Education, employment and human capital

Irrespective of the level of development of a country, economic growth is essential for raising the levels of employment and income. For countries at low level of development like Bangladesh, this is particularly so because it forms the first pillar for inclusive development, and other pillars like reduction of poverty and inequality, decent jobs, progress in social fields like education and health can become strong when the pillar of economic growth becomes strong. Employment is not only an outcome of economic growth; it is also an important input in the form of human capital. And labour is not homogeneous: it's quality and effectiveness can vary with the level of education and skill of the work force. The level and type of education and skills that are required by an economy change as it grows. How is Bangladesh doing on these fronts and what is the outlook like?

Acceleration in economic growth has plateaued and growth targets have been missed

As is well known, there was a steady acceleration in economic growth since the 1990s - from an annual GDP growth of less than five percent, the country reached six percent growth in a decade. What happened since then can be looked at in two different ways. One way is to compare the average growth performance during the Sixth Plan period (2010-11 to 2014-15) with that during the Fifth Plan period (1996-7 to 2001-2): 6.27 percent compared to 5.1 percent. It would seem from this comparison that there has been an acceleration in growth during the Sixth Plan period. However, if one looks at GDP growth rate since the beginning of the present millennium, a different picture emerges. After exceeding six percent for the first time 2003-4, it hovered around the six per cent mark for several years before attaining the height of 6.7 percent in 2010-11. And then it climbed down to just over six per cent during 2012-2014 (see Figure 1). It is thus clear that GDP growth rate has reached a plateau, and there has been virtually no further acceleration during the last three years. Denying this fact may be politically expedient but will not do service to the national aspiration of moving to a higher growth trajectory. It is essential to understand the reasons for the plateauing of growth and undertake measures to overcome them.

The Sixth Five Year Plan of the country had envisaged GDP growth to accelerate gradually to 7.6 percent in 2013-14 and to eight percent in 2014-15 (the final year of the Plan), thus attaining an average growth of 7.3 percent per annum. By lowering the growth target for 2014-15 to 7.3 percent (even that is rather ambitious in the prevailing scenario, and appears unlikely to be achieved), the targets envisaged in the original Plan have already been abandoned. Thus it seems almost certain that the overall Plan target for economic growth is going to be missed by big margin. The country seems to be caught in a bind of six to 6.5 percent growth.

Growth target needs to be realistically ambitious

What is the outlook like with regard to economic growth? The answer to this question would depend a great deal on a variety of factors that influence investment in the economy and its efficiency. During the past few years, although there has been a slight increase in public investment, that has not been accompanied by the expected increase in private investment. In a predominantly private sector based economy, public investment is basically expected to create necessary infrastructure and to raise the level of social development. While some noteworthy achievements have been made in the latter field, the same cannot be said about the former. Moreover, the sorry state of physical infrastructure of the country and long delays experienced in implementing a number of important projects raise serious questions about the efficiency of public investment. That, in turn, has resulted in a failure to remove an important bottleneck that constrains private investment.

But infrastructure represents only one of the bottlenecks; and there must be other factors that stand in the way of the growth of private investment. While anecdotal evidence and perception based discussions point to a number of factors (other than infrastructure) like difficulties in doing business and expectations about political stability, it would be useful to undertake an in-depth analysis of the issue and base future policy and action on such an exercise.

In the absence of informed policy decision of the kind mentioned above, there may be a tendency to breathe the same kind of optimistic air that influenced the Sixth Plan. In fact, there may be a tendency to adopt an approach of being ambitious in order to attain a modest target in the belief that otherwise the performance could be even worse. Rather than suffering from an illusion of growth optimism and disappointment from failure, a better approach may be to adopt realistically optimistic targets, identify concrete steps that are needed to attain such targets and work hard on translating them into reality. Of course, the importance of attaining high rate of economic growth has to be recognised.

We also need to take into account the post-MDG goals that are being discussed now and are expected to be adopted in the course of this year. Goal 8 of the Sustainable Development Goals (that are still being discussed at the international level) emphasizes the importance of high growth with productive employment and specifically stipulates a target GDP growth of at least seven percent per annum for LDCs. Taking the above into account and considering the factors that constrain investment and output growth in the country, it may be realistic to target an acceleration of GDP growth to 6.5 percent in the first year of the Seventh Plan and then gradually raise it to seven percent and to 7.5 percent by the end of the Plan period. However, if there is a feeling that the targets have to be more ambitious in order to attain an average GDP growth of seven percent to 7.5 percent per annum, then they may be formulated differently. In any case, due consideration has to be given to limits of optimism. And rather than leaving the targets on paper, concrete steps would be needed in order to translate them into reality. How the level of investment needed to achieve the targeted output growth can be attained would have to be spelt out in concrete terms.

