Edition 36, Finance

Investing in Human Capital Increases GDP per Hour Worked

By: Irina Nikolaeva and Antonio Quesada

Part of the discourse in human capital management is that employees are the most important part for an organization to be successful. But, sometimes, this discourse lacks empirical evidence.

Nevertheless, PwC recently made a world level study that revealed that in those countries where a significant investment has been made in human resources, the Gross Domestic Product (GDP) per hour worked has also experienced a big increase. In that sense, the research states that emerging countries such as China, the Czech Republic, Estonia, India, Poland or Brazil, amongst other, show a 10% GDP growth per hour worked, and underlying that fact is a strong capital investment in human resources. Actually the Brazilian case is at the forefront as a result of its investment in technology and research.

Which are the issues shared by the most successful countries in this area? Asides from good regulations, they show a government’s effort focused on improving education in schools, universities and institutes. In parallel, the private sector has also increased the resources destined to the training and gives more emphasis to incentivize the mobility of talent within their organization. The work carried out by PwC (called Human Resources Trend: Global Vision) bases its figures on data from the Total Economy Database. The study was made amongst more than 10 thousand companies in 40 countries and it shows the trends in how human capital is managed in those markets. These points of view were also compared with the main macroeconomic indicators or organizations that are the leaders and develop the participation of their personnel. One of the conclusions was that the implementation of these new management tools leads companies to curve their costs.

PwC implements every year the CEOs global survey. During the crisis’ years at least 80% of them in each region of the world started to reduce costs and more than half stated that they could resort to reducing headcount. Companies settled in North America and Western Europe took more drastic measures; 69% of the companies in the United States reduced their personnel, while in the United Kingdom 63% of the companies adopted the same measure. The reduction of personnel was the remedy more frequently used in the automotive industry with 80%, the manufacturing industry with 68%, the communication media and the entertainment sector with 71%. This short term solution may have long term negative effects in the recovery impact and competitiveness of the business in future years.

The last CEOs survey highlights the three big failures of human capital as a consequence of the recession:

  • The compensation models are obsolete and do not coincide with their objectives in many of their parts. In addition, the heavy burden of the pension liabilities and of medical expenses paralyzes many successful organizations in the United States and in Europe.
  • The CEOs were incapable of quickly relocating their talent when the crisis impacted them. On the one hand this caused large scale layoffs to save money and on the other hand it vacated crucial talent positions. The organizations have to find the ways and means to move their people where they are more needed. Those that resorted to a drastic reduction of their staff are facing today a costly and growing rehiring and professional readaptation exercise.
  • Many organizations lack the key skills that are necessary to operate and compete with the new environment such as: the awareness of higher risks, adaptability to the market, change the management capacity and respond to the new clients’ demands, etc. 76% of the CEO’s plans want to increase the budget to train and educate their talents.


Reading Phonetically

It is also stated that the organizations should highlight the new techniques to find and select their employees by considering that there is a shortage of talent, and at the same time, there is tremendous competition after it. “Companies should not be closed to people that do not have the experience in the industry in which they work, but rather they should analyze their skills”, states the study.


A way to retain talent is through motivation, which in turn is a basic component to increase productivity. This leads to the need to generate effective human resources policies that include incentives (for example and amongst other, career development policies, training, and quality of life at the work place) that at the end of the day increase personnel skills.

PwC states that this is also an efficient way to detect the best talent, so that companies may start to consider the potential successors to specific positions. According to the report, this has been a differentiating issue in the countries that have been more successful on this subject.

innovating Cultures

Another variable is innovation. The report states that to promote an innovating corporate culture generates an increase in the competitiveness indices. However, this is an issue that developing countries still do not stress, as can be deducted from the fact that between 2002 and 2007 investment in research and development made by companies in developed countries increased 45%, while in the same period the developing countries had a 7.6% increase.

On the other hand, based on the global experience obtained in the study that states that companies that use subcontracting should move towards a new approach that leads to a higher cost savings. This focus consists in the relationship with the suppliers moving towards a more collaborative business model, with less complex and more flexible contracts that result in a higher added value through specialization. “Future subcontracting should be more focused on improving the products and increasing productivity, before trying to only reduce costs” emphasizes the report.

Innovate Instead of Laying off

This study also considers the experiences caused by the financial crisis on the management of human resources. On this issue, it states that the companies opted to reduce costs by making drastic personnel reductions. However, this measure implied a major expense for companies and subsequently it led to hiring other professionals who did not satisfactorily meet the work requirements.

What the companies can do is to evaluate the productivity and profitability costs in their various functions comparing them with similar teams in the market. As a result, the organizations can be capable of identifying low yield persons, and providing a business model to relocate the persons that require it the most. This allows the more skilled persons to grow despite the global stagnation or personnel reduction throughout the entire organization.

The leading organizations that use the key metrics, such as the performance metrics, that help monitor the differences amongst colleagues, production centers of one group versus another, subsidiaries, or business units, etc. These metrics are also used to compare one organization with its competitors and this helps establish the points of reference.

Therefore, the recommendation is to apply measures which final result is equivalent to the saving expected by layoffs, amongst other. For example: freeze salaries, offer sabbatical years, adjust the expense policies of employees and favor internal recruiting instead of external talent, amongst other.

It would be advisable to look at these concepts because Mexico has recently reported that it fell one point more in the World Competitiveness Index prepared by the Business School of Switzerland (IMF) as it went to place 47 from the 46th.

In addition, the recession has deeply affected employers as well as employees. World productivity has dropped after its increase in 2008. On the other hand, despite the low interest rates, in all environments, employees should not lose from sight the importance of labor agreements and the planning of succession.

Employers should take measures today to manage labor agreements in a reasonable period of time and thus avoid economic conflicts and contain costs. Those that do it shall be in a better position to benefit from an economic recovery.?


Phelps, R. (2010), Tendencias en Recursos Humanos (Trends in Human Resources): Visión Global, PwC, 2010, p. 2, 4.

Quesada, José Antonio (2008), El Comportamiento Humano en las Finanzas. IMEF

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