The Relationship Between Human Capital, Productivity and Market Value

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1. Introduction

The measurement of intangibles and human capital, important for both goods-producing and service-producing industries, has always been a difficult challenge for the statistical system. The growth of the New Economy has made responding to this challenge even more urgent: understanding how such inputs affect the value chain of productivity, growth and firm value now surpasses the need to measure the impact of bricks, mortar and equipment. Yet the changes that have brought the New Economy into existence have, at the same time, highlighted the need for improvements to traditional measures of inputs and outputs (Haltiwanger and Jarmin, 2000). This is particularly true for human capital. Finding new measures of human capital, and quantifying them in such a manner that they can be introduced into a production function and produced on a scale that provides sufficient sample size for use in official economic statistics is a formidable challenge.

This paper uses micro level data on both employers and employees to demonstrate a new approach to addressing this challenge. We use new measures of human capital that directly capture the market valuation of the portable component of skill including the contribution of "observable" and "unobservable" dimensions of skill. In principle, the measures go beyond indirect proxies, such as measures of years of formal education, and quantify the value of individual specific skills, such as innate ability, visual or spatial skills, non-algorithmic reasoning, analytic or abstract decision-making, or "people skills" (Bresnahan, et al. 1999).

An additional challenge has been to document the sources of firm level heterogeneity in productivity, growth, and value. One of the key findings of the literature using micro level data is that there are large differences across many dimensions of firm inputs and outcomes. In particular, there is little uniformity among employers in either the methods used to hire and terminate workers or the selection of types of workers to employ. We therefore use measures of the dispersion of the firm-level human capital distribution to capture relevant aspects of firm-level differences in organizational capital and workplace practices.

We begin by describing the background, motivation and underlying specifications used in this chapter. Next, we describe the newly created data sources and measures that underlie our study. The subsequent section provides an exposition of the measurement of human capital that is made possible by the new Census data. We present exploratory empirical results that relate our new human capital measures to measures of firm performance including labor productivity and market value. The final section concludes the paper.

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Acknowledgments

This paper was prepared for the NBER/CRIW conference on "Measuring Capital for the New Economy" in Washington, D.C. in April 2002. The authors wish to acknowledge the substantial contributions of the LEHD Program staff at the U.S. Census Bureau. We would also like to thank the participants at a pre-conference for helpful comments. This research is a part of the U.S. Census Bureau's Longitudinal Employer-Household Dynamics Program (LEHD), which is partially supported by the National Science Foundation Grant SES-9978093 to Cornell University (Cornell Institute for Social and Economic Research), the National Institute on Aging, the U.S. Department of Labor (ETA), and the Alfred P. Sloan Foundation. Any opinions, findings, and conclusions or recommendations expressed in this publication are those of the authors and do not necessarily reflect the views of the U.S. Census Bureau or the National Science Foundation. Confidential data from the LEHD Program were used in this paper. The U.S. Census Bureau is preparing to support external researchers' use of these data under a protocol to be released in the near future; please contact Ron Prevost, Director, LEHD, Ronald.C.Prevost@census.gov.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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