A new method to estimate the level and distribution of household human capital with application

Abstract

This study introduces a new approach that enables, for the first time, the estimation of national and personal human capital (HC) in money value. National HC is estimated on the basis of the life cycle mean earned income by age using sample survey data which are smoothed with local linear filters. Personal HC is treated as a dimensionless latent endogenous variable. The estimation of each economic unit HC as a latent variable is benchmarked by the estimation of the average national HC in order to obtain estimates in money value. A model is fitted to study the distribution of personal HC. This new approach is illustrated using data from the U.S. Federal Reserve Board sample survey on income and wealth distributions. The new theoretical developments and empirical results provide the framework to advance socioeconomic policies on issues of endogenous economic growth with economic efficiency and social equity, hence, to deal with the problems of poverty and socially unacceptable inequality. This study is integrated with a discussion and evaluation of alternative methods of HC estimation proposed in the literature, i.e. the prospective, retrospective, and educational stock. It includes a brief comment on the contributions of the Chicago School which specifies an earning income function within the HC conceptual framework, without dealing with HC estimation.