The accumulation of human capital is considered as an important determinant in the process of economic growth. Despite a large literature there is still an ambiguity regarding its role in growth as a number of empirical studies have found an insignificant, in some cases even negative, impact of human capital on growth. However, the focus of these studies has been more on issues related to the use of data and methodology and they assume that the impact of human capital is the same across countries.
Using a dynamic threshold model, we show that the reason for the apparent irrelevance of human capital (proxied by average years of schooling) for generating growth in an economy lies with its level of development. This implies that human capital accumulation cannot assert its productive role in the process of growth until an economy crosses a threshold level of development. Our finding remains robust across various tests. What helps human capital to assert its productivity at a higher level of development provides an interesting opportunity for further work (pg. 9).
It seems like the institutions of growth–largely those associated with increased economic freedom–play the most vital role in getting economies off the ground.