Human Capital as an Asset Class Implications from a General Equilibrium Model
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.
- DOI
- 10.1093/rfs/hhu073
- Volume
- 28 (4)
- Pages
- 978-1023
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref