DISCUSSION PAPER SERIES IZA DP No. 13494 A Brief Introduction to Human Capital Measures Gang Liu Barbara M. Fraumeni JULY 2020 DISCUSSION PAPER SERIES IZA DP No. 13494 A Brief Introduction to Human Capital Measures Gang Liu Statistics Norway Barbara M. Fraumeni Central University of Finance and Economics, NBER, IZA and University of Southern Maine JULY 2020 Any opinions expressed in this paper are those of the author(s) and not those of IZA. Research published in this series may include views on policy, but IZA takes no institutional policy positions. The IZA research network is committed to the IZA Guiding Principles of Research Integrity. The IZA Institute of Labor Economics is an independent economic research institute that conducts research in labor economics and offers evidence-based policy advice on labor market issues. Supported by the Deutsche Post Foundation, IZA runs the world’s largest network of economists, whose research aims to provide answers to the global labor market challenges of our time. Our key objective is to build bridges between academic research, policymakers and society. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. ISSN: 2365-9793 IZA – Institute of Labor Economics Schaumburg-Lippe-Straße 5–9 Phone: +49-228-3894-0 53113 Bonn, Germany Email: [email protected] www.iza.org IZA DP No. 13494 JULY 2020 ABSTRACT A Brief Introduction to Human Capital Measures1 There are six major measures of human capital, each of which covers at least 130 countries, all of which are described in this paper. These measures are of two distinct types: monetary and index-based. The two monetary versions are those by the World Bank (Lange et al., 2018) and by the United Nations Environmental Program and the Urban Institute of Kyushu University (Managi and Kumar et al., 2018). The four indicator versions are by the Institute of Health Metrics and Evaluation of the University of Washington (Lim et al., 2018), the United Nations Development Programme (UNDP, 2019), the World Bank (International Bank for Reconstruction and Development and the World Bank, 2018), and the World Economic Forum (World Economic Forum, 2017). In addition to describing each of these six measures, this paper compares them using ranking (Spearman) and level (Pearson) correlations. This paper was written as an introduction to a forthcoming book (Fraumeni, Barbara M., ed., Measuring Human Capital, Academic Press, Cambridge, MA) on human capital in order to help statisticians, researchers, analysts, policy-makers and government officials make an informed choice about which to use as this decision can matter. JEL Classification: J24, O57 Keywords: human capital, international comparisons, methodology, monetary and index-based measures Corresponding author: Barbara M. Fraumeni 770 Middle Road Dresden ME 04342 USA E-mail: [email protected] 1 The forthcoming book includes chapters on the UNECE and Urban Institute of Kyushu University, UNDP, and both World Bank measures. IHME had to withdraw from this project when its priorities had to be re-organized due to the COVID-19 virus. The editor was unsuccessful in contacting WEF to see if they would be willing to contribute. The forthcoming book also includes two other chapters, one on human capital in China and another on human capital in the United States. Draft version, 20200710 Human capital can be regarded as ‘the knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being’ (OECD, 2001). The notion of human capital being equally essential as conventional tangible capital can at least be traced back to Adam Smith’s work in the 18th century (Smith, 1776), but it was not widely recognized until around the 1960s, when economists began to use it to investigate income and growth differentials (e.g. Mincer, 1958, 1962; Schultz, 1961, 1962; Becker, 1962, 1964). In the 1980s and 1990s, human capital regained its importance both within the neoclassical growth accounting framework (e.g. Jorgenson and Fraumeni, 1989, 1992a, 1992b) and through the endogenous growth models (e.g. Romer, 1986; Lucas, 1988; Mankiw et al. 1992). It was also employed regularly in the development accounting works (e.g. Klenow and Rodriguez‐Clare, 1997; Hall and Jones, 1999). Measures of human capital can serve many purposes as human capital is a key indicator of the current and future potential of a country and its individuals. In most countries, human capital is the largest form of wealth. In others where natural resources are the largest form of wealth, human capital is often a growing source of wealth (Lange et al., 2018; Managi and Kumar, 2018). Countries with a relatively young population can have significant advantages over countries with older populations over the longer term. Within the context of sustainable development human capital measures can be used to gauge how well a country is managing its total national wealth, with the purpose of assessing its long-term sustainability (e.g. UNECE, 