toward a human capital accounting that incorporates the individual growth trajectories
DESCRIPTION
M.CIVARDI, Univ. Milano-Bicocca E. ZAVARRONE, Univ. IULM (Milano) R.V.PANSINI Univ. Bocconi (Milano)TRANSCRIPT
Toward a Human Capital Accounting that
Incorporates the Individual Growth
Trajectories
M.CIVARDI Univ. Milano-Bicocca
1
E. ZAVARRONE Univ. IULM (Milano) R.V.PANSINI Univ. Bocconi (Milano)
Human Capital: Definition and Measurement, 17 Novembre 2010, ISTAT, Roma
Agenda
•HC and National Account
•University HC definition and measurement by latent curve approach
•SAM for HC Accounting
2
HC: Human Capital3
Classical approach: “Human Capital revolution” Mincer (1958), starting from neoclassical growth model (Solow 1956), analyzed the investment in human capital as a determinant of personal earnings. Schultz (1961), studied the role of knowledge and ability in accounting for productivity growth. Becker (1962), considers “human capital” as an intangible asset (thought as a stock of embodied and disembodied knowledge, education, information, health, entre- preneurship, and productive and innovative skills) formed through investments in schooling, job training, health, as well as through research and development projects and informal knowledge transfers.
Extensions to this approach (Ben Porath (1967), Heckman (1974), Rosen (1976), Willis and Rosen (1979)), explicitly treated investment decisions over the life cycle or across different schooling levels as the result of optimizing behaviour, either independently or jointly with consumption and labour supply decisions.Katz and Murphy (1992) put the focus on the market for HC as a mechanism for understanding changes in income inequality and wage differentials. Murphy and Welch (1992, 1993) sought to explain shifts in wage disparity by education and across race and gender as a result of changes in the supply and demand for human capital.Lucas (1988), Jorgenson and Fraumeni (1992) propose evolutions of the human capital literature on the mechanics of economic growth.
4
Human Capital in the Accounting System
1 Economic
Capital
Human
Capital
Economic capital represents the most important input for economic growth and it is currently evaluated in the National Account Systems (NA)
Human capital strongly contributes to economic growth, to society and on the life standards .
BUT…
It is not yet systematically measured in NA
A Human Capital Account (HCA) should be :
related to a standard macro measure (typically GDP or total population)
a complete system within the NA
linked to both nonmarket and market accounts
5
Human Capital in the Accounting System
2
1993 UN-SNA: Human Capital is not considered
Consideration of human capital is ‘outside the scope of assets in the System’.
Expenditures on education can be considered as gross fixed capital formation but not conceived as fixed assets or as other forms of capital.
Human Capital in the Accounting System
3
6
2008 UN-SNA: Human Capital is only partially considered
Expenditures on education and training for the acquisition of knowledge are still not considered as investments (gross fixed capital formation) and HC is still not conceived as an asset.
Education services produced by schools, universities, etc. and acquired by students are treated as final consumption.
Costs of training given by the employer to enhance the effectiveness of staff is treated as intermediate consumption.
7
Human Capital in the Accounting System
4 Satellite Accounts
Satellite Accounts for Human Capital are not explicitly considered in the SNA 1993 and 2008 .
In the SNA 2008 satellite accounts of Tourism, Environment, Health and Unpaid Household Production are considered.
8
Human Capital in the Accounting System 5 Recent Applications and Studies:
Abraham and Mackie (2005): ideas and proposals for a framework for Nonmarket Accounting applicable to HC
Jorgenson and Landefeld (2006): proposal for an expansion and integration of the US accounts to nonmarket goods and services, such as HC
Corrado, Hulten and Sichel (2009): calculation for US of intangible investments in education and in training
Christian, M. (2010): Human capital accounting for US (years 1994-2006)
OECD (2010) the Human Capital Project: producing numerical estimates for the stock of HC for international and inter-temporal comparisons for OECD countries
Tartamella and Di Veroli (2010): proposal for compiling an Italian Education Satellite Account
9
HCA: requirements
• Investment and stock-volume, value, depreciation and asset lifetime data
• Evaluation criteria-intangible, not bought and sold in the market
• Quantification of its education component-formal, informal, vocational, education and training
• Starting point: a demographic account - Total number of people by age, sex, highest level of educational attainment, participation in the labour force
HCA: measures• Stock of HC
estimation criteria of its value
Since we do not have a good measure of the quantity of HC, we cannot compute the quantity “q” of HC in a similar manner as the investment literature computes the average Tobin's Q for physical capital.
