Measuring human capital and its applications for Australia

Abstract

This thesis develops measures of human capital from a national accounting perspective and uses these measures to examine how human capital grew in Australia during the period 1981-2001. It adopts the lifetime labour income approach, developed by Jorgenson and Fraumeni (1989,1992a),with a few significant modifications. Based on age-earnings profiles, constructed from full Australian Census data for 1981,1986,1991,1996 and 2001, per capita measures of lifetime labour market incomes are derived for each age/sex/education cohort, and applied to the number of people in the corresponding cohort. These are then aggregated across all cohorts to estimate the human capital stock for Australia. The stock estimates show that there has been a significant increase in the stock of human capital in Australia over the 20 year period, due to increased proportions of more educated workers. This study proposes a human capital accumulation account for the working age population. The findings from this flow accounting exercise show that gross human capital formation, in particular investment in post-school education, grew at a rapid pace. Due to the ageing population, the existing human capital stock also depreciated at a faster rate, and as a result, the growth of net human capital formation slowed down significantly. Using cross sectional annual income profiles, this study attempts to produce estimates of returns to post school education. The base case of this study is the 18 year old age cohort facing alternative educational paths between engaging in the labour market on a full-time basis and full-time study for a bachelor degree at a university. The key findings are that the expected private rates of return increased over time for males, from 13.1 percent in 1981 to 19.6 percent in 2001; these rates of return ranged between 18.0 percent and 20.3 percent for females over the same period. Highlighting the importance of base level education in the production of human capital over life cycles of young men and young women, this study quantifies economic benefits of completing secondary education in Australia. A distinctive feature of this study is that it calculates the option values generated by completing secondary education: the opportunities for obtaining more advanced human capital skills through undertaking tertiary study programs. The results show that option values make up significant proportions of total returns to secondary education, ranging from 20 percent to 30 percent for men, and from 28 percent to 44 percent for women over the period 1986-2001. Using a simple growth accounting approach, this study provides empirical estimates of the direct contribution of human capital to economic growth in Australia. The direct economic impact of the education-led growth of human capital is estimated to be about 0.2 percent and the human capital factor accounts for 7 percent of the 3 percentage points per year increase in the Australian output growth (market sector) for the period 1981-2001.

Date of Award	2008
Original language	English
Supervisor	Anne Daly (Supervisor) & Phil Lewis (Supervisor)