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Business cost and skill acquisition.

Banerjee, A. and Basu, P. and Keller, E. (2016) 'Business cost and skill acquisition.', Working Paper. Durham University Business School.


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.

Item Type:Monograph (Working Paper)
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Date accepted:No date available
Date deposited:05 June 2019
Date of first online publication:2016
Date first made open access:No date available

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