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Business Cost and Skill Acquisition

Anurag Banerjee (), Parantap Basu and Elisa Keller

No 2016_01, CEGAP Working Papers from Durham University Business School

Abstract: Although the ratio of higher educated lifetime earnings relative to primary-educated lifetime earnings (skill premium) is higher in poor than rich countries, poor countries have a substantially lower fraction of individuals with higher education (skilled individuals). Why? In a sample of 52 countries, we document that the unemployment rate of the skilled net of that of the unskilled decreases with a country’s level of development. We argue that the cost of opening and operating a business is a first order determinant of these unemployment rates and can reconcile a lower skill acquisition in front of a higher skill premium in poor compared to rich countries. To formalize our argument, we write and quantify a matching model of endogenous occupational choice and skill acquisition. A country’s business cost, schooling cost and skill-productivity profile determine its fraction of skilled individuals, skill premium and unemployment rates by skill level. We infer a higher business cost for poor countries and, via counterfactual experiments, find that disparities in the business cost account for about one third of the cross-country correlation between skill premium and fraction of skilled individuals

Keywords: Skill; acquisition.; Unemployment.; Business; cost. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-sog
Date: 2016-02
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