Developments in the estimation of the Developments in the estimation of the value of human capital for Australiavalue of human capital for Australia

Presented by Hui WeiPresented by Hui Wei Australian Bureau of Statistics Australian Bureau of Statistics

15 October 200815 October 2008

What is human capital and its measurement scope?

Methodology: lifetime labour income accounting framework

Key experimental statistics and major findings so far

Relevance to policy analysesPossible future directions

OverviewOverview

What Is Human Capital and Key What Is Human Capital and Key DefinitionsDefinitions

Human capital can be broadly defined as productive capacity embodied in individuals

Input view of human capital: innate ability, education, training, experience, health care, etc.

Output view of human capital: enhanced earnings, better health, informed political participation, better parenting, etc.

Human capital theory focuses on relationship between education and wages

Economic definition of human capital: knowledge and skills embodied in individuals that is related to economic activities

Distinction between embodied and disembodied human capital

Any measure of an asset has quantity and valuation dimensions

Quantity dimension: educational attainment, work experience, skill level, test scores and other indicators of cognitive and noncognitive abilities

ValuationCost - the value of resources devoted to human capital formation

Yield methods - the value of output created in the production of human capital

Two methods are same in theory but vastly different in practice

How to Measure Human How to Measure Human CapitalCapital

Capital theory is one of the most difficult and contentious topics in economic theory

The measurement of capital is one of the most complex dimensions in the official national accounting system

More challenging for human capitalMany unknown factors that serve as inputs in the production of human capital

Data available does not directly measure the theoretical concept of human capital

The value of human capital has to be imputed

Key ChallengesKey Challenges

MeasurementMeasurement Scope of ABS Research Scope of ABS Research ProgramProgramThe objective is to develop estimates of human capital from national economic accounting perspective

Scope of choicesConfinement to working age populationFocus on education and work experienceExclude the contribution of human capital to non-market activities

Directly designed for national accounting system and applied to U.S. data

Comprehensive measures of human capital: human capital stock, investment in human capital and human capital services

Human capital is measured as discounted present value of labour income flows over life cycle

Accounting for the effect on human capital growth of increasing educatonal attainment

Stock and flows are integrated through accumulation account

Jorgenson and Fraumeni Lifetime Jorgenson and Fraumeni Lifetime Labour Income ApproachLabour Income Approach

Confinement to working age populationExcluding nonmarket activitiesEducational credentials as measures of educational attainment

Cohort-based estimation of future earnings

Separate estimation of investment in work experience

Modifications and Extensions Modifications and Extensions to JF Frameworkto JF Framework

Lifetime Labour Income =

current Income

employment rate+ Lifetime Labour

Income

age xage x+1

Growth and discount factorsX

Backward recursion

at 65

Lifetime Labour Income Lifetime Labour Income ApproachApproach

Lifetime Labour Income =

current Income

employment rate+

Lifetime Labour Income

aged 65

Growth and discount factorsX

Backward RecursionBackward Recursion

=0aged 66

Lifetime Labour Income =

current Income

employment rate

Lifetime Labour Income

Growth and discount factorsX

aged 64 aged 65

Lifetime Labour Income =

current Income

employment rate

+Lifetime Labour

Income at age x+1

Growth and discount factorsX

Lifetime Labour Income With Lifetime Labour Income With ChangingChanging Educational Educational AttainmentAttainment

Lifetime Labour Income at age x

Lifetime Labour Income

Lifetime Labour Income

Lifetime Labour Income

Vocational Education

Bachelor Higher Degree

Construct a database on demographic accounts and market labour activities

Model the time-paths of income streams for wage-salary earners

Apply per capita measures of lifetime labour income to all working age persons

Aggregating across all sex/education/age groups to derive the value of human capital stock

Estimation Procedures for Human Estimation Procedures for Human Capital StockCapital Stock

Human Capital Accumulation Human Capital Accumulation Account Account

Opening balanceInvestment in educationExperience factorDemographic changesRevaluationOmissions & errorsTotal stock changes Closing balance

Construction of DataConstruction of DataFull Australian Censuses for the years 1981, 1986, 1991,1996 and 2001

Population is classified by sex, educational attainment and single year age

Key variables for each groupannual gross incomesschool enrollment ratesunemployment rateslifetime labour incomesnumber of persons who obtained additional qualifications

number of migrants and emigrants

Per Capita Human Capital for working-Per Capita Human Capital for working-age population (thousands of 2001 age population (thousands of 2001 Australian dollars)Australian dollars)

1981 1986 1991 1996 2001

Male

Higher Degree 1034.2 1051.2 1043.5 1050.9 1047.6

Bachelor Degree 984.3 1019.3 1031.5 1041.2 1034.9

Skilled Labour 618.7 636.9 659.5 663.0 657.7

Unqualified 481.5 485.3 501.5 497.2 490.9

Average 552.1 569.0 598.5 613.3 621.4

Female

Higher Degree 694.8 745.2 801.4 845.2 872.0

Bachelor Degree 627.8 673.3 697.7 738.0 745.9

Skilled Labour 360.2 394.3 443.3 456.4 472.3

Unqualified 202.2 231.3 273.2 289.5 300.9

Average 237.8 276.4 333.5 374.6 410.3

Total average 396.3 424.0 466.4 493.8 515.3

Key Findings from Measures of Key Findings from Measures of Per Capita Human Capital Per Capita Human Capital Average human capital for men grew at 0.6% annuallyAverage human capital for women grew at about 2.8% annuallyOverall average human capital grows at 1.3 % annuallyNarrowing gaps may be mainly due to

increasing labour force participation rate for women and decreasing labour force participation rate for men

narrowing gaps between male and female earnings

Human Capital Stock in Australia (billions Human Capital Stock in Australia (billions of 2001 Australian dollars)of 2001 Australian dollars)

