2. HUMAN CAPITAL: DEVELOPMENT AND CHALLENGES

Human capital in this report is understood as an aggregate of the knowledge, skills, talents and abilities possessed and used by individuals for their economic, social and personal benefit. The value of human capital for people, economies and societies depends on how well it is developed, and on the extent to which it is then available and used.

Historically, Ukraine has benefited from a strong education system that has propelled the country's economic and social development. Since independence, Ukraine has been able to sustain many of its comparative advantages in education, contributing to high levels of educational attainment and human capital development as shown in Table 2. However, the skills demanded by the growing economic sectors are different to those supplied by the education system, and over time reforms have been slowed down or delayed. According to recent estimates of wealth in 141 countries, human capital comprises only 34% of total national wealth in Ukraine, compared to 51% in lower middle-income countries and 62% in Europe and Central Asia (World Bank, 2019a). Human capital has therefore been a relatively weak factor of production in driving economic growth.

TABLE 2 SELECTED HUMAN CAPITAL DEVELOPMENT INDICATORS, UKRAINE

	Year	Value
(1) Population structure (%)
0–24	2015	25.9
25–64		58.2
65+		15.9
0–24	2025	26.0
25–64		55.1
65+		18.8
(2) Average years of schooling	2017	11.3
(3) Expected years of schooling	2017	15
(4) Learning-adjusted years of schooling	2017	10.2
(5) Adult literacy	2015	99.8
(6) Global Innovation Index Rank (x/126)	2018	43.0
(7) Global Competitiveness Index Rank (x/137)	2017-18	81.0
(8) Digital Readiness Index Rank (x/118)	2018	54 accelerate

Sources: (1) UN Population Division, World Population Prospects,2017 Revision; (2) UNESCO, UIS database (3) and (4) World Bank (2018), Human Capital Index; (5) UNESCO, UIS database; (6) World Economic Forum, The Global Innovation Index, 2018; (7) World Economic Forum, Global Competitiveness Index 4.0, 2018; (8) Cisco, Country Digital Readiness, 2018.

Ukraine's educational attainment level is high. In 2017, only 2% of the active population had primary education or lower, 45.1% had secondary education and 52.9% had completed or were in tertiary education. Gross enrolment rates in primary education are almost 100% (99.88%). They are also high in secondary education – 96.79% (2014 data)[10] See http://uis.unesco.org/country/UA.
. Between 1980 and 2010, the average years of schooling for the population aged 15+ increased nearly threefold to 11.3 years (Table 2). Educational attainment for the average Ukrainian now exceeds that of other high-income countries in Europe.

Ukraine has also become one of the top countries in terms of the proportion of the population that participates in higher education, a trend that accelerated rapidly after independence. One of the reasons for this was that, prior to the adoption of the new Law on Higher Education in 2014, colleges and technikums were associated with the higher education system as higher education institutions of 1st and 2nd level accreditation. This new law stipulates that higher education must adhere to the Bologna principles, which moves these institutions away from higher education from 2020. Nevertheless, as of the 2017/2018 academic year, the higher education coverage rate was 82%. As Figure 3 shows, the proportion of 30 to 35-year-olds who had completed tertiary education reached 63% in Ukraine in 2018 while the EU average was 40%.

FIGURE 3 proportion of 30 to 35-year-oldS who had completed tertiary education, 2018 (%)

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Source: Eurostat

The expansion of higher education started soon after Ukraine's independence when the higher education institutions were allowed to start charging tuition fees, in addition to publicly financed enrolment. The private higher education sector began to grow. At the same time, VET enrolments and enrolments in colleges and technikums continued to decline, as shown in Figure 4.

FIGURE 4 Number of graduates of vocational and technical schools, colleges and universities, 1990–2013

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SOURCE: Kupets, 2016, based on State Statistics Service of Ukraine enrolment data.

This trend has led to over-education whereby higher education graduates are employed in jobs requiring lower levels of education. According to a school-to-work transition study conducted by the ILO, the share of young workers in mismatched occupations totalled 37.2%, with the majority in jobs for which they were over-educated (31.7%) while 40.2% of young people employed in elementary occupations had a tertiary degree (Libanova et al, 2016). The highest mismatch was observed among college graduates – 55% were in mismatched occupations (Kupets, 2016).

