What Drives the Correlations between Human and Financial Capital Returns? An International Portfolio Choice Approach

Over a time of increased economic stability, human capital returns have become riskier. Income volatility is increasing, workers bear more risk in labor markets, and global trends in trade and investment expose human capital to risks from a more internationally integrated economy. But measuring the risk and returns of human capital presents distinct challenges. We estimate the correlation between returns to human capital and financial returns implied by observable international portfolio holdings, financial returns data, and a portfolio choice model. Implied correlations vary across countries and time, and are related to education, immigration, trade, and direct investment. Countrylevel characteristics associated with globally integrated labor markets drive the integration between human and financial capital. For example, the positive association of inward FDI with the correlation between home human capital and foreign financial returns suggests that when foreign firms generate wages, human capital returns are more highly correlated with foreign financial returns