Lecture 22. INVESTING IN HUMAN CAPITAL Economics 1490 THE WORLD ECONOMY: GROWTH OR STAGNATION? with Professor Dale W. Jorgenson Lecture 22. INVESTING IN HUMAN CAPITAL November 14, 2017 Harvard University Department of Economics Fall 2017

THE WORLD ECONOMY: GROWTH OR STAGNATION? A. Comparing Economies B. U.S. Crisis and Recovery C. European Slowdown D. Asian Economic Miracles E. Sustainability of Economic Growth F. World Economic Outlook

E. SUSTAINABILITY OF ECONOMIC GROWTH 21. Demographic Projections  22. Investing in Human Capital 23. Fiscal Sustainability 24. Environmental Sustainability 25. Ending Extreme Poverty 

SUPPLEMENTARY READINGS Michael S. Christian (2017), “Net Investment and Stocks of Human Capital in the United States, 1975-2013,” International Productivity Monitor, No. 33, Fall 2017, pp. 128-149. http://www.csls.ca/ipm/33/Christian.pdf Gang Liu (2014), “Measuring the Stock of Human Capital for International and Intertemporal Comparisons,” Ch. 15 in Dale W. Jorgenson, J. Steven Landefeld, and Paul Schreyer, eds., Measuring Economic Stability and Progress, Chicago, University of Chicago Press, pp. 493-544. http://www.nber.org/chapters/c12832.pdf Dale W. Jorgenson, Mun S. Ho, and Kevin J. Stiroh (2005), Information Technology and the American Growth Resurgence, Cambridge, The MIT Press, Ch. 6, pp. 201-290.

THE CONCEPT OF HUMAN CAPITAL Investment in Physical Capital vs. Investment in Human Beings Human Wealth vs. Nonhuman Wealth Market and Nonmarket Labor Incomes Lifetime Labor Incomes and Asset Values

IS HUMAN CAPITAL IMPORTANT? Nonmarket Compensation Includes Leisure Time, Household Production, Investment in Education and Investment in Child-Rearing Nonmarket Labor Compensation is Four Times the Value of Market Compensation The Value of Human Investment Is Four Times the Value of Nonhuman Investment Human Wealth is Ten Times the Value of Nonhuman Wealth Source: Jorgenson and Fraumeni (1989, 1992)

RELATIONSHIPS TO THE LITERATURE MEASURING CAPITAL: Canberra II and Schreyer's OECD Manual (2009), Approved by the United Nations Statistical Commission (2007). INVESTMENT IN EDUCATION: Jorgenson and Fraumeni (1992). INVESTMENT IN HEALTH: Cutler and Richardson (1997), Cutler, Rosen, and Vijan (2006). THE PIONEERS: Machlup (1962), Nordhaus and Tobin (1972), Schultz (1961), and Kendrick (1976).

MEASURING HUMAN CAPITAL The Starting Point: Population Market Labor Data Base: Employment, Hours, and Market Compensation Nonmarket Labor Data Base: Population, Hours, and Imputed Compensation Time Use Surveys Separation into Quantity (Hours) and Price (Wages Plus Fringe Payments) Components

INVESTMENT IN HUMAN CAPITAL Lifetime Incomes for All Individuals Born in That Year Plus: Lifetime Incomes for All Immigrants Plus: Labor Compensation for Formal Schooling (Investment in Education) Each of These Can Be Separated Into Quantity (Number of Individuals) and Price Components

WEALTH BY DEVELOPMENT LEVEL

GROWTH RATES IN HUMAN CAPITAL

WEALTH BY REGIONS

MALE SHARE OF HUMAN CAPITAL

HUMAN CAPITAL BY GENDER

HUMAN CAPITAL AND GDP

STOCK OF HUMAN CAPITAL

DISTRIBUTION OF HUMAN CAPITAL BY GENDER IN 2006 Note: Estimates for Australia refer to 2001, those for Denmark to 2002. Source: OECD human capital project.

DISTRIBUTION OF HUMAN CAPITAL BY EDUCATION LEVEL IN 2006 Note: Estimates for Australia refer to 2001, those for Denmark to 2002. Source: OECD human capital project.

DISTRIBUTION OF HUMAN CAPITAL BY AGE GROUP IN 2006 Note: Estimates for Australia refer to 2001, those for Denmark to 2002. Source: OECD human capital project.

DECOMPOSITION OF HUMAN CAPITAL VOLUMES

MEASURING HUMAN CAPITAL: SUMMARY MEASURING CAPITAL: The Same Principles Apply to Human and Nonhuman Capital. These Were Approved by the United Nations Statistical Commission in 2007. NONMARKET ACCOUNTS: Leisure Time, Household Production, Investment in Education and Child-Rearing, and Additions to the Population Require Nonmarket Accounts. STRUCTURE OF THE ACCOUNTS: Human Capital Appears in All Parts of the National Accounts; the Structure Remains the Same.

MEASURING LABOR INPUT Labor Input is the Flow of the Services of Human Capital into the Labor Market The Starting Point: Employed Labor Force Employment, Hours Worked and Market Labor Compensation Separation into Quantity (Hours) and Price (Wages Plus Fringe Payments) Components

INCORPORATING HUMAN CAPITAL INTO THE MEASUREMENT OF LABOR Hours Worked and Labor Compensation Are Cross-Classified by Age, Gender, Education, and Class of Worker. The Growth Rate of Labor Input Is a Weighted Average of the Growth Rates of the Hours Worked by Each Type of Labor The Weights Are the Shares of Each Type of Labor in Total Labor Compensation Hours Worked Refers to an Unweighted Sum of Hours Worked by All Types of Labor Input

CLASSIFICATION OF CIVILIAN LABOR FORCE

LABOR QUANTITY AND PRICE Growth Rate of Labor Input Labor Compensation Weights Two-Period Average Value Shares Price of Labor Input

LABOR QUALITY AND ITS DECOMPOSITION Labor Quality is the Ratio of Labor Input to Hours Worked. Decomposition of Labor Quality Labor Input Sub-Indexes

AGGREGATE QUALITY AND FIRST ORDER APPROXIMATION

LABOR VOLUME VS. EDUCATION ALONE

DISTRIBUTION OF EDUCATION ATTAINMENT

COMPENSATION BY EDUCATION ATTAINMENT

LABOR INPUT AND HUMAN CAPITAL: SUMMARY Measuring Investment in Human Capital Measuring Labor Input Labor Quantity and Price Labor Quality and Its Decomposition Increased Educational Attainment is the Primary Source of Labor Quality Growth