Ukraine's educational attainment highlights the prominence of credentials rather than skills and qualifications. The rapid expansion of the higher education system has produced an increasing number of graduates, who have ended up in jobs that do not require a university-level education. Thus, a large supply of tertiary education graduates has inflated the relevance of credentials. This has contributed to a mismatch between education level and job requirements, particularly among young university graduates. Consequently, the share of tertiary-educated workers among the unemployed population increased from 32% in 2004 to 47% in 2013 (Kupets, 2016). Moreover, as of 2013, 40% of young university graduates were working in lower-level jobs that did not require university-level education, compared to 29% of prime-age and older workers. A skills mismatch is also identified at company level, as close to 40% of employers reported significant skills gaps that harm their businesses[11] National reporting framework: B 1.1.
.

Thus, limited labour market relevance and poor governance have reduced public confidence in skills and qualifications and diverted the population's focus towards credentials, which threatens Ukraine's human capital. Low participation and declining enrolment in VET are a consequence of this phenomenon.

The share of VET enrolment in upper secondary education in Ukraine is 30.5% (UNESCO, UIS database, 2018). The new government programme[12] See https://program.kmu.gov.ua/ministry/ministerstvo-osviti-i-nauki-ukraini.
adopted in September 2019 has an ambitious target: to increase this level of enrolment to 45% by 2024 and to cut the time needed by VET graduates to find employment that matches their qualifications. The government programme aims to divert enrolments away from higher education and more towards vocational education (covering both secondary VET and professional pre-higher education) by improving the quality and relevance of provision and destigmatising VET among learners and the population as a whole.

In order to obtain a diploma proving that they have undertaken a complete secondary education (currently 11 years of education, which will be extended to 12 years of schooling as per the New Ukrainian School concept), learners need to sit the EIT, which is also required for admission to higher education institutions. The EIT is equivalent to the matriculation exam in other countries and is run by the Ukrainian Centre for Education Quality Assessment. According to the Ministry of Education and Science, the EIT results are used as a proxy to monitor the overall quality of secondary general education.

Ukraine spends more of its GDP on education than most EU and OECD countries. After a steep devaluation of the hryvnia in 2013, public education spending declined by 35% in real terms over two years. Between 2013 and 2017, budget financing shrank from 7.2% to 6.0% of GDP. The decline brought Ukraine closer to international benchmarks but spending still remains high: with public spending on education at 6.0% of GDP and with private spending adding another percentage point of GDP, Ukraine's spending on education is among the highest in the world[13] See https://www.worldbank.org/en/news/opinion/2018/09/12/why-ukraines-educa….
. This is driven partly by the law which requires the state to allocate at least 7% of GDP to education. Since independence, the overall number of students in school has declined by 41% from 7.1 to 4.2 million. However, over the same period, the number of schools declined by only 11% and the number of teachers fell by just 5%. This has decreased the student-teacher ratio to 1:9[14] According to the UNESCO database, the pupil/teacher ratio in 2018 was 13 in primary education and 7.3 in secondary education.
and resulted in one of the smallest average class sizes in the world. This in turn has a considerable impact on the level of current expenditure on education. Out of the 6% of GDP spent on education, 2.8% of GDP went to general secondary schools, 1.3% to higher education institutions, 0.9% to preschools and early childhood education and 0.3% to VET.

The Law on Education promises to quadruple the starting salary of teachers by 2023. The World Bank (World Bank, 2018) estimates that such an increase (and without a change to the various bonuses and top-ups that amount to nearly half the remuneration received by a teacher) would result in spending on education escalating from 6% to 8.8% of GDP by 2023, which would be worrying for Ukraine from a fiscal point of view. Although the number of secondary general and vocational schools has been declining in recent years, the school networks require serious optimisation and restructuring in line with demographic developments and student demand to ensure better value for high spending.

Like secondary general education, VET institutions are financed by public sources. Almost the entire budget is spent on current expenditure, including staff costs, while other types of spending, such as capital investment, are crowded out. VET institutions' own earnings from income-generating activities remain underdeveloped, and range on average from 2% to 12% of total funding, depending on the region. While capital expenditure on VET increased in absolute terms over the last three years, it accounted for only 1 to 2% of total public spending[15] National reporting framework: E 4.1.
.

According to the World Bank Human Capital Index, learning-adjusted years of schooling totalled 10.2 in 2017 compared to average years of schooling of 11.3 in the same year. This indicates a need to reduce the gap and improve the quality of education and learning outcomes.

Ukraine participated in the OECD Programme for International Student Assessment (PISA) for the first time in 2018. Ukraine's overall results are optimistic. With an average score of 462.7 for mathematics, science and reading, it outperforms many EU countries (Malta, Greece, Cyprus, Bulgaria and Romania). However, the share of low performing students remains higher than the EU average (Table 3), which needs to be addressed in the New Ukrainian School reform.

