Governance thresholds and the human capital–growth nexus

Abstract

PurposeThe literature that explores the relationship between human capital and economic growth has produced mixed results. It highlights the puzzle on the correlations between human capital and economic growth. This study contributes to this debate by offering an explanation of the puzzling effects.Design/methodology/approachUsing the threshold model proposed by Kremer et al. (2013), the results document that there is a threshold effect in the human capital–growth nexus.FindingsThe findings illustrate that the relationship between human capital and economic growth is weakly positive up to a certain threshold level of governance; however, the relationship turns out to be positive once the threshold level has been achieved.Originality/valueThe mixed evidence on the human capital–growth relationship can be explained through institutional quality differences. The findings recommend that better governance is complementary to contribute to the productive use of human capital in achieving higher economic growth.