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Measurement of Human Measurement of Human Capital and Official StatisticsCapital and Official Statistics

Øystein Olsen

Statistics Norway

Conference of European Statisticans55th plenary session

Geneva 11-13 June 2007

Measurement of human capital: 3 papers

1. Measuring Australias Human Capital Development: The Role of Post-school Education and the Impact of Population Ageing (ABS)

2. Measuring the Education Output of Government Using a Human Capital Approach: What might Estimates Show? (Fraumeni and NBER)

3. The Measurement of Human Capital Development, also with Reference to Elderly Population (ISTAT)

Why measure human capital?

• Key concept in analysing central issues, such as– Productivity and growth– Impacts of an ageing population– Sustainable development– The returns to education

• OK – but do we need the capital approach?– Estimates of human capital may be compared to other assets– Enables analyses of policy measures in important areas

• Even so – what should be the role for NSOs?

Human capital is an intangible asset!

• Human capital definitions– Wide: Productive capacity of individuals– More narrow: Productive capacity related to knowledge and skills

• Improvements in labour quality may take many forms– Healthcare– Learning in families and neigbourhoods– Formal schooling– On-the-job training

• Empirical studies typically focus on formal education– But stock figures include social capital as well?

Human capital theory in a nutshell

• Education is regarded as an investment

• Investment entails costs – direct costs and opportunity costs of forgone earnings

• To be willing to undertake the investments, individuals must be compensated with higher wages ex post

• For employers to be willing to pay higher wages, individuals with higher education must have higher productivity

Individuals make optimal choices based on net present value of investment – in income or utility terms

Approaches to human capital estimation

• Direct volume measures in NA– Volume indicators for types of education weighted together by unit

costs

• The National Wealth Approach– Implies a ”wide” definition of human capital

• The Jorgenson-Fraumeni approach to measuring output of the education sector (the Australian and the US papers)

– More ”narrow”: Analysing the contribution to national wealth from education

• The ”indicator approach” (the Italian paper)– Human capital as a multidimensional phenomenon– A broad set of human capital-related indicators (OECD: ”Education

at a Glance”)

The National Wealth Approach: Calculating human capital residually

Three steps:

1.Calculate resource rents from all natural resources (renewable and non-renewable)

2.Decompose Net National Income (NNI) into the returns from the inputs i.e. physical capital, natural resources etc. Human capital is calculated as the residual

3.Capitalize the income stream from the human capital component

Estimates of National Wealth - a Norwegian example

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Value human capital

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Value Oil and gas

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The NW Approach: Strengths and weaknesses

• Making the “intangible” comparable to other (measurable) assets

• Based on (mostly) existing national account figures

• Based on rather simple methods and calculations

• The methods are not (necessarily) forward looking

– In particular: demographic trends are not taken into account

• The human capital estimate is a residual!

• There is (usually) no attempt to isolate the contribution to human capital from education

The Jorgenson-Fraumeni Approach

• Based on human capital theory

• Output of the education sector in a year is the increment in human capital stock of the population, i.e. the increase in productive capacity over the lifetime

• The distribution of individual productivity is measured by the corresponding wage differentials

• Relies upon the assumption that market wages reflect the productivity gains attributable to education

• The measure does not capture possible externalities from investments in education

The JF Approach: Strengths and some critical questions

• May uncover underlying structural changes, like

– Demographic: if cohorts entering the labor market are smaller than cohorts leaving, human capital measured by the JF approach will ceteris paribus decline.

– Educational attainment: if cohorts entering the labor market have chosen types of education with on average lower market value than cohorts leaving, human capital measured by the JF approach will ceteris paribus decline.

• Do relative wages reflect the output of the education sector?

• Can we neglect the value of leisure time? (the Australian paper vs. Fraumeni)

• How to deal with the value of basic education?

• Can the complicated calculations be implemented on a regular basis – ie. as official statistics?

Human capital measuring: What should be the role and ambitions of NSOs?

Three possible strategies:

1. Developing databases on human capital for research and analyses

2. Developing methods for output measures in the Government sector (NA)

3. Full integration of capital measures in the National Accounts