Human capital and economic growth in South Africa: A cross-municipality panel data analysis

Abstract

Background:In the literature, human capital has been identified as a key economic variable that is needed to promote growth; hence this study explores the components of human capital, that is, different skill levels in order to capture the real effect of the employed labour on economic output across the municipalities of South Africa.

Aim: This study investigates the effect of human capital of employed labour on economic output and growth in South Africa.

Setting: The study focuses on the balanced panel of 269 South African municipalities for the period 1993 to 2016.

Methods: The study utilises panel causality test and the generalised method of moments estimation techniques.

Results: A panel causality test confirms bidirectional causality between human capital and total output, as well as between total employment and total output. The resultant aggregate findings suggest that human capital has a positive and a significant impact both on total output and economic growth. The disaggregated proxy of human capital shows that higher levels of skilled employment is associated with higher total output and economic growth.

Conclusion: The findings of the effect of skilled employment on economic growth are in line with theoretical literature and therefore the study concludes that human capital in the form of skilled labour has a positive effect on both economic output and growth in South Africa. This informs policy to prioritise the upskilling of the labour force in order to contribute positively towards value-generating economic activities in South Africa.