The measure of the stock of HC would be related to its quantity in an analogous manner as the market value of physical capital (the stock price) is related to its book value.
Several approaches to estimate the quantity or book value of HC have been proposedEs.: A proxy for HC often used is the number of years of education or educational spending.
10
Alternative approaches to measure nominal investments in education:
11
Input costs(Kendrick, 1976; Malizia, 1998,2009; Collesi,1999; Versace, 2009)
Expected value of future returns (Jorgenson and Fraumeni, 1989, 1992 and successive modifications: Wei, 2008, 2010; Gu and Wong, 2010, Abraham, 2010)
Use of cost-based measures is problematic when studying consumption or asset allocation decisions because these proxies ignore the cash flow streams that HC can generate.
HCA: measures 2
Approach A: Components of total cost of investment in formal education
•Market: Teacher and staff salaries, materials, capital costs. (Already included in existing education accounts)
• Non-market: Student time, parent time, other volunteer time,…(Not included in existing education accounts)
(Abraham, 2010)
12
Approach A: Estimation methods of education’ value added in Italy (Malizia, 1998,1999; Collesi,1999; Versace 2009)The measure of volume of the Education output (branch 93) refers to the different levels of teaching, distinguished into four main areas:
I. School system (divided into four levels: pre-primary education; primary education; lower secondary; upper secondary education).
13
Approach A: Estimation methods of education’ value added in Italy 2II. University education (the production of services supplied by universities is split into two CPA classes: Research and Development, for the part related to research, and Education, for the part concerning didactic services).
III. Vocational training
IV. Subsidiary services to education
14
Approach A: Estimation methods of education’ value added in Italy (Malizia 2009) 3 For the School system: output method is applied
Measure of output used: the number of pupils.
For each education level changes in quality of services supplied taken into account through the “number of standard pupils” (i.e. pupils per classroom and teaching aids). The quality is therefore measured through input (classrooms and equipment) rather than on the pupils’ achievements.
15
Approach A: Estimation methods of education’ value added in Italy
4 The Laspeyres volume index for the whole school system is calculated.
Where:the quantities are represented by the number of standard pupils.the weights (costs to provide each of the services) are based on the Cofog classification.
16
Approach A: Estimation methods of education’ value added in Italy
(Versace, 2009) 5
17
For the University education system: quantity
Quantity indicator : the number of students per faculty and/or group of homogenous faculties (18 faculties).
Weights: the cost per student by faculty, using a methodology based on the standard cost per student.
Approach A: Estimation methods of education’ value added in Italy
(Versace, 2009) 6
18
For the University education system: quality
Quality adjustments are outcome-based.
Indicators used:1) The ratio between “regular students” and enrolled students.2) The reduction of the distance between the average number of years actually spent by student to achieve the degree and the theoretical length.
Same weight assigned to both indicators
Approach B: Valuing the returns to education in Jorgenson and Fraumeni model
The JF model computes expected present value of future labour income for individuals by age, sex and years of education, using data for a given cohort. The JF model includes:– both actual market and imputed non-market labour income;– returns to any additional schooling the individual can be expected to acquire.
19
Lifetime Labour Income (LLI) ApproachIt measures HCpc for a given group (by gender, education, age) as
the discounted present value of expected LLIpc for that group.