In addition to economic growth, the goal of full productive employment needs to be pursued

As for the goal of employment, an easy way may be to project the growth of labour force and aim at achieving employment growth at the same rate. That, however, would not be appropriate from the point of view of productive employment. The post-MDG development agenda is going to adopt full productive employment by 2030 as a goal. In a country like Bangladesh, much of employment does not meet the criterion of productive employment; and hence a mere quantitative approach would not be adequate. It would be necessary to attain transformation in the structure of employment towards sectors like manufacturing, modern transport, and higher end services where productivity is higher. The rate of growth of overall employment has to be higher than that of labour force so that some of the underemployed can move to jobs with higher productivity. How much this difference should be would depend on the target time frame for absorbing all the underemployed and also the ability of the economy to generate employment in higher productivity sectors.

In terms of numbers, projections made by the present author indicate that annual GDP growth of 6.5 percent is the minimum requirement merely to absorb all the new additions to the labour force in the medium term and to make some dent in the current rate of unemployment. Higher rate of economic growth would be required in order to absorb the surplus labour that currently exists in the economy, and that process can start when GDP growth reaches and exceeds seven percent per annum. However, in order to be able to exhaust the surplus labour within a reasonable period of time (say, by 2030), GDP growth in the range of eight percent would be required.

In order to address the employment challenge, a focus on the pattern of growth is essential

The above scenario, unfortunately, does not appear very bright, especially since the required labour market transformation appears to hinge critically on economic growth in the range of eight percent. Is there an alternative way of addressing the employment challenge faced by Bangladesh?  In my view, there is. The critical element in that alternative is the pattern of growth and a much greater focus on the manufacturing sector.

Even with a GDP growth of 6.5 to seven percent, higher growth of employment is possible if the weight of manufacturing in that growth increases. In fact, if manufacturing grows at the rate 12-13 percent per year and if labour intensive industries like garments, shoes, furniture, electronics, leather products, etc. feature in that growth, it is possible for employment in manufacturing to grow at nine to 10 percent per annum. That would imply an additional employment in the sector of approximately 600,000 per year (instead of less than 400,000 at present). Such growth in the manufacturing sector will have linkage effects with other sectors, especially transport and service sectors. Hence, the employment outcome could be substantially better than what is observed currently. In other words, the employment challenge could be addressed more effectively with a focus on the pattern of growth rather than on growth alone.

Labour is not homogeneous: workers with different levels of education and training contribute to economic growth in different ways

Better educated and trained people have a greater probability of being employed because education and training can raise qualifications and make labour force more productive. This should be reflected in a lower rate of unemployment for those with higher levels of education. But such a positive relationship between education and employment may hold better in situations where the labour market as a whole seeks educated people, and sectors that are larger and grow at higher rates seek more educated workers. This may not be the case in developing countries where labour markets are often found to be segmented and the educated find jobs only in certain segments of the economy.

For example, in a dual economy with a predominantly traditional segment that consists of agriculture and allied activities, educated workers are likely to find jobs only in the modern sector which is typically small especially at the early stages of development. Such sectors may not require much educated worker except perhaps in research, extension service, etc. Likewise, construction, traditional crafts and other informal sector activities also may not require formally educated and trained worker. As an economy grows, the modern sector is also likely to grow in size, thus raising demand for a more educated and skilled workforce. Hence, in developing countries, one may not find a clear positive relationship between education and employment in terms of the simple indicators mentioned above.

How, then, is the importance of education for the labour market of developing economies likely to be manifested? With economic growth, a dual economy is likely to witness expansion of its modern sectors which in turn is expected to lead to increased demand for educated and skilled labour. In such a situation, education and skill training would be important to facilitate mobility of workers from the traditional to the modern segments of the economy. Likewise, developing countries are expected to witness changes in the composition of labour force in terms of the status of employment for example, from casual workers in agriculture to regular wage and salaried workers in manufacturing and other modern sectors. This may also imply a greater demand for more educated people. All these developments are likely to mean higher wages and earnings of workers with more education.

Higher levels of education is associated with lower levels of unemployment in developed countries, but not so in developing countries

Looking at the actual situation with respect to education and employment, one  finds a negative relationship between average years of schooling and unemployment rate in developed countries, but the opposite in developing countries. A study on OECD countries finds that 84 percent of the population with tertiary education is employed, and it falls to 74 percent for people with upper secondary and post-secondary non-tertiary education. For those without upper secondary education, the figure goes down to just above 56 percent.

