The Economy-Wide Impact of Harnessing Human Capital Development and the Case of Ethiopia: A Dynamic Computable General Equilibrium Model Analysis

Alekaw Kebede Yeshineh () and Firew Bekele Woldeyes
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Alekaw Kebede Yeshineh: Department of Macroeconomy and Finance Policy Research, Policy Studies Institute (PSI), Addis Ababa 2479, Ethiopia
Firew Bekele Woldeyes: Department of Macroeconomy and Finance Policy Research, Policy Studies Institute (PSI), Addis Ababa 2479, Ethiopia

Economies, 2025, vol. 13, issue 5, 1-23

Abstract: This study uses a computable general equilibrium (CGE) model to analyze the impact of skilled and semi-skilled labor supply shocks on the Ethiopian economy and sectoral outputs. The study examines three policy scenarios: a 10% increase, a 15% increase, and a 20% increase in skilled and semi-skilled labor supply compared to a business-as-usual (BAU) scenario. The findings show that all three scenarios contribute to higher economic growth, investment, and exports. The impact on sectoral outputs is also significant, with the industry and services sectors performing better than the agriculture sector. In the 20% increase scenario, the real annual gross domestic product (GDP) growth rate is projected to be 0.79 percentage points higher than the business-as-usual scenario. Additionally, the annual growth rates of investments and exports are expected to be 2.69 and 2.31 percentage points higher, respectively, compared to their business-as-usual scenario counterparts. The agriculture sector experiences a slight increase of 0.16 percentage points in annual production compared to the business-as-usual scenario. Output in the industry sector also sees a rise of 1.61 percentage points higher than the business-as-usual scenario, while outputs in the services sector improve significantly. Overall, the study highlights the positive impact of increasing the supply of skilled and semi-skilled labor on the economy. This is mainly due to the higher productivity of skilled and semi-skilled workers, which contributes to increased economic growth. The findings suggest that governments should implement policies to enhance the supply of skilled and semi-skilled labor, such as investing in education and training programs. These measures would promote economic growth and improve living standards.

Keywords: skill-biased labor supply shock; computable general equilibrium (CGE) model; social accounting matrix (SAM); learning-by-doing growth hypothesis; skill mismatch; business as usual (BAU) high growth (LS20); medium growth (LS15); low growth (LS10); investment in education and training programs (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2025
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