Cross-country Disparities in Skill Premium and Skill Acquisition

Skilled individuals are rewarded more in poor countries than in rich countries. Why aren’t more individuals acquiring skills in poor countries? We study the role of unemployment risk. In a sample of 33 countries, we document that the unemployment rate of the skilled net of that of the unskilled decreases with a country’s level of development. Using a matching model of endogenous occupational choice and skill acquisition, we argue that the cost of doing business is a first order determinant of these unemployment rates and, therefore, of the skill acquisition decision. We then quantify the model and find that decreasing each country’s gap in the cost of doing business to the US by 10% decreases the gap in skill acquisition between rich and poor countries of between 48% and 63%.