Analyzing the role of Human Capital and R&D on Labor Productivity via Endogenous Growth Model"

Abstract

The present study empirically investigates the impact of human capital and R&D on Labor productivity using the modified endogenous growth model. It is argued that human capital affects the economy both directly as per Lucas (1988) and indirectly as suggested by Benhabib and Spiegel (1992). On the other hand R&D is postulated to have indirect impact on economic growth as highlighted by Aghion and Howitt (1992). For empirical investigation the present study uses time series data from 1982-2012 for Pakistan and two models are specified in the study. In the first model, human capital as per employed labor force enters as a separate factor of production and the impact of investment in R&D per employed labor force is captured through total factor productivity. In the second model, both variables are entered indirectly through total factor productivity into the model. Because of the absence of non co-integrating vector the bound testing approach to co-integration and error correction models, developed with ARDL framework has been applied. The results of the study confirm that human capital has positive impact on labor productivity, both directly and indirectly. The expenditure on R&D is found to have positive indirect impact on labor productivity. The present study strongly confirms that expenditures on human capital and R&D improve labor productivity in Pakistan in the long run.