An Accounting Framework for Human Capital

Human capital is a primary driver of economic growth, yet the United States lacks an official measure in its national accounts. This accounting fails to capture education’s full economic significance and contrasts sharply with how other capital assets contribute to GDP. The omission risks skewing investment decisions toward other forms of capital, since their contributions to growth are fully recognized in the accounts while human capital’s are not. To address that, this paper proposes and produces an accounting framework that values human capital as an asset and tracks nationwide investment in, and stocks of, human capital over time. The framework applies two methods: a cost-based approach and an income-based approach. Both methods show a substantial increase in GDP after accounting for human capital investment, but the higher value of the income-based approach reveals substantial returns on educational investment, although the return appears to be declining over time. Cost-based investment averaged 10 percent of GDP, while income-based investment ranged from 20 to 30 percent of GDP—comparable to gross investment in all other forms of capital combined. The framework provides a more complete picture of growth, with both counterfactual analysis and observed dynamics during the Great Recession and the COVID–19 pandemic showing that human capital investments can meaningfully alter measured economic fluctuations compared with traditional accounts.