Estimates of human capital in Malta : the lifetime income approach

Abstract

The main aim of this dissertation is to produce an estimate of the human capital stock for Malta over the period from 2005 to 2013 and analyse its dynamics over this time period. From a review of the literature in the field of human capital, it was concluded that the lifetime income approach should be adopted to estimate Malta’s human capital. This approach was developed by Jorgenson and Fraumeni and estimates human capital stock as the expected future lifetime income of all individuals. The human capital stock is analysed in real terms by means of Divisia quantity indices. Moreover, the human capital change is decomposed into three components: investment, depreciation and revaluation. Investment in human capital is estimated as changes in human capital stock due to the addition of new members in the labour force population arising from the rearing and education of children and the effect of immigration on human capital. The results suggest that the volume of aggregate human capital increased at an estimated annual rate of 3% in Malta for the period 2005 to 2013. Most of this growth was attributed to the increase in labour force population. The real increase in lifetime incomes, representing shifts in the age structure and education levels of the population, accounted for 1% of this growth. Furthermore, from 2005 to 2013, the human capital stock increased by 70% in nominal terms and by 32% in real terms. In 2013, the nominal aggregate human capital stock was equal to €33.43 billion while the real aggregate human capital stock was equal to €25.88 billion. Investment in human capital (in nominal terms) increased at an estimated annual rate of 8%. The human capital stock of Malta was estimated to be approximately twice the value of physical capital stock and four times the value of Malta’s Gross Domestic Product (GDP).