2009). There are both monetary and non-monetary, including subjective, ramifications of the level of human capital (Dolan et al., 2008). Most recently, human capital is frequently applied to inform ‘beyond GDP’ discussions, since its distribution across households and individuals and the non-economic benefits due to its investment are among the crucial determinants of people’s ‘quality of life’ and well-being (e.g. Stiglitz et al., 2010; OECD, 2011, 2013, 2015, 2017). The forthcoming book (Fraumeni, ed.) is about measuring human capital.2 Currently existing human capital measures can be divided into two broad categories: the indicators-based and the monetary measures.3 Except for the Introduction chapter, all the other six chapters collected in the forthcoming book reflect this division, with two chapters applying the indicators-based approach, while the other four using monetary measures. The monetary measures emphasize demographics such as age and education with underlying gender break-outs, as well as income, while the indicator- based measures have a wide-array of types of components in addition such as health, standard of living, deployment, and know-how. Another distinct feature of the forthcoming book is its global perspective, with four chapters focusing directly on large projects for international human capital comparisons that have been undertaken by 2 This paper is a modified version of the introduction to the forthcoming book. It omits a discussion of the two country study chapters, one, which is about human capital in China and the other, which is about human capital in the United States. 3 For an overview of the different measures of human capital within and across the two broad categories, please refer to e.g. Liu and Fraumeni (2016). several international organizations and/or universities.4 Each covers at least 130 countries. While the other two chapters are single-country studies, the two countries respectively addressed are the United States of America and the People’s Republic of China, nowadays two of the three largest economies in the world. With various human capital measures being discussed, the forthcoming book does not take the stand that there exists one specific measure that should be used under any circumstances, rather, it is intended to serve as one of the valuable resources for statisticians, researchers, analysts, policy- makers, and government officials in searching for comparable information, so as to make their own decisions on what human capital measures are best suitable for their purpose. In the following, a brief description of different methodologies applied in the projects for human capital comparisons is provided. However, readers are strongly encouraged to read every and each individual chapter in the forthcoming book in order to have a more comprehensive and deeper understanding of why and how the different detailed methodologies were implemented in practice. A simple comparison of the results is then discussed, with the purpose of giving a flavor of taste of the rich information that can be drawn from these studies. I.1 Monetary-based measures projects The first two chapters are excellent examples of comparing human capital across countries by applying the monetary measures. In both examples, human capital is measured together with non- human capital (such as conventional fixed capital and natural capital) within a consistent framework of comprehensive wealth accounting, with the goal being to help governments plan for a more sustainable economic future. Chapter 1 is about the World Bank’s latest wealth accounts that cover the period 1995–2014 for 141 countries (Lange et al., 2018). Plenty of data from the accounts, including country human capital measures in constant 2014 US$, were presented in the 2018 report: The Changing Wealth of Nations 2018: Building a Sustainable Future (CWON hereafter). In the World Bank’s previous works, human capital was not measured explicitly but included in a residual resulting from deducting produced capital, natural capital, and net foreign assets from total national wealth that was calculated as the present value of future consumption (World Bank, 2006, 2011). Although a large part of this residual could be attributed to human capital (e.g. Ferreira and Hamilton, 2010; Hamilton and Liu, 2014), the non-explicit measure of human capital makes it difficult for policy-making. Human capital in the new CWON wealth accounts was measured by applying the well-known Jorgenson-Fraumeni lifetime income approach (Jorgenson and Fraumeni, 1989, 1992a, 1992b), based on a unique database developed by the World Bank, the International Income Distribution Database, which contains more than 1,500 household surveys. When a household survey is not available for any country for a given year, previous or later surveys that are controlled by country-wide totals for the non-survey years are then used as the basis for these years.