Introduction

The previous chapter analyzed some of the complementarities – such as those with the large informal sectors and short tenure – that discouraged investment in skills. This chapter elaborates on these institutional complementarities and adds in others to analyze the dynamics of a low-skill equilibrium. A sustained examination of skills is essential theoretically to establish the links and complementarities between the firm strategies analyzed in Chapters 3 and 4 and labor market dynamics. Close analysis of skills is also indispensable in practical and policy terms as skills and human capital set the parameters for possible development strategies as well as for the longer-term potential for more equitable development.

For some years, it has been a matter of settled consensus that investment in education and human capital is essential for economic development. However, on the issue of how to increase human capital, research and policy recommendations focus almost exclusively on the supply side. It is, of course, important to increase funding, improve instruction, modernize curricula, and revitalize schools and educational administration, but these efforts are not likely to meet with intense student demand for education if good jobs that require their skills are not waiting at the other end. As a report from the Inter-American Development Bank put it, “policies aimed only at improving the supply of educational services will likely fail to improve young individuals’ school attainment” (Duryea, Edwards, and Ureta 2003, 18). Alice Amsden (2010) goes further and deems the overemphasis on investing in human capital a mistaken application of Say's Law (that supply creates its own demand) and a sort of “job dementia” in its neglect of complementary policies to create jobs for newly educated entrants into the labor market.