TABLE 3 share of 15-year-old low achievers in PISA

		2009	2012	2015	2018
Ukraine	Reading	-	-	-	25.9
	Mathematics	-	-	-	35.9
	Science	-	-	-	26.4
EU average	Reading	19.7	17.8	19.7	21.7
	Mathematics	22.3	22.1	22.2	22.4
	Science	17.8	16.6	20.6	21.6

Source: OECD PISA 2018 database.

Ukraine's labour market faces multiple challenges, including an ageing labour force, low internal labour mobility, high informal employment and different types of skills mismatch, particularly high levels of over-qualification. The rapidly ageing population exacerbates employment challenges by reducing the number of people in the labour force. With the recent trend of growing external labour migration, a third of which consists of young Ukrainians under the age of 35, the diminishing working-age population pool puts pressure on economic development and sustained growth.

The activity rate fell from 65% in 2013 to 62.6% in 2018 (69% for males and 56.8% for females) (Figure 5). Activity rates for women in Ukraine are traditionally lower than male activity rates. This is due to the overall longer duration of women's education, the fact that they manage household and childcare burdens, and the limited support services available for working mothers. The employment rate has also been decreasing: from 60.3% in 2013 to 57.1% in 2018 (62.1% for males and 52.5% for females). The overall unemployment rate increased from 7.2% in 2013 to 9.5% in 2017, but declined slightly to 8.8% in 2018. The long-term unemployment rate is low and increased only slightly from 1.5% in 2013 to 1.9% in 2018 (ETF, 2019, unpublished).

The youth unemployment rate (among 15 to 24-year-olds) fell from 23% in 2016 to 18.19% in 2017 and then to 17.9% in 2018. The NEET rate decreased from 16.2% in 2013 to 14.5% in 2018, which is in line with the EU average of 14.9% in 2018. These moderate labour market indicators would suggest that the majority of this age group is still in education in Ukraine.

In 2018, 44% of the people registered as unemployed with the State Employment Service (SES) had higher education, 37% had vocational education and 19% had general secondary education. In terms of the occupational groups of those who were registered as unemployed, equipment and machinery operators and maintenance workers were in the lead (19.9%), followed by trade and service sector occupations (15.1%), elementary occupations (14.1%), and top public officials and managers (13.2%)[16] Data provided by the State Employment Service of Ukraine. This consists of analytical and statistical information on supply and demand in the labour market by profession and activity type. Available at: https://www.dcz.gov.ua/analitics/68.
.

FIGURE 5 Employment and activity rates in Ukraine

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Source: Eurostat.

Ukraine's labour productivity level (the value added per input) is among the lowest of all the transition economies. This reduces the country's competitiveness, making it difficult to attract investment and develop economic opportunities. Informal employment is also a serious challenge for the Ukrainian economy. According to national data, about 3.5 million people were informally employed in 2018. Informality is high in agriculture (42.9%), but also in the wholesale and retail trade (18.2%) and construction (15.9%). Informal employment is most widespread in the 40 to 49 age group[17] Informal employment by types of economic activity. Data available from State Statistics Service of Ukraine. Available at: http://www.ukrstat.gov.ua/operativ/operativ2018/rp/eans/nzn_ved_2018_u….
.

A highly educated workforce does not produce wealth or increase productivity in the economy but it provides better job opportunities for individuals and reduces poverty incidence. Although there is limited international comparative data on learning outcomes (World Bank Human Capital Index 2018), there is clear evidence of the importance of education for labour market outcomes in Ukraine. Evidence suggests that tertiary education provides much better employment prospects and economic returns, which clearly drives the high demand for tertiary education – it is the top priority for most young Ukrainians (World Bank, 2019a). The disconnection between Ukraine's education sector and the needs of the labour market creates the wrong incentives both for students and educational institutions. However, many young Ukrainians appear to be increasingly over-educated relative to the types of jobs that are available in the labour market.

Figure 6 Labour market outcomes by LEVEL OF education, 2018 (%)

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Source: Own calculations based on State Statistics Service of Ukraine labour force survey data

Although economic returns vary by field of study, all forms of tertiary education provide better outcomes than general secondary or vocational education. Therefore, students pursue tertiary education at any cost, regardless of field, quality or relevance of the programme. On average, over 67% of 15 to 70-year-old Ukrainians who have a college or a university degree were employed in 2018, compared to 52,7% of people with an upper secondary or post-secondary, non-tertiary (vocational) qualification and 15,5% of people with incomplete upper secondary education. Although higher educated workers are less likely to be unemployed, unemployment rates decrease only slightly with education (Figure 6).

Students therefore make their career and education choices without considering employment prospects or the needs of the labour market. At the same time, employers find that educational credentials do not accurately signal workers' underlying skills and competences. This leads to skills mismatches, over-education in the labour market and reliance on social connections and capital as well as alternate forms of skills assessments (World Bank, 2019a).

