**Table 1. Shares of wealth by income aggregate, 2005**

||Intangible|Produced|Natural|
|---|---|---|---|
|Low income|50%|14%|36%|
|Lower middle income|50%|24%|25%|
|Upper middle income|67%|17%|17%|
|High income: OECD|81%|17%|2%|

Source: World Bank (2011).

# **3. Measuring human capital**

As mentioned above, one of the key findings from the World Bank’s national wealth accounting is that intangible capital – the unexplained residual – constitutes a large share of total wealth, an estimated 60% to 80%, in most countries covered. In particular, the share is around 80 % for high income OECD countries (World Bank, 2011).

To better understand the composition of this residual, accounting for the main components within it is a natural way forward. Ferreira and Hamilton (2010) find that, by treating human capital as a function of years of schooling (adjusted by survival rates), human capital is the most important component of intangible capital for all countries and especially so for high income countries.

Many different approaches to measuring human capital currently exist.<sup>5</sup> One approach, common in the economics literature, is to use single indicators as proxies for human capital, such as educational attainment in the form of average years of schooling (e.g. Barro and Lee, 2001, 2010). However, these single indicators, though simple and based upon available data, do not on their own adequately measure the stock value of human capital (OECD, 2001); and they may even poorly specify the relationship between education and the stock of human capital (Wößmann, 2003; Kokkinen, 2010).

Moreover, applying a single indicator as a proxy for human capital is in any case not equivalent to accounting as practiced in the SNA and the World Bank wealth accounts. In the SNA, produced capital (e.g. machinery, equipment, and structures) is accounted using the perpetual inventory method (PIM), in which the stock of capital is measured as the sum of depreciated flows of investment; and commercial natural resources (e.g. energy and mineral resources, timber resources) are valued as the present value of resource rents – both methods are consistent with standard economic theory. Therefore, to serve the purpose of directly accounting for human capital within the World Bank’s wealth accounting framework, a monetary measure based on sound economic theory is needed.

To this end, the results from the recently launched OECD human capital project are employed in this paper. The methodology applied by the OECD for measuring human capital is the lifetime income approach, developed by Jorgenson and Fraumeni (1989, 1992a, 1992b). This approach measures the stock value of human capital embodied in individuals as the total present value of the expected future labor income that could be generated over the lifetime of people currently living – it therefore produces values of human capital that are consistent with the SNA and World Bank asset accounts.

As outlined in Annex II, the implementation of the lifetime income approach usually requires three steps: first, a database for each country is constructed, containing information on the number of people, their earnings, school enrolment rates, employment rates, and survival rates, all cross5 . For discussions on the pros and cons of these various approaches for measuring human capital, please refer to Liu (2011) and Boarini _et al._ (2012).

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