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									 Human Development and
Its Contribution to Wealth
   Accounts in Canada

                   Wulong Gu and Ambrose Wong

Presentation to the OECD Workshop on the Measurement of Human Capital
                       Turin, November 3, 2008
    Background


 In early 2008, a research program “Human Development and its
  Contribution to the Wealth Accounts in Canada” was approved by
  the senior management of Statistics Canada.

    • Construct a measure of human capital;

    • Make progress towards providing estimates of the level and
      composition of Canada’s total wealth; and

    • Fill gaps in the set of environment and sustainable development
      indicators recommended by the National Roundtable.




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    Objectives of this paper


 Develop a measure of human capital in Canada for the period 1970-
  2007.

    • In the late 1990s, the Canadian Productivity Accounts begun to
      assess the contribution of investment in human capital to
      productivity growth.

    • This paper represents an additional step towards the
      incorporation of investment in human capital in empirical studies
      of economic growth and national accounts.

 Provide an estimate of the level and composition of Canada’s total
  wealth that includes produced capital, natural capital, and human
  capital.


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    Outline of the presentation


 The methodologies for estimating the stock of human capital

 The construction of data used for estimation

 Human capital estimates and composition of full wealth in Canada

 A summary and outline of future work related to human capital




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    Methodologies


 Income-based approach (Jorgenson and Fraumeni, 1989, 1992a
  and 1992b)

    • Value human capital in terms of lifetime labour income for all
      individuals.
    • The approach was used to estimate human capital for Sweden
      (Ahlroth et al. 1997), Australia (Wei, 2004, 2007), and New
      Zealand (Le, et al., 2005), and Norway (Greaker and Liu, 2008).

 Cost-based approach (Kendrick, 1976 and Eisner, 1989)

    • Estimate human capital as the accumulated value of all
      expenditures related to human development, such as the rearing
      and the cost of education.


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    Income-based approach


 We will adopt the income-based approach by Jorgenson and
  Fraumeni with two differences:

    • We will exclude the value of non-market activities; and

    • We will focus on human capital embodied in the working-age
      population, aged 15 to 74.

 We will learn from the experts at this workshop on those issues.




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    Income-based approach


 First, we construct lifetime income for individuals in the working-age
  population, cross-classified by age, gender and education.

 Second, we estimate the stock of human capital in current prices as
  the sum of lifetime labour incomes for all individuals of working-age.

 Third, we estimate the volume index of human capital stock as a
  weighted sum of the number of individuals in the population, cross-
  classified by gender, age and education, using their lifetime income
  as weights.

 The difference between the growth of this weighted population
  counts and un-weighted population counts reflects the compositional
  change.


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    Estimating lifetime income


 Estimate lifetime labour income for all individuals using cross-
  sectional data.

 Assume that expected incomes in future periods are equal to the
  incomes of individuals of the same gender and education, with age
  that the individual will have in the future time period, adjusted for
  increases in real income and survival rates.




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    Construction of data


 We have cross-classified individuals in the working-age population
  by 2 genders, 60 ages (15 to 74) and 5 educational levels (primary,
  secondary, post-secondary, Bachelors degree, and Masters degree
  or above).

 We have developed a database on labour market activities and
  school enrolment for those individuals for each year over the period
  1970 to 2007. The data base includes:
   • population counts;
   • paid employment;
   • self-employment;
   • school enrolment;
   • annual labour compensation of paid workers; and
   • Annual labour compensation of self-employed workers.


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     Data sources


 Monthly Labour Force Survey (LFS) from 1976 to 2007

 Census of Population for the years 1971, 1981, 1986, 1991, 1996,
  2001, and 2006

 Annual labour compensation in the Canadian Productivity Accounts
  of Statistics Canada

 Survival rates from Statistics Canada “Life Tables, Canada,
  Provinces and Territories”




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     Empirical results


 The distribution of the working age population across different
  individual characteristics (gender, age and education)

 employment rates

 enrolment rates

 The estimates of aggregate human capital stock and the
  composition of full wealth in Canada

 Sensitivity analysis on the measure of human capital




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     The distribution of working-age
     population


    The share of women in the working-age population was virtually unchanged
     over the period 1970 to 2007.

