A Labor-Income-Based Measure of the Value of Human Capital: An Application to the States of the United States.

Casey B. Mulligan and Xavier X. Sala-i-Martin

Journal of Japan and the World Economy, (forthcoming) 1996.


We argue that a sensible measure of the aggregate value of human capital is the ratio of total labor income per capita to the wage of a person with zero years of schooling. The reason is that total labor income not only incorporates human capital, but also physical capital: given human capital, regions with higher physical capital will tend to have higher wages for all workers and, therefore, higher labor income. We find that one way to net out the effect of aggregate physical capital on labour income is to divide labor income by the wage of zero schooling worker. For the average U.S. state, our measure suggests that the value of human capital during the 1980s grew at a much larger rate than schooling. The reason has to do with movements in the relative productivities of different workers: in some sense, some workers and some types of schooling became a lot more relevant in the 1980s and, as a result, measured human capital increased.

This paper also circulated as

NBER Working Paper No. 5018, February 1995.

CEPR Discussion Paper Series No. 1146, March 1995.

UPF Discussion Paper # 106, March 1995