AN EVALUATION OF THE IMPACT OF HUMAN CAPITAL FORMATION AND UTILIZATION ON ECONOMIC GROWTH IN NIGERIA (1981-2007

AN EVALUATION OF THE IMPACT OF HUMAN CAPITAL FORMATION AND UTILIZATION ON ECONOMIC GROWTH IN NIGERIA (1981-2007

Abstract:

The broad objective of this dissertation is to empirically assess the channels through which human capital formation and utilization affects economic growth in Nigeria. This was done at both aggregate and disaggregated levels for various sub sectors of the economy using annual time series data from 1981 to 2007 by applying the Johansen co-integration technique and vector error correction methodology. There are two channels hypothesized: the first channel is when human capital is a direct input in the production function while the second is when human capital affects total factor productivity. Because of the inadequacies of the various existing measures of human capital, a multi-indicator latent measure of human capital was developed for the study using Factor Analysis. Having tested for the stochastic characteristics of the times series using Augmented Dickey Fuller (ADF) test, the study estimated a (cointegrated) Vector Autoregressive Model of the Nigeria’s growth process at both aggregate and sectoral levels. The Impulse Response Functions (IRFs) were used to estimate the dynamic elasticities of the various measures of output with respect human capital. The findings confirmed the role of human capital as a source of economic growth in Nigeria through factor accumulation. The result of the study shows that human capital does not only have a positive impact on economic growth but such impact is strong and statistically significant. The long run co-integrating coefficients show that in the long run, a 1% increase in human capital will enhance economic growth by 0.3% and in the event of a one unit deviation from the long run GDP growth, there is a correction of approximately 4%. From the plot of the dynamic elasticity of output with respect to human capital, it was found that the immediate impact of a 1% increase shock to human capital is a 2.5% increase in output and the long run permanent impact is a 1% increase in output which implies that the interaction of human capital and technology did not lead to increasing returns to scale in the Nigerian economy as might be expected. The disaggregated results confirmed the role of human capital in the agricultural, manufacturing and service sectors of the economy. From the plot of the dynamic elasticity of output with respect to human capital, it was found that the immediate impact of a 1% increase shock to human capital increases output in the agricultural, manufacturing and service sectors by 5.5%, 3.9% and 0.2% respectively. In the long run, the permanent impact of a 1% increase shock to human capital is a 4.5% increase in agricultural output and a 0.28% and 4% decrease in manufacturing and service output respectively. A major policy implication of our findings is that in order to reduce the number of years it takes human capital effect to be optimal, government should provide public subsidies and company tax concessions for on the job training in the private sector. Government should direct its focus on linkages with employers of labor to generate demands for skills. In view of the growing proportion of people working in the informal economy, government should adopt strategies to train for self employment.

AN EVALUATION OF THE IMPACT OF HUMAN CAPITAL FORMATION AND UTILIZATION ON ECONOMIC GROWTH IN NIGERIA (1981-2007