Wealth of regions depends on people, say experts

The wide wealth gaps between Europe's regions can mostly be explained by using just a handful of measures related to 'human capital' including youth unemployment, research and innovation, according to research published this week (28 February).

Following a detailed analysis, a team of social scientists has concluded that factors connected with the concept of 'human capital' are responsible for around 70% of the difference in wealth between regions.

Perhaps even more surprisingly, these differences can be measured using just a handful of indicators, which social scientists consider to be particularly relevant to the three dimensions of human capital.

The first dimension can be measured by looking at the percentage of jobs in each region that can be described as "complex". These include managers, entrepreneurs, doctors, engineers, lawyers and other highly-skilled professionals.

The second dimension concerns the extent to which the human capital in each region is being utilised. Here, the most useful indicators were found to be the unemployment rate among young people (aged 15-24) and the percentage of people who have been looking for a job for longer than 12 months (long-term unemployment).

According to Dr. Peer Ederer, who led the team that carried out the research, youth unemployment and long-term unemployment emerged from the analysis as being more closely linked to GDP than other labour market indicators.

"It turns out that for measuring economic wealth creation in the regions, it is actually these two indicators which indicate whether wealth is being created or not," said Ederer.

Productivity and innovation

The third dimension relates to productivity and innovation. It is measured by looking at two things: the amount of public and private money being invested in research and technological development (R&D), and the number of patent applications being made in each region.

"It's not so much how much money is being put into R&D and the number of patents that this is creating, but rather it is the faith that individual businesses and individual persons in the region put into the future of their region," explained Ederer.

"If they believe in their region, if they have faith in their region, then they will invest in innovation, they will invest in R&D in that region," he insisted.

The conclusions of the study, entitled 'Human Capital Leading Indicators: How Europe's regions and cities can drive growth and foster inclusion' were presented at a policy seminar held in Brussels on 28 February.

Ederer told the audience that the small selection of specific indicators identified in the report "explain everything that is explainable by human capital".

"If you are in the top 10% of those human capital leading indicators, then you will have an average GDP per person of €41,000 in your region," said Ederer. "If you are in the bottom 10% of this ranking then you will have €12,000 GDP per capita," he added, noting that the average for a medium region is €22,000.

According to Ederer, the only other factors that could influence the wealth of regions are not related to human capital. "They are the typical issues around financial issues, social issues and also historical issues," he said.

This week's seminar was organised by the Lisbon Council – a Brussels-based think-tank that deals with economic and social policy issues, together with the EU2020 Regions Network – a group of 15 regions who are interested in seeing how regional governments can contribute to achieving the goals of the 'Europe 2020' strategy.

The research was carried out by an international team of 11 social scientists, coordinated by Dr. Ederer on behalf of the Lisbon Council. It was financially supported by the European Commission's PROGRESS programme for employment and social solidarity.

Wide differences between regions

There are wide differences between the 271 regions that make up the European Union in terms of their relative levels of wealth, which is measured by looking at the average amount of economic output (GDP) per inhabitant.

According to the latest official statistics, published by Eurostat last week (24 February), there are 18 regions with a GDP per person that is over 50% higher than the EU average, taking into account national price differences.

These relatively wealthy regions are mostly based on major centres of economic activity, such as London, Brussels, Hamburg, Prague, Paris, Stockholm, Bratislava and Vienna.

At the other end of the scale, there are 24 regions with a GDP per person below 50% of the EU average. These regions are found in Bulgaria, Hungary, Poland and Romania.

All of the regions with a GDP per person below 75% of the EU average are eligible to receive extra financial support from the European Union under the 'convergence' objective of the EU's cohesion policy, which is currently under review.

The research published by the Lisbon Council confirms that the differences between regions are in many cases much wider than the differences between the 27 member states.

Looking at youth unemployment, Ederer said "the difference in performance between the regions is much higher than between the countries. So if you want to tackle that problem you need to tackle it on a regional basis and not on a national basis".

The researchers also visited seven regions, spread across the EU, in order to learn about local initiatives and challenges related to different aspects of human capital.

"All these phenomena – whether it's youth unemployment rates, or share of complex occupations – they tend to be best tackled on a regional level," said Ederer.

He believes that greater attention should be paid to developing policies and actions at a regional level, targeting the different dimensions of human capital in order to create the best possible conditions for sustainable economic growth.

In specific terms, he suggests that each region should appoint a "human capital manager" who would be in charge of developing a human capital strategy for the region, taking its particular social and economic conditions into account.

"If there was one central recommendation coming out of our study, I would say let's create that institutional capacity-building in order to form a body – even better, a person – to be in charge of equalising that explainable 70% of difference in performance between the different regions," said Ederer.

More higher education not always the answer

Some significant differences emerged when the researchers compared different types of region. For example, they looked at the percentage of people who had completed higher education, and compared this with the share of highly-skilled jobs in each region.

What they found is that in densely populated regions, and more generally across the countries of Central and Eastern Europe, there appears to be a correlation between the number of people with university diplomas and the number of people with highly-skilled jobs.

However, when the researchers looked at the remaining regions – those in Western European countries with an average or below-average population density (some 150 regions with a total of 210 million inhabitants) – they could not find any evidence of such a relationship.

Ederer said that for these regions, "you can have rates of tertiary education going up and down and it does not make a whole lot of difference in terms of complex jobs".

"The conclusion is if you are in a thinly-populated region, investing in more university or tertiary education is not going to give you as much bang for the buck."

"The economic wealth-creation machine is different whether you are a densely-populated or thinly-populated region," said Ederer.

The researchers' report notes that densely populated regions have inherent advantages, and states that urban regions are "a natural magnet for highly skilled labour".

"I think this only serves to reinforce that we really need a regional unit of analysis rather than national unit of analysis," concluded Ederer.

European Commission puts emphasis on skills

László Andor, the EU commissioner responsible for employment, social policy and inclusion, attended the seminar and provided an overview of the Commission's actions in relation to human capital.

In particular, Andor referred to the five headline objectives of the 'Europe 2020' strategy for smart, sustainable and inclusive growth, and the seven flagship initiatives being developed by the Commission in support of this strategy (see 'Background').

"It is clear that one of the key preconditions for meeting our objectives is that people have the right skills," said Andor. "Jobs in the future are likely to be more knowledge-intensive and to demand higher skill levels."

"The Commission expects that jobs requiring highly-qualified people will rise by almost 16 million between now and 2020 in the EU, while those held by low-skilled workers will decline by around 12 million," he added.

The commissioner noted that the number of people having completed higher or tertiary level education had already increased significantly during the previous decade, and would continue to grow as more young people finished their studies.

However, Andor admitted that several major problems are yet to be tackled by policymakers. "There is certainly scope to do more in a number of regions, particularly in Central, Southern and Eastern Europe," he said.

"Besides the improving figures on higher education, we have to consider that there are still many poorly educated and low-skilled people, even in places with some of the best universities," Andor added.

"Unemployment rates are obviously highest in the lowest-skilled group, and we have seen also an increase in the number of people who are neither in education, nor in employment, nor training."

"If nothing is done, the scissors between those who benefit and those who do not will continue to open," said the commissioner.

Andor emphasised the role of national, regional and local authorities in addressing such problems. He also described the main elements of the Commission's flagship initiative, 'An agenda for new skills and jobs'.

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