The Value of Human Capital Wealth
AbstractThe value of human capital wealth and its return process are important to quantify in order to study consumption behavior and portfolio allocation. This paper introduces a new approach to measure the value of an economy's total human capital wealth. By assuming that the consumption to wealth ratio is constant, we exploit aggregate consumption data to recover total wealth, and then use household non-human capital wealth data to recover the value of human capital wealth as a residual. Using U.S. data over the period 1952-2007, we find that human capital is approximately three-quarters of total wealth in the aggregate economy, and that this ratio is remarkably stable over time. Applying our methodology to a group of OECD countries yields similar results. We estimate the cointegrating relationship between our estimated measure of human wealth and labor compensation (income) to show that our consumption-based approach estimate of human capital is linked to one based on a labor-income approach. We next calculate the returns to human capital and find them to be as high as equity returns on average but much less volatile; positively correlated with returns on real estate and consumption growth, but negatively correlated to equity returns. Finally, we show that both human capital and equity returns are predictable by human capital's dividend to price ratio.
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Bibliographic InfoPaper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd10-174.
Date of creation: Mar 2011
Date of revision:
Household Wealth; Human Capital; Wealth Effect;
Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-05-24 (All new papers)
- NEP-HRM-2011-05-24 (Human Capital & Human Resource Management)
- NEP-MIC-2011-05-24 (Microeconomics)
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