20
Denoting the LLI (value of HC of an individual in year y, of gender s, age a and educational attainment e) by miy,s,a,e is:
ymi : average labour income in the current year (including both market
and nonmarket incomes)
sr,a+1 : probability of a person at age a, surviving to age a+1
senr : school enrollment rate
g : real income growth rate
r : one year period discount rate
For individuals obtaining an additional year of schooling by the next year
For individuals remaining at their current educational attainment
Our proposal 1 regards a new approach to calculate the “value” of university education in HCA
We consider a specific dimension of HC, which refers to knowledge accumulation through the attendance of University courses (University Human Capital, shortly UHC)
We provide a UHC definition and a measurement in terms of knowledge accumulation through Latent Curve Model (LCM), modelled through a Gompertz function
21
UHC features
22
UHC is characterized by :
Growth context: enrolled students, through the university training, change own initial HC in UHCIndividual components : each student presents different HC levels and different accumulation’ trajectories of UHC Group components : on each student effects induced by the "group" membership (eg cohort enrolled) workSystemic components : on each student effects induced by the “university system" (eg degree course)
UHC : its measure
23
)(max10 1
ll
t
ijl
ljlljl TUHC
iuhcHCtUHC
t=month of observation; t=1,2,3,…, T l; Tl=12 if l=1; Tl=24 if l=2; Tl=36 if l=3 l=year of enrollment j=1,2,…., Nl i=interval between t-1 and t
.
jli
jljl markcfuiuhc
cfujl(i): credits acquired by student j, enrolled at the lth year of degree, in interval i markjl(i): weightuhcjl(i): increase of UHC of the student j, enrolled at the lth year of degree, at t respect to t-1.
30)(max lll cfuTUHC
1 0 tUHC jl
[1]
degree of year theat enrolled student of mark final school Secondary lthjHC jl :0
))((
HC0 toassigned weight :
lHC0lTlUHC( and lHC0 between tcoefficien ncorrelatio to alproportion
ll
UHC: estimation methods 1
In our proposal UHC can be estimated through a Latent Curve Model (LCM) (Tucker 1958, Rao 1958).LCM, used for representing the structure in repeated measures data, is, at its core, a factor analysis model.In details, we have:
24
.residuals specific me vector ti factor curvelatent of vector
loadingsfactor matrix
where
x
x
x
kTε1kηkTΛ
εΛη
UHC
l
l
jl t
UHC: estimation methods 2
In most factor analysis models the elements in are freely estimated from the data. However, in latent curve models these elements are often fixed to predetermined values to specify a particular linear o non linear form for the growth process (Curran et al. , 2004).
Data driven choice: Gompertz Growth Curve*(Browne, 1993; Browne &DuToit, 1991)
25
*Hypothesis: Given the upper limit α, time t growth rate is proportional to the difference between the maximum achievable level logarithm and the logarithm of the level achieved at time t.
.
speed UHC thereflects which change, of rate0
eperformanc potential represents and asymptote
explnexp
HC
ttf l
26
UHC: estimation methods 3The columns in matrix becomes three: one for each parameter.
UHC of the first student is
The parameters can be estimated using software devoted to covariance structures (Mplus, Lisrel, and so on)
1explnexplnexplnexp
explnexp)exp(11
ll tttttl
tttUHC ll
ll
Our proposal number 1 for approach A:
In the estimate of the value added of education for the University system the weights proposed by ISTAT researchers for quality adjustments can be replaced by the estimated UHCF (T) of faculty and/or group of homogenous faculties F.
27
FlFlFlFll
lFF NNwwTUHCTUHC / *
Nl :Number of students enrolled at year l in Faculty F
N :Total number of students enrolled in Faculty F The difference between the estimated VA before and after the quality adjustments can be considered a measure of the “loss” in the UC production.
