Measurement of Human Capital and Official Statistics

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Measurement of Human Capital and Official
Statistics
Conference of European Statisticans55th plenary
session Geneva 11-13 June 2007

• Øystein Olsen
• Statistics Norway

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Measurement of human capital 3 papers

• Measuring Australias Human Capital Development
  The Role of Post-school Education and the Impact
  of Population Ageing (ABS)
• Measuring the Education Output of Government
  Using a Human Capital Approach What might
  Estimates Show? (Fraumeni and NBER)
• The Measurement of Human Capital Development,
  also with Reference to Elderly Population (ISTAT)

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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?

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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?

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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

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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)

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The National Wealth Approach Calculating human
capital residually

• Three steps
• Calculate resource rents from all natural
  resources (renewable and non-renewable)
• 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
• Capitalize the income stream from the human
  capital component

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Estimates of National Wealth - a Norwegian example
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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

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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

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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?

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

• Three possible strategies
• Developing databases on human capital for
  research and analyses
• Developing methods for output measures in the
  Government sector (NA)
• Full integration of capital measures in the
  National Accounts