1981 1986 1991 1996 2001

Male

Higher Degree 42.9 52.6 92.2 127.0 161.4

Bachelor Degree 244.1 315.6 448.2 607.4 733.2

Skilled Labour 840.7 943.7 1039.9 1143.2 1259.8

Unqualified 1541.0 1685.3 1889.7 1951.0 1957.5

Sub-total 2668.7 2997.1 3470.0 3828.6 4111.8

Female

Higher Degree 9.5 14.0 30.4 55.7 90.6

Bachelor Degree 106.5 160.3 305.3 489.4 663.8

Skilled Labour 349.4 421.0 429.2 489.0 553.7

Unqualified 1251.8 1353.1 1569.4 1623.9 1616.4

Sub-total 1717.2 1948.4 2334.3 2658.1 2924.4

Total 4385.9 4945.5 5804.3 6486.7 7036.2

Key Findings from Measures of Key Findings from Measures of Human Capital StockHuman Capital StockSignificantly increased proportions of more-educated workers, in particular for womenAnnual growth rate of human capital stock for men is 2.0% between 1981-2001Annual growth rate of human capital stock for women is a massive 4.2% between 1981-2001Overall growth rate is 2.8% between 1981-2001

Human Capital Accumulation Accounts, Human Capital Accumulation Accounts, Males (millions of 2001 Australian Males (millions of 2001 Australian dollars)dollars)

1981-86 1986-91 1991-96 1996-2001

Opening Balance 2,668,736 2,997,060 3,470,005 3,828,618

Investment in Education Investment in post-school education 62,060 81,564 103,468 102,938 Depreciation on post-school investment -30,378 -35,773 -51,368 -68,249 Net formation by post-school investment 31,682 45,791 52,100 34,690Experience Factor Gross on-the-job investment 319,558 308,898 296,896 274,426 Depreciation on the job investment -178,938 -225,414 -276,644 -313,712 Net on-the-job investment 140,620 83,484 20,251 -39,286Persons Turning Working Age 485,721 554,633 534,861 549,963

Ageing of Base Level Human Capital -432,825 -437,324 -427,979 -410,168

Immigrants 136,760 208,898 155,619 184,047

Revaluation 76,679 131,589 151,234 120,925

Omissions & Errors (including emigrants) -110,314 -114,125 -127,473 -157,034

Changes in Human Capital Stock 328,323 472,945 358,613 283,136

Closing Balance 2,997,060 3,470,005 3,828,618 4,111,754

Human Capital Accumulation Accounts, Human Capital Accumulation Accounts, Females (millions of 2001 Australian Females (millions of 2001 Australian dollars)dollars)

1981-86 1986-91 1991-96 1996-2001

Opening Balance 1,717,170 1,948,398 2,334,262 2,658,080

Investment in Education

Investment in post-school education 37,593 63,876 87,765 90,750 Depreciation on post-school investment -11,419 -15,760 -24,384 -37,642 Net formation by post-school investment 26,174 48,116 63,380 53,108Experience Factor Gross on-the-job investment 123,785 110,013 140,482 145,821 Depreciation on the job investment -111,043 -151,766 -195,887 -220,242 Net on-the-job investment 12,742 -41,754 -55,405 -74,420Persons Turning Working Age 340,898 404,026 394,857 410,493

Ageing of Base Level Human Capital -226,040 -217,106 -255,622 -271,219

Immigrants 90,999 145,939 120,448 136,928

Revaluation 55,078 113,785 128,765 89,715

Omissions & Errors (including emigrants) -68,623 -67,143 -72,605 -78,243

Changes in Human Capital Stock 231,228 385,864 323,818 266,362

Closing Balance 1,948,398 2,334,262 2,658,080 2,924,442

Key Messages from Flow Key Messages from Flow Accounting ExerciseAccounting ExerciseInvestment in education grew at a rapid pace, in particular for women

Magnitudes of depreciation on education capital trended up strongly

Net investment in work experience saw significant negative growth

Revaluation is a major driver of stock changes

Some Applied StudiesSome Applied Studies Measuring option values and economic benefits of completing base level education

Shaping ‘official’ statistics on rates of return to education

Quantifying the contribution of human capital to economic growth

Assessing the impact of population ageing on human capital development

Possible Future DirectionsPossible Future DirectionsConstruction of database linking Census data, labour force statistics, data on labour earnings and hours of work, education and migration statistics

Refining estimates by relaxing some assumptions and incorporating latest developments in relevant fields

Measuring the contribution of human capital to social well-being

Construction of education and health satellite accounts using human capital approach

Questions/CommentsQuestions/Comments