How much do public and private sectors invest in physical and human capital? Towards a new classification of investments

Abstract

Conventional wisdom says that today's investment drives future economic growth. Recent research shows that returns on human capital investment can be higher than those on physical capital investment. Yet, national accounts classify human capital expenditures as consumption and only investment in physical capital is recognized as investment. We propose new classification methodology and apply it to the data on public and private expenditures in 28 EU countries. We find that human capital investment constitutes on average 11.1% of GDP, of which 8.8 p.p. come from public sector. Physical capital investment constitutes on average 20.6% of GDP, of which 17.6 p. p. come from private sector. Understanding investment in narrow sense may lead to excessive concentration on the expansion of physical capital at the expense of otherwise profitable human capital spending.