In OECD countries, an upper secondary education is typically considered the minimum needed to be competitive in the labour market. The average unemployment rate among those who have completed this level of education is close to 5 percentage points lower than among those who do not have.

In contrast with developed countries,  the relationship between unemployment amongst the youth and average years of schooling is positive in developing countries. This apparently perverse result may not appear very surprising if one remembers the observations made above about the nature of the labour market in such countries, especially the segmented nature of the labour market and the demand for educated labour being limited mainly to the modern sectors of an economy. In such a situation, expansion of education, especially at the secondary and tertiary levels may not correspond directly with the demand for the products. This becomes clear from data on unemployment by levels of education (see figure 2).

If one ignores the inexplicably low level of unemployment for degree holders, one can see a positive relationship between the rate of unemployment and level of education, those with higher education suffer from higher rate of unemployment! Similar relationship has been found in the case of other developing countries like India and Sri Lanka. In India, the rate of unemployment is particularly high for diploma/certificate holders. But more significantly, those with secondary and tertiary education suffer from higher unemployment rates than those who are illiterate or have only primary education. Do these data imply that education is not of much use in getting jobs? Why then is there so much demand for higher education? In order to understand this, it may be useful to look at some more data relating to employment and education.

Education provides job-seekers with mobility between sectors and occupations

Data on the distribution of various sectors' employment by level of education as well as the share of the sectors in total employment for Bangladesh show that employment in the major sectors of the economy like agriculture, trade, manufacturing, and construction is dominated by workers who are either illiterate or have less than primary education. On the other hand, sectors where the proportion of employment with secondary and higher levels of education is high (say at least 20 percent), e.g., electricity and gas, information and communication, professional and scientific work, administration including public administration, education, real estate, financial services, etc. account for very small proportions of total employment. In the circumstances, it is possible that those with secondary or higher levels of education would look for work outside sectors like agriculture, transport, construction, etc. and keep waiting until they find a job that matches their aspiration. And that, in turn, may, at least partly, explain the observed relationship between education and unemployment. Education, especially secondary and higher level, is most likely being used as a mechanism for getting jobs in the modern sectors of the economy.

That education may provide a means of another type of mobility is indicated by data on the distribution of employment by status and level of education. For those who have no education or less than primary level, the major categories of employment are self-employment and “day labourer” in both agriculture and non-agriculture. On the other hand, even for those with just secondary education, “regular paid employee” accounts for the highest share followed by unpaid family work. For this level of education, the share of day labourer and other irregular paid worker is very low (and falls drastically compared to those with no or primary education). If one looks at those with post secondary level education, the share of regular paid employee shows a big jump (nearly two-thirds or more for those with degree and higher level education). Thus it seems that education provides one with entry to salaried jobs, and one is perhaps willing to accept a period of unemployment in order to get such a job. Moreover, the fact that the rate of return to education is quite significant, and in some cases is found to be higher for higher levels of education implies that it must be economically worthwhile to accept a period of unemployment.

Apart from mobility in terms of the sector and status in employment, education also brings direct income benefit which is already apparent from rate of return estimates that are available in different studies. The income premium due to education can also be seen from direct comparison of incomes associated with different levels of education. A recent study on Bangladesh (by Binayak Sen and Mahbubur Rahman) brings out a number of interesting points in this regard. First, average monthly earnings are positively correlated with levels of education. Second, monthly earnings of those with technical and vocational education are higher than those with HSC or equivalent qualifications. Third, for women workers in urban areas, even a bit of education can make notable difference in earnings although for rural women the difference becomes substantial only after one crosses the threshold of SSC.

Education and skill requirements change with the level of economic development

The requirement of manpower with different levels of education and skills changes with the level of development. First, at the early stage of economic development of a country, basic education may be adequate for many of the jobs that open up in segments of the economy registering high growth (e.g. manufacturing, construction and services). However, as an economy attains higher levels of development and the composition of the sectors changes, the requirements of education and skills are also likely to change. On the side of general education, there would be a growing need for people with post-primary education, and at a later stage, post-secondary education. On the side of skills, requirements evolve from basic cognitive skills to ones with ability to think and create. A country's education and skill development system must undertake reforms to gear itself to meeting such changing requirements. Experience shows that there may often be a tendency to simply expand higher education or vocational education without due regard to the type of education and skills for which demand is expanding. The result often is unemployment of the educated. A careful examination of the factors responsible for such a situation may show that it is more due to the expansion of education and training that is not required rather than due to the inadequacy of education itself.

