Formative Indicators and Effects of a Causal Model for Household Human Capital with Application

Dagum and Slottje (2000) estimated household human capital (HC) as a latent variable (LV) and proposed its monetary estimation by means of an actuarial approach. This paper introduces an improved method for the estimation of household HC as an LV by means of formative and reflective indicators in agreement with the accepted economic definition of HC. The monetary value of HC is used in a recursive causal model to obtain short- and long-term multipliers that measure the direct and total effects of the variables that determine household HC. The new method is applied to estimate US household HC for year 2004.