Business Cost and Skill Acquisition

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