Declining Quality of Human Capital

Are living standards getting worse, because we are less skilled?

Markets and economies ebb and flow with the business cycle, but with technological progress and increased rates of education the long-term trend for positive growth has continued unabated since the 19^th century. This is despite wars, pandemics, inflation crises and deflationary busts.

The main bear cases for US stocks by most economists are either a business cycle trough or high interest rates resetting valuations. However, those are temporary speed bumps and not structural forces.

A long term left tail is emerging. It is not political or economic collapse as an Argentina style political phenomenon, but the exposure of a gradual decline in the quality of human capital.

When I mentioned it at a conference I recently spoke at focused around corporate financial professionals, this was the point that caused the most discussion afterwards. See the link below for full video presentation, and the embedded track for audio version.

FPA Conference Presentation on Human Capital and Macro Trends

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I would define a decline in human capital quality is the deterioration of physical or mental capabilities that reduces labor productivity across the entire labor force over multiple generations. Historically human capital value has increased with the Flynn effect boosting IQs, education rates rising, and technological improvements allowing for economies of scale with skilled labor. However, there are signs in developed economies that this virtuous cycle may be reversing.

Human capital is the knowledge, skills, and abilities that people possess. It is an essential driver of economic growth and prosperity. However, there are signs in developed economies that this virtuous cycle may be reversing. The possible decline in OECD human capital is due to several factors. The most notable examples include: