Rate of Returns to Investment in Education and Human Capital in Pakistan

Abstract

It is widely acknowledged that physical or natural resources are not the only source of growth in a country in this era of knowledge. Human capital is considered more important to define the type and rate of economic and social growth; so, making every effort to initiate human capital development at all levels is, therefore, crucial for a developing nation like Pakistan. In this context, the goal of this study is to determine the significance of important factors in Pakistan's growth of human capital. This study utilized employment, economic growth, technology, and wages as the independent variables while dependent variable was human capital (HC). Time series data is extracted from World Development Indicators (WDI) for the period of 1990 -2020. This study used a Vector Error Correction Model (VECM) to obtain short- and long-term empirical estimates while study employed Variance Decomposition to find relative contribution of modeled variables in the HC. Moreover, study employed Generalized Impulse Response Function (GIRF) to examine the response in HC in predicted 10 quarters. Results of this study indicate that employment, economic growth, technology, and wages all have a long-term positive impact on HC. Moreover, variance decomposition results indicate that, employment in industry (EIND), employment in services (ES), labour force participation total (LFPT), GDP, technology (TECH), and wages (W) have relative contribution 6.054%, 5.013%, 5.797%, 1.635%, 3.707%, and 15.179% respectively in HC in the long run period. This study suggest that policy makers should keep in view employment, economic growth, technology and wages for increasing Human Capital.