Skill formation and exports: are we generating the required

qualifications for development?

Rossana PatrónMaría Inés Terra

University of Uruguay

Paper prepared as a part of the project “Poverty, Trade Policy and Complementary

Policies” financed by Cepal

1. Motivation There is increasing demand of qualifications. At global

level the most dynamic activities are those associated to skilled intensive sectors.

Educational systems in developing countries present inefficiency problems: low coverage, low quality and low completion rates.

So the problem is: Early dropouts generate an inflow of new workers with

low qualifications, contrary to the global and local patterns of labour demand.

The aim is to investigate the economy-wide effects of the mismatch between creation and demand of skills

2. The model

General descriptionHouseholds make a consumption-leisure choice

Sectors and factors:

Traded sectors charge different prices in domestic and foreign markets All production functions are subject to constant returns to scale There are competitive markets for goods and factors

Static version of the model, where endowment growth is exogenous

Factors Sectorsskilled Primary (5 activities) medium-skilled Manufacturing (23 activities)unskilled Traded services (6 activities)capital Services non-traded (9 activities)

The rate of endowment growth in the economy is given by

where , and are the stocks of skill, medium and

unskilled labour

MMM LdLL ˆ

UUU LdLL ˆ

SL UL

SSS LdLL ˆ

ML

),( jjjj EKFQ

'' qualityschoolkFE

Qq jj

j

jj

ratedropoutq jj )( 0

j

j

q

BBU EdLT

HHM EdLT

HHS EdLT )1(

Thus, the accumulation process is driven by

HBj ,

Education sector

3. The Uruguayan situation3.1 The education sector

Table 1 Educational attainment by income quintiles and selected ages, Uruguay

(percentages)

- Only 64.3% of the population complete compulsory education (9 years of schooling)

- Coverage is very unequal across income groups

Table 2 Composition by educational attainment (complete or incomplete) in extreme

income quintiles, Uruguay

While more than half of the people in the richest quintile has tertiary education, the majority of people in the poorest quintile has primary education as the highest level of attainment.

3.2 Skills and production

Labour by schooling level is classified as:

a) Unskilled: basic education complete or incomplete (9 years of schooling or less).

b) Medium-skilled: higher education incomplete (10 to 14 years), corresponding to post compulsory education with less than 3 years of tertiary education.

c) Skilled: 15 years or more, corresponding to a university degree (with a degree of minimum length of 3 years) or further studies.

Table 3 Composition of employment by labour type and sector (percentages)

Panel a: Services sector is the main employer in the Uruguayan economy, and almost all skilled workers are employed in the services sector (93%).

Panel b: The composition of sectors by labour type is very different, however, the participation of semi-skilled labour is similar across sectors.

Table 4 Employment, production and export by sector (percentages)

The services sector is mainly oriented to the domestic market, accounting for only the 18% of the country exports.

Goods sector account for the 82% of exports.

Table 5 Ranking positions by several variables, selecting top 15 sectors by skill content

Eight (out of 15) sectors included are services The sectors with more skill content are almost non-traded: Teaching activities and Health and

social services Eight out of the top 10 contributors to the GDP are included in the list

Table 6 Ranking positions by several variables, selecting top 15 sectors by GDP growth 1997-2005

There are 5 of the top 10 major contributors to GDP (Telecommunications and postal services, Rental equipment, TIC’s and R&D, Livestock and related services, Real state and Teaching activities);

There are 5 of the top 10 contributors to exports (Sugar and confectionary, Meat processing, Dairy products, Crops and related services, Oil refinery);

There are 5 of the top 10 sectors with higher skill content (Telecommunications and postal services, Rental equipment, TIC´s and R&D, Fertilizers and chemicals, Oil refinery, and Teaching activities)

Data summary

Table 7 Profile of aggregated sectors (percentages)

Employment Skill content GDP Exports

Primary 5 5 8 7

Manufacturing 14 8 17 74

Services traded 16 25 22 18

Services non-traded 66 20 54 1

4. Simulation scenariosAn increase in the external demand is simulated.

Time horizon 20 years.

Projected based on recent trend:

Three scenarios: Composition of the inflow of workers

ESC0 Remains unchanged

ESC1 Increase in the participation of skilled labour (reduction of HE dropouts)

ESC2 Increase in the participation of semi-skilled labour (reduction of BE dropouts)

2000-2007

Agriculture 4

Oil and mining 3.5

Manufacturing 6.5

Services 12

ESC0 ESC1 ESC2

Skilled 16 35 16Semi-skilled 33 15 70Unskilled 50 50 14

5 Simulation results

Table 8 Rise in export of services – Effect on wages

ESC0 ESC0 without shock with shock

Wu 0.6 0.8 0.2Wm 3.5 3.8 0.3Ws 2.7 3.0 0.3

marginal

ESC1 ESC2

Growth skilled biased

Growth medium skilled biased

Wu 0.2 5.5Wm 4.1 -7.4Ws -7.6 0.1

Table 9 Rise in export of services – Effect on output of productive sectors

ESC0 ESC0 without shock with shock

Primary 18.4 18.1 -0.3Manufacturing 18.2 18.2 0.0Services traded 16.2 17.0 0.8Services non-traded 16.4 16.6 0.1

Marginal

ESC1 ESC2

Growth skilled biased

Growth medium skilled biased

Primary -0.6 -2.3Manufacturing 0.0 -0.2Services traded 1.5 2.5Services non-traded 0.8 0.6

5 Conclusions

1) The analysis of the Uruguayan data on skills, trade and growth shows some important facts.

Firstly, even when the main exporting sectors have high content of unskilled labour, there are some skill intensive sectors with a high exporting profile, for which the development of human resources is a key element in a context of increasing external demand.

Secondly, as all sectors demand a significant share of semi-skilled labour, it seems that there is an important pressure on the creation of intermediate qualified workers.

Thirdly, some of the skill-intensive sectors have shown an important dynamism during recent years and are included in the list of fastest growing sectors, which is independent of external demand.

2) The analysis of the data suggest that both skilled and medium-skilled labour are key factors for growth, which are resources of deficient formation in Uruguay. The analysis of the situation of the Uruguayan education sector shows a problem at the secondary level of the education sector was identified, where only two thirds of individuals complete a compulsory level.

3) Educational policies, by determining the production of skills, affect the country’s pattern of trade and have distributional effects, as the simulation exercise shows:

An increase in the external demand of skilled intensive services, will cause a rise in wage gap with the current pattern of skills formation, however, any enhancement of resource formation (skilled or semi-skilled labour) favours equity.

Educational policies aiming at improving the efficiency of the education sector will contribute to a better matching between demand and supply of qualifications, allowing the expansion of dynamic sectors with a reduction in inequality.

Skill formation and exports: are we generating the required qualifications

for development?

Rossana PatrónMaría Inés Terra

University of Uruguay

Paper prepared as a part of the project “Poverty, Trade Policy and Complementary

Policies” financed by Cepal