    Levels of education in the Canadian population have risen steadily since the
     1970s.

    The share of the Canadian population by age group has changed
     substantially since 1970.

      • The 1970-1980 period was characterised by the entry of younger
        individuals for the 15-34 group—the post-war baby-boomers to the
        Canadian population.

      • The trend towards a younger population reversed itself in the early
        1980s, when the baby-boomers entered the prime-age group.


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     Employment rates


 The ratio of paid workers to the working-age population increased
  from 48.8% to 58.9% over the period 1970 to 2007.

     • The dramatic increase in employment rate for women and slight
       decline in employment rate for men.

 The ratio of self-employment to the working-age population changed
  little over time, for both men and women.




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     Enrolment rates


 Over the period 1970 to 2007, the enrolment rate of persons aged
  15 to 74 showed a little change.

     • a net result of rising enrolment rates for women and declining
       enrolment rates for men.

 The enrolment rate increased across all age groups.




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     Indices of human capital, working-
     age population and composition
               Figure 1. Indices of human capital, working -age population and
                              human capital per capita in Canada


      200


      180


      160


      140


      120


      100
        1970      1975     1980      1985        1990       1995      2000      2005      2010

            Human capital stock      Working-age population          Human capital per capita



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Average growth in human capital,
working-age population and composition

                                                                        1970-    1980-    2000-
                                                  1970-2007             1980     2000     2007

Human capital stock                                               1.7      3.0      1.2        1.1

Working-age population                                            1.5      2.1      1.2        1.3

Human capital per capita                                          0.2      0.9      0.0       -0.2

First-order indices of human capital per
capita

Gender                                                            0.0      0.0      0.0        0.0

Education                                                         0.9      1.4      0.8        0.6

Age                                                           -0.4        -0.1     -0.5       -0.6

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     The composition of full wealth
                   Figure 2. The distribution of total wealth in Canada (%)

     100


      80


      60


      40


      20


       0
           1975   1979      1983      1987        1991        1995     1999    2003   2007

                         Produced Assets        Natural Wealth        Human Wealth




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     Annual growth in human capital and
     produced capital


 The growth of human capital in constant prices was slower than the
  growth of produced capital.

 The growth rate of the price index is similar for human capital and
  produced capital.




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     Sensitivity analysis



 The level of human capital estimates is sensitive to the choice of the
  expected future income growth and the discount rate used to
  discount the future income.

     • One-percentage-point changes in the real income growth or the
       discount rate are associated with about 10 to 15 percent
       changes in the value of human capital stock.

 The growth of the quantity and price of human capital is not
  sensitive to the choice.




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     Summary of findings



 Aggregate human capital rose at annual rate of 1.7% in Canada for
  the period 1970 to 2007, and most of the growth is due to the
  increase in the number of individuals in the working-age population.
  The rising educational level of the Canadian population is also
  significant factor for the growth in human capital.

 The aging of the Canadian population after the early 1980s reduced
  the human capital growth by 0.5% per year, while the rising
  educational level increased the human capital growth by 0.8% per
  year.




20                    Statistics Canada • Statistique Canada     21/04/2011
     Summary of findings



 The value of human capital exceeds the value of produced capital.
  The ratio of human capital relative to produced capital declined over
  time. In 2007, the value of human capital is about 4 times as large
  as the value of produced capital.

 The level of human capital estimates is sensitive to the choice of the
  expected future income growth and the discount rate used to
  discount the future income, but the growth of the quantity and price
  of human capital is not.




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     Future research on human capital


 Estimate human capital stock using the income approach at the sub-
  national level (provinces).

 Estimate the output of the educational sector as investment in
  human capital, using Jorgenson and Fraumeni’s approach.

 Estimate human capital stock using the cost-based approach.




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