The educational level of the labour force of Bangladesh is still low

It may be useful to look at where Bangladesh is located today, especially in relation to the experience of other developing countries. A few indicators may be helpful. First, the distribution of labour force (or employed labour force) by levels of education. Data presented in Table 1 show that nearly two-thirds of the total labour force either have no education or only primary education. Only one in a thousand has vocational or technical education.

What is the situation regarding educational efforts? Looking only at enrolment (which does not say anything about quality of education), one would note that important strides have been made in the area of primary education where enrolment has reached the maximum that can be targeted (Table 2). Progress has also been made in the areas of secondary and tertiary education, but there is a long way to go with regard to both those levels. More worrisome is the slow progress in the area of secondary enrolment after 2000. Even more disappointing is the proportion of technical and  vocational education in total secondary education (Table 3). In 2007, this figure was less than three per cent in Bangladesh compared to over 12 and 18 percent in Republic of Korea and China respectively.

The country needs to develop its human capital with a long-term perspective

Given the current situation in Bangladesh described above and future growth prospects (as well as potentials), what kind of targets can/should the country set for itself in the area of human capital for the next decade and a half? Some indicative figures are presented in Table 4. Before looking at these figures, it may be useful to note a few points. First, the figures in Table 4 are not projections based on any quantitative model. They are simply based on a review of international experiences of countries that have gone through a process of economic development that Bangladesh is going through now and would like to see unfold in the future. More specifically, the question that have been used as a basis for the figures is whether Bangladesh can aim at attaining a level in 2030 that a country like Malaysia, for example, had a few years ago. This, combined with what South Korea and Taiwan looked like at comparable levels of development should not be too unrealistic as a goal and as a basis for some planning and policy making for Bangladesh. The “targets” mentioned in Table 4 are thus merely “indicative”, and should be treated as just suggestions.

Second, although human capital represents the supply side of the growth equation and is an important factor, investment in education and skill development has to be in line with the rate and pattern of economic growth. It is in that respect that one has to look at the question very carefully. Whether it would be realistic for Bangladesh to aim at a different trajectory of human capital development would depend critically on what rate and pattern of economic growth unfolds. By a “different trajectory”, we mean a greater focus on secondary and tertiary education (without of course ignoring the importance of primary education, especially of raising quality at that level) as well as on vocational and technical education. If the rate of economic growth continues to hover around six percent per annum and the pattern of growth does not change much, business as usual in human capital development may be good enough. It may be noted that for almost two decades, growth in the manufacturing sector has been almost entirely driven by ready made garments and the rest of the economy remains focused on food grains and services. The sectors with growth potential identified by the Sixth Five Year Plan of Bangladesh (2011-2015) also include the familiar ones like RMG, leather and leather products, agro-processing, ship building, ICT, etc. However, if the economy changes gear with the growth trajectory shifting to one of seven to eight percent per annum and the composition of the manufacturing and service sectors changes considerably, then the strategy for human capital development will also have to change accordingly, and the figures of Table 4 may start looking relevant.

But a simplistic supply side approach would not be adequate

That education and training by themselves may not provide the solution is almost a banal remark. One simply has to recall (from figure 2) that the relationship between education and unemployment has been found positive, implying that the quantitative approach of providing more education and training cannot be the solution to the issue of human resource development. In this regard, it would be worth noting a few points:

*  In defining the level of skills of workers, employers consider certificates obtained from formal institutions of the technical and vocational education system (TVET) as only one, and not even the major, amongst several criteria. Duration of on-the-job training, duration of overall work experience, an assessment of tasks that can be performed by a worker are considered to be more important.

*  Many employers consider the quality of training offered by formal institutions as “inadequate” or not relevant for their needs.

*  Not surprisingly, many with qualifications from vocational training institutions remain unemployed.

*  Hence, mere expansion of training capacity cannot be the solution to skill gaps that may exist. In fact, a good deal of the existing capacity remains unutilized. It would be essential to reform the training system by taking into account the factors that are responsible for the situation mentioned above. The poor performance of graduates of the TVET system is mainly due to the absence of linkage between the system and the labour market, outdated and often theoretical nature of the course curricula, outdated mode of teaching, etc.

Issues of quality and relevance to the labour market may be raised about general education as well. Hence, rather than talking generally about raising the level of education of the labour force, it is important to look at ways and means of providing not only more education but also education that is useful for the world of work. On all these matters (viz. quantity and quality of employment and human capital), a long term approach should be taken, and Five Year Plans should be regarded as vehicles for pursuing the goals that the nation might set for itself.

The writer is, an economist, is former Special Adviser, Employment Sector, International Labour Office, Geneva.