Depreciation of Human Capital

2011 – The human capital of workers in a knowledge based economy is of great value but can quickly become obsolete when skills are utilized insufficiently. This report examines the development of human capital during a work life and discusses the impact of unemployment and inactivity on human capital value. Research on the depreciation of human capital typically applies indicators like wage data and labor participation opportunities. This study also applies indicators like individual skill testing on language, comprehension and arithmetic (the ‘functional literacy’), memory tests and the subjective own knowledge assessment. The contribution of this report concerns the provision of an innovative addition to the literature in this field (by the effect of economic inactivity) and the value of human capital analyzed based on data covering the entire life cycle of employees. This offers the opportunity to make long-term effects visible with the effects differentiated to workers cohorts. The effects of unemployment on human capital value are examined in the light of new data from the Dutch Central Bureau of Statistics which relate to people who have become unemployed due mass lay off or bankruptcy. The research questions are:

1 In what way does the value of human capital develop during the working life?

2 To what extent depreciates human capital during periods of inactivity associated with caring for children?

3 To what extent declines human capital in value during periods of unemployment?

4 To what extent does the depreciation of human capital differs in the labor market between different groups?

Based on functional literacy analyzes is concluded that human capital partly depreciates in a working life without major differences by gender. The depreciation rate of human capital also does not differ between mixed, male and female professional occupations. However, low-skilled individuals with a lower average level of literacy are less affected by depreciation than secondary and higher education in which cognition declines in old age (enhanced by exit of employment) where the knowledge development is less steep at an increasing age but will not become negative. The knowledge of workers which have followed courses over the past two years depreciates significantly less than those that didn’t. Inactivity due to unemployment and care for children may result in depreciation of human capital because it often remains untapped in this period. This may result in lower employment rates, lower occupational or a lower wage involving a negative dependence between the period of inactivity and the chance to participate. This negative effect is offset by the accumulated labor market experience before the career interruption. This is interesting from a policy perspective, because it means that the knowledge and skills gained for the career not completely get lost if women withdraw from paid work for a longer time. There is a focus on economical dismissal in the analysis of the effect of unemployment on the value of human capital. This because the risk of unemployment is selective in general, but plays a less important role within an economical dismissal. A distinction is made in three forms of economic dismissal: dismissal by UWV (Dutch Labor Office) , bankruptcies and corporate outflow. Especially UWV dismissed have similar background characteristics as non-expelled. Especially for this group this suggests that selectivity does not play a large role in unemployment. The analyzes show that the three groups of dismissal unemployed have a lower participation chance compared to employed individuals. Econometric analyzes in addition show that dismissal by the UWV, or as a result of bankruptcy, has significant negative effects on the wages that someone deserves after discharge. On the other hand a positive wage effect is found for collective redundancies who founded work again.

Reference: Fouarge, D.,  Grip,  A. de (2011)  Depreciatie van menselijk kapitaal. (Depreciation of human capital)  Maastricht: Researchcentrum voor Onderwijs en Arbeidsmarkt School of Business and Economics.