Summary of WP/94/83: “The Low-Skill, Bad-Job Trap”

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

Abstract

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

This paper analyzes how a country can fall into a “low-skill, bad-job trap,” characterized by a vicious cycle of low productivity, deficient training, and low-skilled jobs, preventing the economy from competing effectively in the markets for skill-intensive products.

“Bad jobs” are ones associated with low wages and little opportunity to accumulate human capital. They are the lot of the working poor. “Good jobs” command higher wages and higher skills. The paper argues that in countries with a small proportion of skilled workers, firms have little incentive to provide good jobs, since such positions would be difficult to fill; but if few good jobs are available, workers have little incentive to acquire skills, since such skills would be likely to remain underutilized and consequently insufficiently remunerated.

Thereby the paper provides a possible explanation for why individual western countries responded so differently over the 1980s to a broadly common shift in labor demand from unskilled to skilled labor--with earnings differentials across skill groups rising in some market economies, but remaining constant or even falling in others.

The paper examines the interaction between two mutually reinforcing externalities: a “vacancy-supply externality” and a “training-supply externality.” The former arises when an increase in the number of skilled vacancies raises the probability that skilled workers will find good jobs and thereby raises the expected return from training. The latter arises when an increase in the number of skilled workers raises the probability that firms with good jobs will find skilled workers to fill them, and thereby raises the expected return from supplying vacancies.

Each of these externalities in isolation would lead the market mechanism to provide insufficient training. When both externalities are present, the market failure is considerably amplified.

It is shown that when an economy is in the low-skill, bad-job trap, “small” subsidies are associated with significantly smaller employment multipliers than are “large” subsidies. Finally, the paper argues that while the vacancy-supply and training-supply externalities make a policy stimulus for training both socially desirable and economically effective in any labor market equilibrium, the need for and effectiveness of such a stimulus--particularly one of sufficient magnitude--is especially pronounced when the economy is in a low-skill, bad-job trap.

Working Paper Summaries (WP/94/77 - WP/94/147)
Author: International Monetary Fund