Effect of Human Capital Development on Economic Growth in the

The broad objective of this research is to empirically assess the channels through which human
capital development affects economic growth in Nigeria. Using annual time series data from 1980
to 2023 the study applied the Ordinary Least Square (OLS) 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 (co-integrated) Vector Autoregressive Model of
the Nigeria’s growth process at both aggregate and sectoral levels. 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. 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.