Our proposal number 1 for approach B:
With reference to individuals with educational attainment e > upper secondary education, the JF formula can be modified introducing a “learning under use rate” τel where :
28
degree at onregistrati of year :l
attainmentleducationaeTUHC1 elelel :
easymieasysenr
eleasymieasysenrle
gasysreleasyymieasymi ,1,,,,,1
111,1,,,,,
11
111,,1
11
1,,,,,,
Our proposal number 2: To construct a SAM for the HC Accounting
It is well know that the Social Accounting Matrix (SAM) is a flexible schema that include data related to the production side, data related to the income distribution and to consumption expenditure. These characteristics allow to consider the SAM not only as a database and as an accounting tool, but also, in a wider sense, as a macroeconomic simulation model. We propose a SAM specifically designed for the HC Accounting.
29
Why to construct a SAM for the HC Accounting?
Under right hypothesis , the SAM can be used as a Leontief linear model and its solution brings to a matrix of multipliers which allows assessing the effects of changes of some of the variables (exogenous) on the others (endogenous) of the system.
Structural analyses of HC generation and accumulation become therefore possible.
30
Other commodities
Human Capital
Economic Capital HouseholdsEnterprices EducationEconomic other Human Capital TOTAL
Codes 1a 1b 1c 2a 2b 3a 3b 3c 3d 3e 3f 3g 4a 4b 4c 4d 4e 8a 8b 9a 10a 10b
1a Gross fixed capital
EXPORT of goods
Total demands for other public 1b
private 1c
Other economic activities2a Sales of other commoditieHuman Capital Formation (Education)2b Sales of HC services
no primary education 3a
primary education 3b
secondary education 3c
university degree 3dvacational/technical training 3e
3f value added of HC from 3g value added from the education level of the household 4ademographic characteristics of the 4b
Enterprices 4c
local 4d
central 4e
education (resources) 8a
economic (activities) 8b
Apreciation 9a Appreciation of HC
Appreciation of econom
Appreciation
Other 10a Remittances to ROW for Human Capital 10b Remittances to ROW TOTAL TOTAL PRODUCTION
TOTAL INTERNAL
TOTAL INTERNAL
Capital GainsTotal export of good
Total exports of
Other commodities
SAM for Human Capital
TOTAL PRODUCTION TOTAL FACTOR INCOME Total expenditure by institutions Capital outlays
Aggregate receipts from RoWIMPORTS of human capital Current taxes on income, wealth etc, and current transfers to ROW Current external balance CURRENT EXTERNAL
Rest of the world
IMPORTS of goods and services COMPENSATION OF EMPLOYESS TO ROW (remittances to the RoW) Current taxes on HC and current transfers for HC to ROW
Governement savings/final capital/ capital formation
Capital transfers from RoW Capital ReceiptsConsumption of fixed capital
Capital Accounts /Real Goods
Consumption of human capital HOUSEHOLD SAVING / final capital/
Enterprises savings/final capital/
Capital gains
Current taxes on income, etc, and current transfers from ROW
Current institutions receipts
Current transfers to enterprises
Distributed profits to househ
Current transfers to households
Initial HC
Initial economic capital
Direct taxes
INSTITUTIONS
Households
INCOME FROM FACTORS TO INSTITUTIONS
Inter-household transfers
Government
Taxes on production less subsidi
Taxes on the education
courses/formation
Indirect Taxes on production less
Indirect Taxes on the education
Compensation
of employees/val
ue added from RoW
Factor income receipts
Human Capital
Economic Capital
EXPORT of human capital activitie
Total demands for education goods
PROUCTION Activities
TOTAL PRODUCTION/OUTPUT TOTAL PRODUCTION OF HUMAN CAPITAL
gross HC formation (investments and change in
Education (resources) HUMAN CAPITAL INPUTS FINAL CONSUMPTION EXPENDITURE of human capital/education services
Entrate Monetarie/ Flussi Reali /uscite
Commodities TRADE AND TRANSPORT MARGINS
INTERMEDIATE CONSUMPTION /
FACTORS
Labour
VALUE ADDED
Activities Labour Government Central Local
FINAL CONSUMPTION EXPENDITURE of other commodieties
Uscite Monetarie/Flussi Reali in EntrataCommodities PRODUCTION FACTORS INSTITUTIONS Capital accounts/Real Rest of the world
Apreciationeducation (resources)
31
Other commodities
Human Capital
Economic Capital
HouseholdsEnterprices EducationEconomic other Human Capital
TOTAL
Codes 1a 1b 1c 2a 2b 3a 3b 3c 3d 3e 3f 3g 4a 4b 4c 4d 8a 8b 9a 10a 10b
1aGross fixed capital
EXP. of goods&services
Total demands for other
public 1b
private 1c
Other economic activities
2aSales of other commoditiHuman Capital
Formation (Education)
2bSales of HC services
no primary education 3a
primary education 3b
secondary education 3c
university degree 3d
vacational/technical training 3e
3fVAofHC fromRoW
3gVA from RoW
Enterprices4b
Current transf.
