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The Value of Human Capital Wealth

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  • Julian di Giovanni
  • Akito Matsumoto

Abstract

The 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.

Suggested Citation

  • Julian di Giovanni & Akito Matsumoto, 2011. "The Value of Human Capital Wealth," Global COE Hi-Stat Discussion Paper Series gd10-174, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hst:ghsdps:gd10-174
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    File URL: http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd10-174.pdf
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    References listed on IDEAS

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    1. Charles Engel & Akito Matsumoto, 2009. "The International Diversification Puzzle When Goods Prices Are Sticky: It's Really about Exchange-Rate Hedging, Not Equity Portfolios," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(2), pages 155-188, July.
    2. Motohiro Yogo, 2004. "Estimating the Elasticity of Intertemporal Substitution When Instruments Are Weak," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 797-810, August.
    3. Trinh Le & John Gibson & Les Oxley, 2003. "Cost- and Income-based Measures of Human Capital," Journal of Economic Surveys, Wiley Blackwell, vol. 17(3), pages 271-307, July.
    4. Christopher D. Carroll & Misuzu Otsuka & Jirka Slacalek, 2006. "How Large Is the Housing Wealth Effect? A New Approach," NBER Working Papers 12746, National Bureau of Economic Research, Inc.
    5. Ravi Jagannathan & Zhenyu Wang, 1993. "The CAPM is alive and well," Staff Report 165, Federal Reserve Bank of Minneapolis.
    6. Luis M. Viceira & Adi Sunderam & John Y. Campbell, 2008. "Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds," 2008 Meeting Papers 355, Society for Economic Dynamics.
    7. Stijn Van Nieuwerburgh & Hanno Lustig, 2005. "The Returns on Human Wealth: Good News on Wall Street is Bad News on Main Street," 2005 Meeting Papers 105, Society for Economic Dynamics.
    8. Ignacio Palacios-Huerta, 2003. "An Empirical Analysis of the Risk Properties of Human Capital Returns," American Economic Review, American Economic Association, vol. 93(3), pages 948-964, June.
    9. Christopher J. Malloy & Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2009. "Long-Run Stockholder Consumption Risk and Asset Returns," Journal of Finance, American Finance Association, vol. 64(6), pages 2427-2479, December.
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    Cited by:

    1. Mukherjee, Rahul, 2015. "Institutions, Corporate Governance and Capital Flows," Journal of International Economics, Elsevier, vol. 96(2), pages 338-359.

    More about this item

    Keywords

    Household Wealth; Human Capital; Wealth Effect;

    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; Aggregate Human Capital; Aggregate Labor Productivity
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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