdown of Brazilian economic growth
To break down economic growth in Brazil, economists often use a methodology called the “production function,” which relates GDP to different factors, such as physical capital, characterized by machines, equipment and buildings, and hours worked. However, Veloso points out that it is not very common in Brazil to calculate human capital as a component of this production function in isolation.
“In our country, physical capital and hours worked are the basis for measuring economic growth. However, human capital is usually included in total factor productivity (TFP), which also encompasses several other components, such as economic efficiency and technology. The difference in our study is that it analyzed human capital separately, in a long series. We are not aware of any other study that has measured human capital in Brazil in this way,” Veloso says.
According to him, despite challenges in the education sector, human capital has been growing consistently since 1995. In addition, he notes that the Brazilian population has experienced a demographic dividend, meaning an increase in the population able to work.
“The debate about education often goes more to the negative side, which makes us question whether the investments made in recent decades have really paid off. Despite the problems, our study shows that investing in education contributes to the growth of human capital and, consequently, to the country’s economic growth,” he says.
Human capital on the rise and TFP on the decline
Feijó explains that total factor productivity measures the contribution of economic efficiency and technology to economic growth. “One example is the use of artificial intelligence by companies. Our index is characterized by the sum of residual factors beyond physical capital and working hours – the main items analyzed in economic growth studies,” she says.
When analyzing human capital in isolation, the researchers found that TFP, which in conventional calculations shows low growth, has actually been falling in recent decades. “This is because human capital was previously calculated as part of TFP, but when we analyzed it in isolation, we could see the drop in the indicator that measures the country’s economic efficiency and level of technology,” Veloso says.
“When we incorporated human capital, which is a variable that has grown over the years, TFP showed growth. When we removed human capital and analyzed it in isolation, it indicated that TFP has actually been falling over the last few decades, meaning that the country’s performance in terms of economic efficiency has worsened, even though human capital has been constantly growing,” the FGV IBRE researcher adds.
According to Veloso, one of the hypotheses that explains the fall in TFP is the complexity of Brazil’s business environment, including the tax system. “We have a system that encourages companies to produce in places far from consumption centers, and that reduces economic efficiency. This generates inefficiency, because companies’ decisions ought to be based on other factors, such as demand prospects, market size and the quality of professionals, but with a complex tax system, you harm efficiency and therefore have an impact on TFP. That’s why there is a proposal for tax reform in Congress, which could improve this situation,” he says.
Recommendations and impact on public policies
Researcher Janaína Feijó believes that if there is evidence that human capital is crucial for GDP growth, it needs to be promoted more. “We’ve observed that in recent decades there has been an expansion in education, but we need to invest even more to increase this human capital,” she argues.
“Our study generated a policy paper to guide the creation of fundamental public policies to continue fostering human capital in the country, such as initiatives to improve professional qualifications through mapping of job openings and business vouchers, as well as developing the soft skills and socio-emotional skills of professionals already employed. Often a professional already has the technical ability to carry out an activity but has difficulty working in a team. This is a fundamental factor in an environment that is absorbing new technologies capable of replacing operational professional activities,” Feijó adds.
Veloso also points out that it is necessary to invest in improving the National Employment System in order to increase efficiency in the allocation of workers between different companies and sectors, which could contribute to TFP growth.
Both Veloso and Feijó reiterate that, after realizing the importance of human capital for the country’s economic growth, it is now necessary to deepen our knowledge of the determinants that contribute to the growth of human capital. “This involves better understanding the isolated contribution of schooling and professional experience to the growth of human capital over the last 30 years,” Veloso says.
The data from this research is now available at the Regis Bonelli Productivity Observatory and it can be used by researchers, government officials or anyone else. Click here to access it.