1504.0 - Methodological News, Sep 2003  
ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 27/02/2004   
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The Analytical Services Branch has embarked on its next stage of its human capital project - Towards Integrated Stock-Flow Human Capital Accounts for Australia. This is a natural extension to the previous work on measuring the stock of human capital for Australia. Stocks are connected with flows. The changes in stocks between periods result from the accumulation of prior events, transactions and other flows. In the case of human capital, its stock in the long run depends on the rates at which:

  • new workers enter the work force; and
  • workers acquire knowledge, skills and other related attributes.

Of course, it also depends on the extent to which:
  • they manage to retain their acquired knowledge and skills; and
  • they retire from the workforce.

In order to provide a full account of the growth of human capital, it is necessary to establish an integrated stock-flow accounting system in which changes in the stock of human capital can be fully explained by investment and other flows in human capital.

Consistent with the choice of using the Jorgenson and Fraumeni approach to valuing the stock of human capital, this study uses the Jorgenson system of accounting for human capital, developed by Dale Jorgenson and his colleagues in the 1980s, to obtain estimates of human capital flows over periods and integrate them with the changes in the human capital stock between periods. The major features of this accounting system are summarised as follows:
  • it is based on the concept of human capital measured as the lifetime labour incomes for all individuals in the economy;
  • the changes in human capital stock from period to period is viewed as the sum of human capital formation, net of depreciation on human capital and the revaluation of human capital;
  • human capital formation results from increases in the workforce and increments to lifetime incomes due to investment in formal education;
  • depreciation on human capital is considered as being due to ageing and decreases in the workforce;
  • the difference between gross human capital formation and depreciation on human capital is net human capital formation;
  • revaluation on human capital is considered to be due to changes in lifetime incomes over time for each age/sex/education groups;
  • among other flows, investment in education, which causes increments to lifetime incomes for individuals who undertake additional schooling activities; stands out as the most important source of flows into the human capital stock.

The estimation of flows of human capital formation requires data on demography, education and immigration. In the short-term, these information are either directly available or could be indirectly extrapolated from data from the Census of Population and Housing. In the long-term, for refinement and reconciliation purposes, independent and more detailed data on education enrolment and completion rates are needed to derive separate estimates of investment in education. Data on migration are used to reconcile school enrolment data with estimates of transitions from lower to higher levels of educational attainment and demographic changes between different age/education groups.

Accordingly, a two stage estimation procedure has been proposed. The first stage starts with the census data and the experimental estimates of the human capital stock for the five census years from 1981 to 2001. Given data on schooling activity and recent new migrants, it could be possible to trace the changes in number of persons for each age/sex/education group between census years into three sources:
  • number of persons who have moved from one educational level to the higher ones;
  • number of persons who have immigrated;
  • number of persons who have emigrated.

In the second stage of estimation when all data required on migration and education are obtained, detailed estimates on human capital formation and depreciation will be made and reconciled with those derived by using the census data.

If the acquisition and development of skills embodied in human beings are treated as production, the conventional production boundary as defined in the System of National Accounts could be expanded. This expansion would have a number of ramifications on the existing Australian National Accounts.

For more information, please contact Hui Wei on (02) 6252 5754.

E-mail: hui.wei@abs.gov.au.