This paper derives the value and risk of aggregate human capital in a stochastic equilibrium model with Duffie-Epstein preferences. A three-factor asset-pricing model is derived, where the factors are the market, the capital share, and investment in human capital. When the model is calibrated to match the historical ratio of wages to consumption in the United States, the weight of human capital in aggregate wealth is estimated to be about 93%, well above most previous estimates, and human capital's riskiness is lower than that of the market portfolio.

This paper derives the value and the risk of aggregate human capital in a dynamic equilibrium production model with Duffie-Epstein preferences. In this setting the expected return of a risky asset is a function of the asset's covariance with consumption growth and a weighted average of the asset's covariance with aggregate wage growth and aggregate financial returns. A calibration of the model matching the historical ratio of wages to consumption in the United States (85% between 1950 and 2007) suggests that the weight of human capital in aggregate wealth is 87%. The results of the calibration follow from the relative size of wages and dividends in the economy and the dynamics of the ratio of wages to consumption, which are counter-cyclical. As a result, human capital is less risky than equity, implying that the risk premium of human capital is lower than that of equity.