Issues in Statistical Modelling of Human Capital and Economic Growth Nexus

Abstract

The human capital and growth relationship has been subject to considerable debate in economic literature. The empirical growth models are beset with problems ranging from theoretical frameworks and statistical modelling to estimation procedures. Due to non-availability of precise human capital variable, theoretical knowledge fails when pitched against empirical data. This paper endeavors to answer four main questions that have been figured out prominently in this debate: Is there a direct interplay between human capital and growth? Are parametric techniques incapable of capturing non-linear aspects of human capital-growth relationship as compared to semi-parametric techniques? Are estimates of human capital sensitive to proxy of human capital variables? Are estimates of human capital sensitive to estimation techniques? Our findings reveal that human capital has a well-established role in accelerating growth through both its ‘level effects’ and ‘rate effects’. The results are not sensitive to definition of education variable but are rather technique dependent. The semi-parametric model provides sufficient evidence for non-linearity in human capital-growth relationship contrary to parametric models.