Evaluation of the Dagum–Slottje method to estimate household human capital

In Dagum and Slottje's breakthrough contribution of on human capital (2000), the authors combine its microeconomic estimation as a standardized latent variable with the macroeconomic estimation of its average value in the population. The standardized latent variable is obtained applying the partial least squares method after transforming the qualitative indicators considered as investments in human capital and called formative indicators. This approach, however, does not take into account the effects of investing in human capital (reflective indicators), hence ignoring its economic definition. The main purpose of this paper is to introduce an improved statistical method of household human capital estimation as a standardized latent variable which is a function of both formative and reflective indicators. The latter is measured by household earned income, excluding income generated from wealth.A comparison of the new results with those obtained by Dagum and Slottje [Dagum, C., Slottje, D.J., 2000. A new method to estimate the level and distribution of the household human capital with applications. Journal of Structural Change and Economic Dynamics 11, 67–94] using the same data clearly show the advantages of the new approach.