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

1. Developments in the estimation of the value of human capital for Australia Presented by Jason Russo Australian Bureau of Statistics September 2009

2. Overview • The Australian context • Human capital and its measurement scope • Methodology • Some findings so far • Possible future work

3. Australian context • Intergenerational reports (2002, 2007) • Human capital is a 'headline' policy arena • Policy reforms across governments (COAG) • Yet to fully exploit measures of human capital (distinct from policy indicators)

4. The Australian context • Intergenerational reports (2002, 2007)

5. The Australian context • Intergenerational reports (2002, 2007)

6. The Australian context • Intergenerational reports (2002, 2007)

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

8. How to Measure Human Capital • Measuring capital is challenging • Objective: develop human capital estimates from a national economic accounting perspective • Quantity and valuation dimensions of assets • Quantity dimension: educational attainment, work experience, skill level, etc • Valuation – cost and yield

9. Jorgenson and Fraumeni Lifetime Labour Income Approach • 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 of educational attainment • Stock and flows are integrated through accumulation account

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

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

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

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

14. Estimation Procedures for Human Capital Stock • 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

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

16. 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 enrolment rates • unemployment rates • hours worked • lifetime labour incomes • number of persons who obtained additional qualifications • number of migrants and emigrants

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

18. 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 • Converging gender participation rates • Narrowing gaps between male and female earnings

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

20. 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

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

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

23. 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

24. Future Work • OECD Consortium of partners • Construction of a Human Capital database • Refining estimates • Measuring the contribution of human capital to economic growth / productivity • Richer assessment of longer-term impacts of population ageing • Industry level estimates

25. Questions / Discussion