to
central 4c
local 4d
education (resources)
8a
economic (activities)
8b
Apreciation 9aApprec of HC
Apprec of EC
Appreciation
Other 10aECRemit
to ROW
Human Capital 10bHCRemit
toROW
TOTAL
TOTAL
PROD-
SUPPLY
of other g
TOTAL INTERNAL PRODUCTION
TOTAL INTERNAL PRODUCTION
Capital Gains
Total export of good and service
Total exports of human capital
SAM including Human Capital
Rest of the world
Capital Accounts /Real Goods
INSTITUTIONS
Households
Monetary Incom
ings
Commodities
education level
of household
head
TOTAL PRODUCTION
of HUMAN CAPITAL
TOTAL FACTOR INCOME Total expenditure by institutions Capital outlays
Aggregate receipts
from RoWIMPORTS of human capital
Current taxes on income, wealth etc, and current transfers to ROW
Current external balance
Current externa balance
IMPORTS of goods and services
COMPENSATION OF EMPLOYESS TO ROW (remittances to the RoW)
Current taxes on HC and current transfers for HC to ROW
Capital transfers from RoW
Capital ReceiptsConsumption of
fixed capital
Consumption of human capital
HOUSEH SAVING/
final capital/
cap. formation
Enterpr savings/final capital/ cap.for
Governement
savings/ final
capital/ capital
formation
Capital gains
Current taxes on income, etc, and current transfers
from ROW
Current institutions
receipts
Distrib.profits
to housh.
Initial HCInitial
economic capital
Direct taxes
Current transfers to households
INCOME FROM FACTORS TO INSTITUTIONS
Inter-househ
transfers
Government
Taxes on
produc.le
ss sub
Taxes on the
education courses
/ formation
Ind. Taxes on produc
less subs
Indirect
Taxes on
educ.sec
tor
4a
Compe
nsation
of
employ
ees / VA
from
RoW
Factor income receipts
Human Capital
Economic Capital
EXPORT
of HC
activities
Total demands
for education
goods
PROUCTION Activities
TOTAL PRODUCTION/OUTPUT
TOTAL PRODUCTION OF HUMAN CAPITAL
gross HC formation (investments and
change in
Education (resources)
HUMAN CAPITAL INPUTS
FINAL CONSUMPTION EXPENDI.of HC/ Educ. Services
TRADE AND TRANSPORT MARGINS
INTERMEDIATE CONSUMP./INPUT
S
FACTORS
Labour
VALUE ADDED
Other commodities
Activities Labour Government Central Local
FINAL CONSUMPTION EXPEND.of other commodieties
Monetary OutlaysCommodities PRODUCTION FACTORS INSTITUTIONS Capital
accounts/Real Rest of the world
Apreciationeducation
(resources)
32
The SAM including HC should be extended introducing a Satellite set of accounts for HC Stocks and Flows in Real/Physical Units.These accounts in Real/Physical Units can be attached to a SAM in which only a few of the accounts traditionally introduced can be considered. On the supply side, HC production will increase the disposable resources.On the demand side, these resources are acquired by Institutions (first of all by households) and are used in domestic activity or in export. A revaluations/ depreciation account is also necessary
Final remarks
