4914.0.55.001 - Newsletter: Age Matters, Apr 2005  
ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 29/04/2005   
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    Human capital is an important concept in modern economics and in economic policy discourse. Unfortunately, direct measures of human capital stocks are available for very few countries. A research paper, Measuring the Stock of Human Capital (cat.no. 1351.0.55.001) was re-issued in March 2005 to provide experimental measures of the stock of human capital for Australia. The aim is to present accounts of developments and research work or analysis of an experimental nature so as to encourage discussion and comment.

    The working paper adopts a ‘lifetime labour income approach’. This method measures the stock of human capital as the discounted present value of expected lifetime labour market income. Expected income streams are derived by using cross-sectional information on labour income, employment rates and school participation rates. This approach is also able to account for the effect on human capital formation of current schooling activities — that is, it can account for additional human capital embodied in those individuals who are still participating in formal schooling and who anticipate improved employment and income prospects as a result.

    The paper uses full Australian Census data for 1981, 1986, 1991, 1996 and 2001, which provides five snapshots of age-earnings profiles for four categories of educational attainment for both men and women over this 20-year period. Based on these age-earnings profiles, this study derives per capita measures of lifetime labour market incomes for each age/sex/education cohort, and applies these per capita measures to the number of people in the corresponding cohort. It then aggregates across all cohorts to estimate the human capital stock for Australia. The study results show that there has been a significant increase in the stock of human capital in Australia over the 20-year period, characterised by sharply rising shares of total human capital attributable to more educated workers. It also shows that the value of human capital stock is significantly greater than that of physical capital.

    In the Australian System of National Accounts (ASNA), measures of capital stocks are confined to physical capital and that it is not yet standard practice for any official statistical agency to include human capital in their capital stock measures. Although human capital is one of the most important assets of a country and a key determinant of a nation’s economic performance, it is left unaccounted for in the national accounts. This is because there is a lack of consensus about how this important economic variable should be measured. Even if such consensus was achieved, there would still be many methodological difficulties to overcome. Indeed, human capital is different from physical capital, and this lies at the foundation of the difficulties encountered in measuring human capital. The following quotation from the System of National Accounts 1993 (paragraph 1.52.) sheds light on the reason why measures of human capital are still missing from the ASNA:
    '...while knowledge, skills and qualifications are clearly assets in a broad sense of the term, they cannot be equated with fixed assets as understood in the System (of National Accounts)... Education assets are embodied in individuals as persons. They cannot be transferred to others and cannot be shown in the balance sheets of the enterprises in which the individuals work. Education assets could possibly be shown in balance sheets for the individuals in which they are embodied, but individuals are not enterprises. They would be difficult to value...'

    This experimental study focuses on the Australian adult working age population, defined as everyone aged between 25 years and 65 years. Again there were other possibilities. The ABS Labour Force Survey, for example, looks at the 15–64 year age group. Others studies look at 18–64 year olds. The age someone has formed their basic productive capacity (human capital skills) and the age at which they cease productive activity are the key issues to consider. There are no straightforward answers. As modern economies are characterised by rapid technological changes and increasing demand for skilled labour, more and more people choose to allocate more time to investments in their human capital and therefore delay joining the labour force. In the present study 25 years was chosen as the age at which individuals actively pursue productive activities and 65 years as the age at which they retire. This somewhat arbitrary choice, while not crucial, could easily be relaxed and extended to other age groups. A future update may undertake sensitivity analyses of the impact of the choice of age groups on the stock value of human capital.

    Key Findings

    Graphs 1 to 4 display gross annual income per capita for males and females constructed from the 1981 and 2001 Australian Censuses to illustrate the age-earnings profiles. The greatest jump in income occurs between those without degrees and those with degrees. The educational differences in income between the bottom two education groups are relatively small. It also shows that the annual income of more educated groups increases more sharply with age than for less educated groups. This suggests a wage premium may exist for more educated workers associated with time spent in the labour market.

    Graphs 5 to 8 display gross lifetime income per capita for males and females computed from the 1981 and 2001 Census data. These charts show the present value of the discounted income stream of income for four levels of educational attainment for men and women aged 25–65 years. A few factors affect the shape of the lifetime income curves. The first factor is the age range at which annual income peaks. The age-income profiles charted demonstrate that the income (earnings) premiums generated by higher educational attainment increases with time spent in the labour market.


    The study demonstrates how human capital can be estimated by a lifetime labour income approach and calculates experimental estimates of values of human capital stock embodied in the adult population of Australia for the census years 1981, 1986, 1991, 1996 and 2001. The results of this exercise show significant increases in the value of human capital and that the more educated components of the Australian human capital stock have increased dramatically, particularly for women.

    For more information please contact Hui Wei, hui.wei@abs.gov.au.