Comment on D. W. Jorgenson and B. M. Fraumeni, "Investment in Education and U.S. Economic Growth"

Abstract

In his Presidential Address, Griliches (1977) wrote that it is almost impossible to attain an output measure of schooling. Each job and each person are multidimensional. It seems that Jorgenson and Fraumeni (hereafter JF) have now accomplished this impossible task. For analytical purposes, they have reduced the broad concept of human capital to school education. The reason for isolating formal schooling from other related forms of human capital is to extend national accounts by measures of all economic activities related to welfare. Their basic contribution to productivity measurements and national accounting is to illustrate the critical importance of the interrelationship between national accounting and economic theory. The major innovation in JF's paper is in the measurement of investment in human capital. Education is a service that transforms inputs (individuals) into individuals with different qualities. The difference in quality as investment in human capital is measured by discounting earnings profiles. In JF's view, the value of a year of formal schooling is the difference between the present value of projected labor earnings of a person with and without schooling. It is therefore not imputed as the time spent in school times the after-tax market wage as its opportunity cost. However, I do not know why there is no deduction for living costs or human maintenance. JF's method of treating investment in human capital as the sum of gross lifetime incomes for all individuals born in the same year plus imputed future gross labor compensation for formal schooling for all individuals enrolled in school results in huge estimates of investment. Such figures would be significantly lower if depreciation of human capital, like deterioration in health and erosion or obsolescence of skills, were subtracted. Without depreciation of knowledge and education, Jorgenson and Fraumeni (1989, p. 228) found that the value of wealth in the form of human capital is more than 11 times the value of physical or nonhuman capital. However, whereas their calculation of physical capital