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Black-White Differences in the Insurance Value of Human Capital

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  • Alexander Whalley

Abstract

This paper studies the implications of black-white differences in uninsurable labor market risk for racial differences in the value of human capital. Two approaches to estimate the value of human capital in the presence of heterogeneous labor market risk and preferences for risk are implemented. A simple asset pricing approach is applied to consumption and labor income streams to estimate the shadow value of human wealth for an individual explicitly accounting for the individual's preferences for risk and expected labor income risk. Differences in these values between high school dropouts and high school graduates provide estimates of the risk-adjusted value of human capital for both black and white individuals. A method of estimating the effect of education on the risk-adjusted rate of return is also pursued. The results of both strands of the analysis indicate that human capital is a more valuable -- and less risky -- asset for blacks than for whites. A simple calculation shows the results imply the risk-adjusted rate of return to high school graduation is up to 31% higher for blacks than whites

Suggested Citation

  • Alexander Whalley, 2004. "Black-White Differences in the Insurance Value of Human Capital," Econometric Society 2004 North American Summer Meetings 575, Econometric Society.
    • Handle: RePEc:ecm:nasm04:575
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    More about this item

    Keywords

    racial differences; human capital; risk aversion; uncertainty; stochastic income process;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • I2 - Health, Education, and Welfare - - Education
    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination

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