The Globalizing Economy and a Strategy for Developing the Human Resources Needs

INUI Tomohiko
Faculty Fellow, RIETI

Japan's growth strategy and human resource development

In the growth strategy, the third arrow of the Shinzo Abe administration's economic policy, the great emphasis is on the importance of human resources development, i.e., improved human resources that are prepared for globalization to ensure Japan's economic growth. Certainly, for Japan, with few natural resources, it is inevitable to use its human resources effectively to cope with its rapidly aging population and the globalized economy while maintaining and boosting its economic dynamism and improve its growth capacity.

As offshoring (a form of globalization) increases, Tomiura (2014) says that "we should expect it to have significant impacts on the nation's industrial policies and human resources development" (p. 173). He also quotes from a lecture (Trefler, 2014) by University of Toronto Professor Daniel Trefler, an international economist, who, in regard to human resources development, has stated that instead of retraining adults who have lost their jobs, it is far more efficient to adopt policies supporting childhood education in economically disadvantaged families, starting as early as the infant years when the brain is developing (p. 174). In other words, given that globalization also has a major impact on the labor market, we should recognize the need to begin human resources development at an early stage of life.

Educational effect at different life stages

Recent economic research has shown clearly that cognitive and non-cognitive abilities impact measurable outcomes in the labor market, such as wages, and even affect marriage, welfare payments received, voting behavior, and health. Moreover, individual differences in cognitive and non-cognitive abilities increase with age, and the role of parents and teachers in this process is very important (Almond and Currie, 2011). There is growing awareness of the importance of clarifying what kind of investment in human capital is effective and at what point in the human life cycle.

Unfortunately, not much comparative research has taken place in Japan on the effect of education at each life stage, in part due to data constraints. With insufficient accumulated research findings, there has been little discussion based on an adequate study of the cost-effectiveness of, for example, recent reforms for smaller class sizes in public elementary schools. University reform is considered as an important part of any growth strategy, and one suggestion entails the Education Rebuilding Council calling for expanding the human resources development function of universities. If the goal is to give universities a distinctive feature, what educational effect can we expect from that? Outside Japan, post-graduation wages are considered as the measure of the educational effect of a university. Taking that as the basis, what constitute the distinctive features of universities whose graduates earn higher incomes have been examined.

Educational effect of Japanese universities

Nakamuro and Inui (2013) analyzed the educational effect of Japanese universities by asking what kind of investments should be prioritized by universities in order to produce graduates with higher wages. We used data on twins (to account for differences in students' innate capabilities) and data from the School Basic Survey, which include school-specific data from the Ministry of Education, Culture, Sports, Science and Technology (to account for distinctive features of different universities), as well as standard score data announced by a major exam-preparation school. To obtain twins data, information was collected on about 1,300 pairs of identical twins between the ages 20-60 and living in Japan. Analysis was then conducted on about 400 pairs in which both twins had graduated from university. Fourteen indicators of distinctive features of universities were used: (1) founders of the university (i.e., national/public or private school); (2) location; (3) number of undergraduate students; (4) percentage of students in doctoral programs; (5) percentage of foreign students; (6) ratio of students to full-time faculty; (7) ratio of students to staff; (8) ratio of students to professors; (9) ratio of full-time faculty to part-time faculty; (10) percentage of foreign faculty; (11) standard score information as an indicator of school selectiveness; and for national universities, the following: (12) average salary of full-time faculty; (13) average tuition per student; (14) average subsidy per student.

Results from a model that uses twins data to control for genetics and home environment clearly show that none of the above indicators of university characteristics have an impact on wages earned by former students. Moreover, when the samples were narrowed to those graduating from national universities, such that faculty salary and student tuition and subsidies were estimated, no impact was found in any case. So why is it that universities' distinctive features have no impact on their educational effect?

Why does the choice of university have no impact?

The above findings suggest the strong possibility that the choice of university in Japan does not have as much impact on the child's future as is generally expected. One reason why school choice does not impact post-graduation wages may be that resources are not optimally allocated at universities. In the case of Japan's national universities, the national government applies certain frameworks (public finance laws, accounting laws, etc.). The resulting existence of itemized budgets and the single-year budgeting system, which are frequently pointed out as harmful, limit universities' flexibility in executing their budgets. Additionally, a comparison against U.S. universities shows that Japanese universities are more dependent on tuition fees for their income, while leading U.S. schools may receive funding from a variety of sources, such as asset management, patents, and donations. That is why many Japanese universities, especially private ones, have higher student-to-faculty ratios than the international norm, so naturally they tend to rely on lectures in large classrooms, with the students remaining seated. Moreover, both public and private universities in Japan have much higher student-to-staff ratios than the international norm. Thus, they do not provide adequate educational support, such as teaching assistants or staff with a high level of expertise in such matters as entrance exams and selection processes.

It appears that Japanese universities need deregulation to give them greater discretion over how to raise and allocate funds. This would allow them to distribute funds optimally so that their human resources development function would work better. Additionally, each university, considering its own resources, needs to explore how to make its educational program distinctive to accommodate the capabilities and qualifications of its incoming students and respond to structural changes in industry and the globalization of the economy. This is merely hypothetical, however, and not evidence-based. The first step in any discussion of Japan's human resources development policy would be a strict empirical analysis that includes research on the university educational effect.

February 3, 2015

February 3, 2015