# **1. Introduction and Overview**

The World Bank's Human Capital Index (HCI) captures the size of the income gains when today's better-educated and healthier children become tomorrow's more productive workers. Specifically, a child born today can expect to be HCI ×100% as productive _as a future worker_ as she would be if she enjoyed complete education and full health. But this implicitly assumes that when today's child becomes a future worker, she will be able to find a job—which may not be the case in countries with low employment rates. Moreover, even if today's child is able to find employment in the future, she may not be in a job where she can fully use her skills and cognitive abilities to increase her productivity. In these cases, human capital can be considered _underutilized,_ because it is not being used to increase productivity to the extent it could be. For example, unemployed future workers may be underutilizing their human capital, as are those out of the labor force. Likewise, engineers driving taxis are underutilizing their human capital because, even though they are employed, they do not hold jobs in which their education increases their productivity. Moreover, there is a stark gender gap in terms labor market outcomes: in many countries, women face inferior job and income opportunities compared to men, even with the same human capital. As such, simply considering the HCI by sex may give a distorted view in terms of realizing the potential of human capital investments.

This paper introduces two Utilization-Adjusted Human Capital Indices (UHCIs) that, as their name suggests, adjust the HCI for labor-market underutilization of human capital in a consistent way across a large number of countries. The UHCIs are designed to complement the main HCI, and _not_ to replace it. In part this is because they have different purposes: the HCI is an index of supply of a factor of production (in the future), whereas the UHCIs are a hybrid between an index of factor supply (capturing investment in human capital), and a productivity index (capturing how efficiently that human capital is used in production). Second, there are numerous challenges in defining and measuring utilization in a consistent way across diverse country contexts. As such, the UHCIs should be seen as a first step towards a simple and consistent cross-country measure of human capital utilization and should be interpreted with caution for policy analysis.

Like the HCI, the UHCIs focus only on the private gains to worker productivity from human capital, which does not include broader gains from human capital to the production of children’s human capital, women’s empowerment, technological advancement, political economy and other areas. Moreover, incomplete utilization should not be interpreted as there being no gains from human capital investments, but rather that private labor market gains are just smaller than they could be.

Also like the HCI, the UHCI is derived to measure the effect of human capital on future GDP per capita. Specifically, Kraay (2018) writes that "Projected future per capita GDP will be approximately 1/ H times higher in a 'complete education and full health' scenario than in a ‘status quo’ scenario." Both UHCI measures are derived in a similar HH way. However, for the UHCIs, utilization rates are now different in the status quo and full human capital scenarios. Specifically, both UHCIs are derived as future GDP per capita under the _status quo_ relative to future GDP per capita with complete health, education, _and full utilization_ .<sup>2</sup> This means that, in the long run, GDP per capita will be 1/ _UHCI_ higher in a world of full utilization, full health, and complete education than in the _status quo_ .

While the two UHCIs take different approaches to measuring utilization, they have the following simple form, as the utilization rate multiplied by the HCI: (1) b f f ) = U b f f ) × HCI 2 In other words, a child born today can expect to be only UHCI×100% as productive as she would be, on average, if she enjoyed UUH HH(b bb o bbffbbUUbbUUbbooUU RRbbUURR (b bb o 2 In other words, a child born today can expect to be only UHCI×100% as productive as she would be, on average, if she enjoyed complete education and full health, and her future labor was fully utilized in better employment.

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