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<p>Our paper is about a crucial yet often neglected policy issue regarding human capital formation in poor economies. Although increasing the supply of human capital in terms of rapid expansion of educational institutions and increased enrolment is essential, failing to pair it with complementary investments that stimulate demand for skills may lead to unintended adverse outcomes. Skill formation is frequently observed as a supply-side concern without emphasizing the equally important role of demand-side dynamics. It is commonly assumed that a greater supply of skilled labour will lead to higher demand driven by a fall in skilled wages. However, in a small open economy with fixed minimum wages for unskilled workers, the return to capital and skilled wages effectively gets pegged due to traded goods prices being disciplined by the world prices. Hence, skilled wages cannot fall sufficiently to absorb a growing supply of educated workers without the complementary investment, particularly a shift of capital toward skilled-intensive production. As a result, the economy experiences underemployment and a growing informal sector in order to absorb increasing surplus labour. Also, it is important to note that if a return to capital can’t increase, fresh private investment is not likely to happen, and this calls for a big push by public investment. In our paper, first, we provide motivating empirical evidence with a cross-section of countries, which suggests that if education and investment go hand in hand, the unemployment rate falls; otherwise, it may increase. Then, taking this cue, our rigorous theoretical model suggests that greater education for the hitherto employed unskilled group may generate educated unemployment within the group and increase unemployment of the uneducated outside the group, leading to underemployment through the expansion of the informal sector. Both effects are due to a shortage of complementary investment in production activities, which is often the consequence of policymaker’s choice of policies motivated by electoral success. Hence, our study highlights how the scarcity of capital or the lack of investment in productive activities can nullify the good impact of human capital accumulation.</p>

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Education, lack of complementary investment and underemployment in an open economy

  • 期刊论文

  • 发表日期：

    2025年12月1日

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  • Sugata Marjit,
  • Rashmi Ahuja,
  • Abhilasha Pandey

摘要

Our paper is about a crucial yet often neglected policy issue regarding human capital formation in poor economies. Although increasing the supply of human capital in terms of rapid expansion of educational institutions and increased enrolment is essential, failing to pair it with complementary investments that stimulate demand for skills may lead to unintended adverse outcomes. Skill formation is frequently observed as a supply-side concern without emphasizing the equally important role of demand-side dynamics. It is commonly assumed that a greater supply of skilled labour will lead to higher demand driven by a fall in skilled wages. However, in a small open economy with fixed minimum wages for unskilled workers, the return to capital and skilled wages effectively gets pegged due to traded goods prices being disciplined by the world prices. Hence, skilled wages cannot fall sufficiently to absorb a growing supply of educated workers without the complementary investment, particularly a shift of capital toward skilled-intensive production. As a result, the economy experiences underemployment and a growing informal sector in order to absorb increasing surplus labour. Also, it is important to note that if a return to capital can’t increase, fresh private investment is not likely to happen, and this calls for a big push by public investment. In our paper, first, we provide motivating empirical evidence with a cross-section of countries, which suggests that if education and investment go hand in hand, the unemployment rate falls; otherwise, it may increase. Then, taking this cue, our rigorous theoretical model suggests that greater education for the hitherto employed unskilled group may generate educated unemployment within the group and increase unemployment of the uneducated outside the group, leading to underemployment through the expansion of the informal sector. Both effects are due to a shortage of complementary investment in production activities, which is often the consequence of policymaker’s choice of policies motivated by electoral success. Hence, our study highlights how the scarcity of capital or the lack of investment in productive activities can nullify the good impact of human capital accumulation.