Modern services led growth and development in a structuralist dual economy: long-run implications of skilled labor constraint

Motivated by the South Asian experience, this paper highlights the importance of the rate of expansion of skilled labor force for service-led growth and development in economies characterized by large populations and low average education and skill endowments using a dual economy model. The model economy consists of a skilled-labor intensive service sector and a skilled-labor indifferent industrial sector - both Kaleckian, in the sense that they maintain excess capacity and operate under conditions of imperfect competition. Labor market is fragmented. There is unlimited supply of unskilled labour but skilled labor is scarce and grows only at a finite rate. Growth of skilled labor supply is only fractionally explained by growth in real wage of skilled labor while the rest depends on education policy of the government. Since government policies take time to adjust to the needs of the private sector, we argue that effect of education policy on skilled labor supply growth can be treated as autonomous. The main result of this paper shows that the model economy can converge to a steady state characterized by balanced sectoral growth at a rate equal to the autonomous part of skilled labor growth. Also, increase in returns to skilled labor can drive up the output share of modern services as the two are positively related in the steady state. The model also shows that the supply side can determine growth in structuralist models despite persistence of unemployed resources.