Higher education is also perceived as a way to succeed in life and combat poverty, as evidenced by the youth transition surveys conducted in 2013 and 2015 in Ukraine (Libanova et al, 2016). The results are illustrated in Figure 7. The higher the level of education of respondents, the better off they feel in society. Among employed young people, the proportion of young people with higher education is notably higher than the corresponding proportion among unemployed and economically inactive youth. Vocational education, on the other hand, remains undervalued. Despite evidence of an equal or higher wage premium among VET graduates, 73.2% of young people who planned to complete higher education expressed an unwillingness to enrol in VET even if they had a better chance of finding a stable job at a higher wage. The survey shows that, in 2015, only 13.7% considered participating in VET, while 84.6% planned to attain higher education.

Figure 7 poverty by education level

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Source: School-to-work transition study, 2016

When asked why they would reject vocational education as an option, nearly half (48.2%) claimed that higher education was necessary for their desired future employment and 42.5% believed that higher education would bring them greater earnings in the future. One-quarter (25.2%) discarded vocational education due to its low social status, while the families of 14.7% of young people would object to them enrolling in VET.

Thus, changing the mindset and attitude of the population on VET will not be an easy task but it needs to be the focus of the government in the years to come. Low participation in VET and its lack of attractiveness will not allow the education system to supply sufficient number of skilled workers to meet future demand in the economy if serious long-term commitments are not made and actions are not taken today.

Recent migration studies suggest that, relative to the working-age population, migrants are less likely to be tertiary-educated, but more likely to have vocational or upper secondary education (Luecke and Saha, 2019). The main destinations for migrants are Poland, Russia and Italy. In addition to permanent and temporary residence permits and work visas, Poland has given 1.7 million short-term work authorisations to Ukrainians, increasing the total number of migrants to nearly 2 million in 2017. As regards the migrants' educational background, Poland attracts workers with vocational education, mainly in elementary occupations, while Russia receives the highest share of professionals. Labour force survey statistics report on the over-education of migrants in jobs that do not require any education: 46% of migrants in Poland and 56% in Italy but only 21% in Russia. With rising emigration to Poland, the reported shortages of industrial workers in Ukraine could become more pertinent in coming years (Figure 8).

FIGURE 8 MIGRANTS' Education level by destination country[18] State Statistics Service of Ukraine, labour force survey, 2018.
, 2017 (in %)

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According to the National Bank of Poland and the National Bank of Ukraine, around 1.4 million Ukrainians migrated to Poland for work in 2016; this number increased to almost 2 million in 2017. However, labour migration tends to be short term and cyclical. Working abroad sustains the livelihoods of at least 2 million Ukrainian migrants and their dependents. Many migrants are members of a household in Ukraine. Remittances have been increasing in recent years and amounted to 8.5% of

GDP in 2018[19] National Bank of Ukraine, remittances data 2018.
. The remittances sent by migrants in Poland alone contributed USD 3.1 billion to Ukraine's economy in 2017. However, some of the remittances come from IT specialists who physically reside in Ukraine and receive their income by working for foreign companies[20] National reporting framework: B 1.3.
. Wages have grown somewhat faster in the economic regions where there has been a greater increase in migration. However, real wage growth since 2015 represents mostly a recovery from the 2014 economic crisis.

Other risks to the development of the Ukrainian labour market are the increase in the migration of labour to other countries and the gradual loss of professional skills by those who could not find jobs corresponding to their occupation and qualification level. According to the State Statistics Service of Ukraine, almost 36.1% of labour migrants worked in jobs that did not require any qualifications. Only 26.8% of migrant workers worked in accordance with their qualifications (State Statistics Service, 2017). Prevalence of emigration (migrants/working-age population) is highest in Western Ukraine, where the employment rate, gross output and wages are also the lowest (Figure 9). Relative to the working-age population, migrants are less likely to be tertiary-educated, but more likely to have a vocational education: 34% of migrants have VET versus 24% of the working-age population, while only 16% of migrants have higher education versus 26% of the working-age population (Luecke and Saha, 2019).

FIGURE 9 Migrants, population and gross regional product, by economic region[21] State Statistics Service of Ukraine, labour force survey for 2017
, 2017 (in %)

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Another significant phenomenon is a growing trend of educational migration among young people[22] National reporting framework: A 3.1.
. Ukrainian employers have argued that one-third of enterprises are affected by labour migration[23] National reporting framework: B 1.3.
. Even higher salaries offered by export-oriented industries have not stopped the migration flows of skilled workers who leave the country due to the deteriorating quality of life.