1. Human Capital, Consumption and Housing Wealth in Transition Human Capital, Consumption and Housing Wealth in Transition Jarko Fidrmuc ZU Friedrichshafen, Comenius University Bratislava, IOS Regensburg Matúš Senaj National Bank of Slovakia and Comenius University Bratislava Bratislava Economic Meeting

2. 8th. Jun 20122 The views expressed are those of the authors and do not necessarily reflect those of the National Bank of Slovakia or the Eurosystem.

3. 8th. Jun 20123 Motivation Microeconometric analysis: households surveys on income, expenditures, and housing. What is the impact of age, experience and human capital on disposable income, consumption and housing value. The relationship between income, real estate wealth and private consumption (welfare). Political economy implications with regard to support of economic reforms in Eastern Europe. Who are the winners and losers of economic reforms?

4. 8th. Jun 20124 Human Capital and Transition It is generally acknowledged that the CEECs have a relatively efficient education system especially in field of natural and technical sciences. „Conventional wisdom holds that if there is one area where the countries of Eastern Europe and the former Soviet Union are well served, it is with respect to their stocks of human capital.” (Campos and Coricelli, 2002, JEL, p. 808) However, education of economics, business administration, marketing, and foreign languages were often insufficient.

5. 8th. Jun 20125 Our Contribution We estimate the returns to human capital in Slovak economy. We augment this discussion by an analysis of real estate wealth and consumption. We show that cohorts entering the labor market before or after 1989 have highly different equipments of human and physical capital, which corresponds to differential institutional settings in both periods. Through the estimation of the consumption function we can get a proxy for the welfare effects.

6. 8th. Jun 20126 Data Description We merge two data sets in our paper. (1) we use the household budget survey (HBS) conducted annually by the Statistical Office. (2) we calculate the value of real estates owned by the households using the database of housing prices published by the NBS. The final data set representative data for more than 4500 households for every year in all Slovak regions. Households are available only for 1 year. The recent data set covers ranges from 2004 to 2009, which reflect the change of methodology of HBS in 2004. Weights ensure that the results are representative.

7. 8th. Jun 20127 Income Profile

8. 8th. Jun 20128 Consumption Profile

9. 8th. Jun 20129 Home Ownership

10. 8th. Jun 201210 Housing Wealth

11. 8th. Jun 201211 Income Equation We estimate the income equation with the following explanatory variables: Age and squared age of the household head; Household size: number of adults, number of children, dummy for single households; Gender variable of the household head; Education: secondary, tertiary for household head and the partner; Cohort variable – labor market entrance (age 26) before 1990 Cohort education variable (dummies & years of education) Regional and time dummies.

12. 8th. Jun 201212 Income Equation – OLS I

13. 8th. Jun 201213 Income Equation – OLS II

14. 8th. Jun 201214 Income - Summary of Results Very standard results. Concave age profile. Negative gender differential. Positive returns to education, especially for higher education. Returns to education are also gender specific. Moreover, they differ between the cohorts. Labor market entrants from before 1990 receive lower returns to education. The difference for basic education is not significant. High regional and time effects, slower growth after the financial crisis.

15. 8th. Jun 201215 Household Wealth About 95% of household owns a house or an apartment. For the cohort entering labor market before 1990, 97% of households own a real estate. The main explanatory variables is income and the cohort variable. There may be a truncation or selection problem. Therefore we use Heckman selection model.

16. 8th. Jun 201216 Heckman Selection Model We estimate a linear Heckman selection model. In the first step, we estimate the probability that a respondent has house In the second step, we estimate the value of his property Age variables are used as instrumental variables for the identification of the selection equation.

17. 8th. Jun 201217 Housing Wealth - Heckman Selection Model

18. 8th. Jun 201218 Consumption Equation Income and consumption are endogenous variables. We instrument income with gender and small town, because these variables are not correlated with residuals from the consumption equation, as confirmed by Hansen J-test. Housing ownership may also influence consumption trough lower savings and better access to credits. We keep housing ownership as exogenous variable, although it could be endogenous.

19. 8th. Jun 201219 Consumption Function – IV Results

20. 8th. Jun 201220 Conclusions Employees with education gained before 1990 have significantly lower returns to education. By contrast, they have accumulated significantly higher stock of physical capital (housing). In sum, the impact on household welfare (consumption) is ambiguous.

21. 8th. Jun 201221 Thank you for your attention