The Impact of Human Capital Underutilization on Productivity and Economic Growth in Egypt

This study estimates the effects of human capital underutilization on economic growth and productivity. This paper investigated the relationship between underutilization of human capital and economic growth using a variety of econometric tests like the Augmented Dickey Fuller test, the Johansen Integration test, and the ARDL model. The results indicate that, there is a negative relationship between human capital underutilization and economic growth. The results indicate that underutilization of human capital has a greater long-term impact on economic growth than it does in the short run. Reforms to education and training systems are required in order to maximise human capital utilisation and thus increase productivity and economic growth.


Introduction
One of the most problems facing developing countries and hinder economic growth is the underutilization of human capital. Human capital underutilization indicates that resources are not being used efficiently. So, better utilization of human capital is considered as one of the most important targets of any country's economic plan. Several economic literatures assesses the validity of Okun's law, which indicates that there is a strong relationship between economic growth and unemployment. Okun's law proved that unemployment is inversely related to economic growth (IMF, 2012: 4).
However, avoiding unemployment is not sufficient; there are other types of labour underutilization. Human capital underutilization refers to the mismatch between labour supply and labour demand. Unemployment is commonly used as the only indicator of labour underutilization, but this only provides a partial picture of labour underutilization. There are other types of labour underutilization, such as time-related underemployment, which includes employees who want to work more hours or have worked less than a specified number of hours during a short reference period (ILO, 2018: 2). In addition, there is labour underutilization in qualitative terms, which means that workers are overqualified for the jobs they have. In addition to those outside the labour force who stop their job search or who are not immediately available but want a job in the future.
In many developing countries, a sizable proportion of the population is unemployed or working in jobs that do not allow them to fully utilise their skills to increase productivity. As a result, underutilization of human capital has an impact on productivity and economic growth (Steven Pennings, 2020: 3-4). Most studies concentrated on the relationship between unemployment and economic growth, ignoring other types of underutilization. As a result, in this study, we examine the relationship between different types of human capital underutilization and economic growth.

Literature Review
Several studies tried to examine the empirical relationship between economic growth (output) and unemployment. There are two points of views, first one found that economic growth has a significant negative impact on unemployment in Egypt (validity of Okun's law) as in (Khaliq s. petal, 2014). This study examines the relationship between unemployment and GDP growth in nine Arab countries [Algeria, Egypt, Tunisia, Sudan, Morocco, Lebanon, Palestine, Syria, and Jordan] using pooled EGLS over 16 years old (from1994-2010).
The result of this study found that economic growth has a negative and significant impact on the unemployment rate, with a 1% increase in economic growth resulting in a 0.16 percent decrease in the unemployment rate. Hany Elshamy (2013) This paper examined Okun's coefficient in Egypt from 1970 to 2010 by using cointegration analysis to estimate Okun's coefficient in the long run and the error correction mechanism (ECM) in the short run. This study found that Okun's law in Egypt had a statistically significant coefficient with the expected sign in both the long and short run (World Bank, 2014). This study assesses the relationship between economic growth and unemployment in Egypt using quarterly data from 2003 qi to 2013 qi. This study found significant negative correction between GDP growth rate and unemployment rate for all labours, but especially for women.
The relationship is no longer statistically significant when the sample is limited to men; however, the results show that a 1% increase in year-to-year GDP growth is associated with a 5.8 percent decrease in female unemployment. On the other hand there are other studies that found the invalidity of Okun's law in the Egyptian economy like Moosa (2008), This paper investigated the validity of Okun's law in four Arab Countries (Egypt, Morocco, Algeria and Tunisia) for the period (1990 -2005).
The study found that the Okun's coefficient is -0.011 in Algeria, 0.001 in Egypt, -0.00009 in Morocco, and 0.001 in Tunisia. As a result of the findings of this study, which indicate that unemployment and output are unrelated in the four countries. Also (Fouzia Mohmed et al, 2015), this study assessed the relationship between unemployment and growth rate in Egypt from 2006 Q1 to 2013 Q2 using the ADF unit root test, the standard Granger Causality test and the Johansen Co-integration test. The findings indicated that there was no cointegration relationship between output (GDP) and unemployment, which indicates that there is no long-term relationship between the economic growth and unemployment rate. From the above we noticed that previous studies concentrated on the relationship between economic growth and unemployment through examine the validity of okun's law. But in this paper, we examine the relationship between different forms of human capital underutilization and economic growth.

Okun's law
Okun's law explains the relationship between output and unemployment. Shifts in aggregate demand, according to Okun's law, causing output to fluctuate around potential. These outputs causing firms to hire and fire employees, causing the employment rate to shift in the opposite direction. These connections can be expressed as Where:log of employment log of output unemployment rate Then substitute (1) into (2) − * = ( − * ) + , < Okun's law can be estimated in two ways.
First way: To estimate the changes in unemployment based on the changes in log real GDP, where beta can be considered as a simple correction for changes in unemployment and output, do the following.

