Working Paper

The Value and Risk of Human Capital

Abstract: Human capital embodies the knowledge, skills, health and values that contribute to making people productive. These qualities, however, are hard to measure, and quantitative studies of human capital are typically based on the valuation of the lifetime income that a person generates in the labor market. This article surveys the theoretical and empirical literature that models a worker?s life-cycle earnings and identifies appropriate discount rates to translate those cash flows into a certainty equivalent of wealth. This paper begins with an overview of a stylized model of human capital valuation with exogenous labor income. The authors then discuss extensions to this framework that study the underlying economic sources of labor income shocks, the choices, such as work, leisure, retirement and investment in education, that people make over their life and their implications for human capital valuation and risk.

Keywords: human capital; labor income; employment;

JEL Classification: G10; G12; J22; J24; J26; J31;

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Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series

Publication Date: 2015-07-20

Number: WP-2015-6

Pages: 34 pages