1. Developments in the estimation of the value of human capital for Australia Presented by Hui Wei Australian Bureau of Statistics Australian Bureau of Statistics 15 October 2008 15 October 2008

2.  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 analyses  Possible future directions Overview

3. What Is Human Capital and Key Definitions  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

4.  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  Valuation  Cost - 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 Capital

5.  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 capital  Many 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 Challenges

6. Measurement Scope of ABS Research Program  The objective is to develop estimates of human capital from national economic accounting perspective  Scope of choices  Confinement to working age population  Focus on education and work experience  Exclude the contribution of human capital to non- market activities

7.  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 Labour Income Approach

8.  Confinement to working age population  Excluding nonmarket activities  Educational credentials as measures of educational attainment  Cohort-based estimation of future earnings  Separate estimation of investment in work experience Modifications and Extensions to JF Framework

9. Lifetime Labour Income = current Income employment rate + Lifetime Labour Income age x age x+1 Growth and discount factors X Backward recursion at 65 Lifetime Labour Income Approach

10. Lifetime Labour Income = current Income employment rate + Lifetime Labour Income aged 65 Growth and discount factors X Backward Recursion =0 aged 66 Lifetime Labour Income = current Income employment rate Lifetime Labour Income Growth and discount factors X aged 64 aged 65

11. Lifetime Labour Income = current Income employment rate + Lifetime Labour Income at age x+1 Growth and discount factors X Lifetime Labour Income With Changing Educational Attainment Lifetime Labour Income at age x Lifetime Labour Income Vocational Education Bachelor Higher Degree

12.  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 Capital Stock

13. Human Capital Accumulation Account Opening balance Investment in education Experience factor Demographic changes Revaluation Omissions & errors Total stock changes Closing balance

14. Construction of Data  Full 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 group  annual gross incomes  school enrollment rates  unemployment rates  lifetime labour incomes  number of persons who obtained additional qualifications  number of migrants and emigrants

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

16. Key Findings from Measures of Per Capita Human Capital  Average human capital for men grew at 0.6% annually  Average human capital for women grew at about 2.8% annually  Overall average human capital grows at 1.3 % annually  Narrowing 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

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

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

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

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

21. Key Messages from Flow Accounting Exercise  Investment 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

22. Some 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

23. Possible Future Directions  Construction 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

24. Questions/Comments