Validity of Okun's law in developed and developing countrie:
Some studies, such as (Zidong , (ILO, 2019), and (IMF, 2017), investigated the validity of Okun's law in developing countries and discovered that okun's law is less valid in developing countries, particularly low-income countries, than in developed countries. There are some factors that can explain why developing countries have lower okun's coefficient values than developed countries.
3.2.1 Economic structure: An important factor in determining the validity of Okun's law is economic structure. The inverse relationship between economic growth and unemployment is more pronounced in the service sector. Large movements in employment would be observed in the service sector or a service-oriented economy. While economies that rely largely on agriculture and have a higher rate of self-employment would see more price adjustment than employment growth (ILO, 2019: 32).
3.2.2 Informal sector: The size of the informal sector is another variable that could influence how labour markets respond to economic growth. The magnitude of Okun's coefficient decreases as the share of informal employment increases (Zidong An, 2017:18).

Labor market flexibility:
Countries with more flexible labour markets are more likely to have more responsive labour markets (An, Zidong, 2017). Increased business regulation slows the hiring and firing process, reducing the labour market's responsiveness to fluctuations in output. As a result, higher levels of business regulation are associated with weaker labor market responses (IMF, 2017:22).

Human Capital Index (HCI)
The HCI is intended to assess how current health conditions and education outcomes influence the next generation's labour productivity.

Components of Human Capital
Index 1) Survival till school age, which measured by under 5 years mortality rates.
2) Expected years of schooling adjusted by measurements for the quantity and quality of education.
• The quantity of education Based on the current pattern of enrollment rates across grades, the number of school years a child can expect to end by the age of 18 is measured. • The quality of education is measured according to the World Bank's efforts to harmonize test scores for the major international student accomplishment testing programs.

The adjusted years of schooling (LAYS)
Where: -: a measure of the average number of years of schooling obtained by a relevant cohort of country C's population : Learning assessment using a numeraire for a relevant cohort of students in Country c (or benchmark) 3) Health: measured by two indicators; Adult survival rates (represent by 15 years old who survive for age 60 and the stunting rate of children under 5 years 4.1.2 Aggregation methodology of HCI The HCI components are combined into a single index after they have been converted into productivity contributions relative to a guidelines of complete education and complete health The resulting index has a value between 0 and 1. So, a score of 0.70 indicates that a child born today's productivity as a future worker is 30% lower than what could have been accomplished by complete education and total health. (world Bank,2020:2-6)

The utilization adjusts Human Capital Index (UHCI)
The HCI (Human Capital Index) iindicatesthe amount of human capital that a child can be expected to accumulate by the age of 18 , taken into consideration the risks of poor health and education in his country. As a result, it assesses how changes in health and education affect the next generation of workers' productivity. HCI assumes that when today's child grows up and becomes a future worker, he will be able to find work. which may not be correct, particularly in developing countries. In many developing countries, a sizable proportion of the population is unemployed or working in jobs that do not allow them to fully utilise their skills. Human capital underutilization is a problem in developing countries (World Bank, 2020: 109). The utilization adjusted human capital index (UHCIs) correct the HCI labour market underutilization of human capital according to the proportion of the working-age population employed or in jobs where their skills and abilities can be better used to increase productivity. So, The UHCIs are intended to supplement the HCI.
• Basic UHCI : Captures the income gains from employing all potential [unemployed] workers.
• Full UHCI: Gains from increased employment rates + Gains from relocating workers to locations where they can better utilization of their human capital to increase productivity [better employment].
Better employment rate: as the proportion of the working-age population in better employment The world bank examined utilization measures for more than 160 countries and found that GDP per Capital will be 1 UHCI higher in a world of full utilization total health and complete education (Steven Pennings, 2020: 3-4).

Human Capital in Egypt
Between 2010 to 202, the HCI value for Egypt increased from 0.48 to 0.49.
The value 0.49 indicates that a child born in Egypt today will be only 49% as productive when he reaches the age of 18 as he could be if he received a good education and was in full health.   • The main problem facing Egypt's labour market is a mismatch between the educational system and the labour market. This is reflected in the relatively high unemployment rates among graduates of higher education. • In 2019, the unemployment rate for those with a bachelor's degree or higher was 16.7 percent [10.5 percent for males and 29.9 percent for females], while it was 2.2 percent (15 percent for males and 5.2 percent for females) among illiterates. • For the distribution of employment by economic activity, we observed that construction had the highest percentage increase in employment, reaching 26.8 percent in 2019. While employment in the agriculture sector fell by 2.8 percent. In 2019, the sector employed 23.2 percent of the workforce. • About the geographic distribution of unemployment. There are significant disparities between urban and rural areas, with urban areas accounting for a greater proportion of unemployed people than rural areas. • The most governorates have high unemployment rate in 2019 was: Damietta 21.1%, North Sinai 15.6%

Underutilization in Egypt
• The unemployment rate focuses on a very specific population (the unemployed) while ignoring those who are employed or are not in the labour force. • The unemployment rate is only one component of labour underutilization; there is also unused labour supply among those who are employed (but would like to work more hours than they do) and those who are not employed (Having given up on the job search or not being immediately available but desiring a job in the future). There is also qualitative labour underutilization caused by a skills mismatch, in which employees are overqualified for the jobs they have.
Other than the unemployment rate, we have more indicators to measure underutilization.
People in Time Related Underemployment can defined as all employees who wanted to work more hours during a short reference period, whose total Working hours was less than a specified number of hours , and who were willing to work more hours if given the opportunity.
The potential labour force consists of two categories first people of working age who are actively looking for work, who were not available to start work immediately but will be available soon, second, who were not actively looking for work but wanted to work and were available soon (available potential jobseekers) (ILO,2020:6).

