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The Value and Risk of Human Capital

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  • Luca Benzoni
  • Olena Chyruk

Abstract

Human capital embodies the knowledge, skills, health and values that contribute to making people productive. These qualities, however, are hard to measure, and quantitative studies of human capital are typically based on the valuation of the lifetime income that a person generates in the labor market. This article surveys the theoretical and empirical literature that models a worker?s life-cycle earnings and identifies appropriate discount rates to translate those cash flows into a certainty equivalent of wealth. This paper begins with an overview of a stylized model of human capital valuation with exogenous labor income. The authors then discuss extensions to this framework that study the underlying economic sources of labor income shocks, the choices, such as work, leisure, retirement and investment in education, that people make over their life and their implications for human capital valuation and risk.

Suggested Citation

  • Luca Benzoni & Olena Chyruk, 2015. "The Value and Risk of Human Capital," Working Paper Series WP-2015-6, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-2015-06
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    References listed on IDEAS

    as
    1. Luca Benzoni & Pierre Collin‐Dufresne & Robert S. Goldstein, 2007. "Portfolio Choice over the Life‐Cycle when the Stock and Labor Markets Are Cointegrated," Journal of Finance, American Finance Association, vol. 62(5), pages 2123-2167, October.
    2. Lance Lochner & Alexander Monge-Naranjo, 2012. "Credit Constraints in Education," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 225-256, July.
    3. Diego Restuccia & Carlos Urrutia, 2004. "Intergenerational Persistence of Earnings: The Role of Early and College Education," American Economic Review, American Economic Association, vol. 94(5), pages 1354-1378, December.
    4. Huggett, Mark & Ventura, Gustavo & Yaron, Amir, 2006. "Human capital and earnings distribution dynamics," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 265-290, March.
    5. Francisco Gomes & Alexander Michaelides, 2005. "Optimal Life‐Cycle Asset Allocation: Understanding the Empirical Evidence," Journal of Finance, American Finance Association, vol. 60(2), pages 869-904, April.
    6. Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 41-71, September.
    7. repec:pri:cepsud:238kaplan is not listed on IDEAS
    8. Luca Benzoni & Olena Chyruk, 2009. "Investing over the life cycle with long-run labor income risk," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 33(Q III), pages 29-43.
    9. Disney, Richard & Emmerson, Carl & Wakefield, Matthew, 2006. "Ill health and retirement in Britain: A panel data-based analysis," Journal of Health Economics, Elsevier, vol. 25(4), pages 621-649, July.
    10. Deborah J. Lucas & Stephen P. Zeldes, 2009. "How Should Public Pension Plans Invest?," American Economic Review, American Economic Association, vol. 99(2), pages 527-532, May.
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    Cited by:

    1. Hanushek, Eric A. & Kinne, Lavinia & Lergetporer, Philipp & Woessmann, Ludger, 2020. "Culture and Student Achievement: The Intertwined Roles of Patience and Risk-Taking," Rationality and Competition Discussion Paper Series 249, CRC TRR 190 Rationality and Competition.
    2. Giovanni Gallipoli & Brant Abbott, 2017. ""Permanent Income" Inequality," 2017 Meeting Papers 1033, Society for Economic Dynamics.
    3. A.V. Sultanova & O.S. Chechina, 2016. "Human Capital as a Key Factor of Economic Growth in Crisis," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 71-78.
    4. Borys Grochulski & Yuzhe Zhang, 2019. "Wealth Effects with Endogenous Retirement," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 173-200.
    5. Angerer, Silvia & Bolvashenkova, Jana & Glätzle-Rützler, Daniela & Lergetporer, Philipp & Sutter, Matthias, 2021. "Children's Patience and School-Track Choices Several Years Later: Linking Experimental and Field Data," IZA Discussion Papers 14401, Institute of Labor Economics (IZA).
    6. Silvia Angerer & Jana Bolvashenkova & Daniela Glätzle-Rützler & Philipp Lergetporer & Matthias Sutter, 2021. "Children’s patience and school-track choices several years later: Linking experimental and field data," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2021_12, Max Planck Institute for Research on Collective Goods.

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    More about this item

    Keywords

    human capital; labor income; employment;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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