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This paper develops a measure of the human capital derived from the lifetime earnings approach. It provides an estimate of the value of Canada's total wealth associated with the lifetime labour related earnings of individuals that can be compared to the wealth estimates derived from produced physical capital and natural capital.

Investment in human capital is seen to be as important for growth as the expenditures that generate physical capital such as machinery and equipment or natural resources. While measures of the latter have long attracted the interest of the statistical community, measures of human capital are less developed. Recently, member countries of the Organisation of Economic Co-operation and Development have begun to experiment with such measures.

In the late 1990s, the Canadian Productivity Accounts (CPAs) began to assess the contribution of investment in education and training to output growth and productivity growth in Canada. Investment in human capital that has produced a shift in the composition of the workforce towards more educated and more experienced workers has been found to be an important source of productivity growth.

The indices of labour composition constructed by the CPAs of Statistics Canada are an essential first step in incorporating investments in human capital into empirical studies of economic growth and national accounts. This paper is an additional step in this direction.

In the national accounting systems of Canada and other countries, expenditures on human development and related 'intangibles' are all regarded as current expenditures (rather than investment). This, in effect, means that outlays on education, child rearing and training are all classified as consumption expenditures, either intermediate or final. This paper treats human development expenditures as investment (that should be accumulated into human capital stocks) because the benefits of such expenditures accrue to the individual over a lifetime. This paper adopts the income-based approach developed by Jorgenson and Fraumeni and estimates human capital stock as the expected future lifetime income of all individuals. Investment in human capital is estimated as the changes in expected future lifetime income due to the rearing and education of children plus the effect of immigration on human capital accumulation.

The paper focuses on five questions.

1. What are the sources of human capital growth in Canada?
   Aggregate human capital stock rose at annual rate of 1.7% in Canada for the period from 1970 to 2007. Most of the growth is due to the increase in the number of individuals in the working-age population aged 15 to 74. The rising education level of the Canadian population is also a significant contributing factor to the growth in human capital. Of the 1.7% growth in human capital in the period from 1970 to 2007, 1.5 percentage points is accounted for by the growth in the working-age population, the remaining 0.2 percentage points is due to the effect of the compositional shift of human capital (i.e.., rising education levels of the Canadian population). For the period 1970 to 2007, the rising education level increased human capital growth by 0.9% per year.
2. What was the compositional effect of the aging of the Canadian population on human capital stock?
   The aging of the Canadian population (a shift in the population distribution towards older workers) has a negative effect on the growth of human capital stock as older workers on average have lower human capital stock (measured by remaining lifetime earnings) because of their shorter remaining working life. Our estimates show that the aging of the Canadian population reduced human capital growth by 0.6% per year over the period 1980 to 2007.
3. What was the level of human capital investment and stock relative to physical capital investment and stock?
   The value of human capital investment and stock exceeds the value of produced physical capital investment and stock. But the ratio of human capital investment and stock to physical capital investment and stock declined over time. In 2007, human capital stock is about four times as large as produced capital stock, and investment in human capital was about two times as large as investment in produced capital. The difference between human capital and produced capital was higher in the early 1970s. The ratio of human capital stock to produced capital stock was 5.7 to 1 in 1970, and the ratio of investment in human capital to investment in produced capital was also 5.7 to 1 in 1971.
4. What was the growth of human capital investment and stock relative to the growth of physical capital investment and stock?
   The growth of human capital investment and stock was slower than the growth of produced capital investment and stock. Over the period from 1970 to 2007, the volume of human capital stock increased 1.7% per year, while produced capital stock rose at 2.8% per year. From 1971 to 2007, human capital investment in constant dollars grew at 0.4% per year, while real investment in produced capital rose at 3.9% per year.
5. Are estimates of the growth and level of human capital investment and stock sensitive to alternative assumptions adopted for the estimation?
   The levels of human capital investment and stock estimates are sensitive to the assumptions made about expected future income growth and the rate used to discount the future income when calculating human capital, but the growth of the quantity and price of human capital investment and stock is much less sensitive to the assumptions in these areas.