The Impacts of covid 19 on Human capital in Egypt
In 2020, 8.8 % of total working hours all over the world were lost compared to the fourth quarter of 2019. This translates into 225 million full-time positions. In 2020, working-hour losses will be roughly four times higher than they were in 2009, during the global financial crisis. Global employment fell by 114 million jobs in 2020 compared to 2019. In relative terms, women lost more jobs (5%) than men, and young workers (8.7%) lost more jobs than older workers. Total labour income all over the world is expected to fall by 8.3 percent in 2020, amounting to US$ 3.7 trillion, or 4.4 percent of total GDP (ILO stat). The employment rate fell from 38.8 percent in the second quarter of 2019 to 35.1 percent in the second quarter of 2020. As a result of the crisis, the unemployment rate increased to 9.6 % in the second quarter of 2020. Unemployment rates by gender, we can see that the gender disparity in the unemployed has downsized from five to one. This could be attributed to a high proportion of female participation in essential services such as education and health care.
According to ILO estimates, working hours lost in Egypt as a result of the Covid 19 crisis will be 9.5 percent in 2020. (total weekly hours worked of employed decreased from 1222641.3 in 2019 to 1126411.2 in 2020). In terms of full-time jobs, the loss is 2972 thousand jobs based on 40 hours per week and 2476.7 thousands jobs based on 48 hours per week (ILO estimate stat). It should be noted that The rate of real economic growth fluctuates a lot. between 1991 and 2011. This can be due to local and global economic and political changes. The annual rate of economic growth has risen from 1.13 percent in 1991 to 5.56 percent in 2019. The global financial crisis has had a negative impact on the Egyptian economy, causing the GDP growth rate to fall from 7.16 percent in 2008 to 4.67 percent in 2009. This was offset by an increase in the unemployment rate, which rose from 8.52 percent in 2008 to 9.09 percent in 2009. In 2011,Political instability in Egypt resulted in a significant decrease in GDP growth rate in 2011, from 5.15 percent in 2010 to 1.76 percent However, this was offset by an increase in the unemployment rate from 8.76 percent in 2010 to 11.85 percent in 2011.

Augmented Dickey fuller & Johansen Integration Tests
The aim of this study is to see if there is a link between underutilization of human capital, productivity, and economic growth in Egypt using a diverse range of econometric tests like the Augmented Dickey Fuller test, the Johansen Integration test, and the ARDL model. The first step is to determine if time series are stationary or nonstationary. There are several tests, one of the most important and widely used being the Augmented Dickey Fuller test (ADF)     (6) and (7) show the results of the Johansen Method for the Trace and Maximum Eigenvalue tests indicate that at the 0.05 level of significance there is three cointegrating egn(s). Thus, these findings confirm the presence of a long term relationship between those variables.

ARDL model
Because some variables are stationary in level and others are stationary in first difference. Then, we can utilize ARDL model 6.2.1 First: the impacts of underutilization of human capital on economic growth.  The short run relationship shows that the relation is stable as the cointegration components equal to -0.516 then it is negative less than one and significant. The changes in GDP in significantly affected by changes in employment in agriculture sector, labor productivity and the second lag of unemployment rate. Moreover, F-Bound Test indicates that there is a level relationship at I(0) with significant level 10%.  The short run relationship shows that the relation is stable as the cointegration components equal to -0.11 then it is negative less than one and significant. The changes in labor productivity in significantly affected by changes in its lag, changes in GDP, changes in agriculture sector, time related unemployment.

Conclusion
This paper examines the effects of human capital underutilization on economic growth and productivity. The study relies on annual data from 1991 to 2019. According to the findings, there is a negative relationship between human capital underutilization and economic growth. In the short run, if unemployment falls by 1%, GDP rises by 0.595 percent, but in the long run, other forms of underutilization (such as time-related unemployment) will have an impact on economic growth.
As a result, the long-run effects of underutilization of human capital on economic growth exceed the short-run effects. People and their abilities are viewed as an important means and instrument for achieving economic, social, and political goals. As a result, better utilisation of human capital is regarded as one of the most important goals of any country's economic policy. The main challenge facing utilization of human capital in Egypt is the weak link between education outputs and labor markets needs. As a result, adequate and convenient education and training are required. In addition to some labour market flexibility in order to increase employment, which increases productivity and economic growth.