Skill Formation and Wage Inequality in Developing Countries : A Theoretical Analysis

The paper is purported to analyze the impact of skill formation on the skilled-unskilled wage inequality using a few variants of the HOS-type framework. It shows that the effect of skill formation on the wage inequality depends crucially upon the technologies of production of the economy and institutional nature of the markets for unskilled labour. In the extreme case when all unskilled labour markets are distorted any attempt of skill formation unequivocally accentuates the wage gap and may increase the level of unemployment of unskilled labour. These results point out that the empirical evidence as found in Beyer, Rojas and Vergara (1999) and the World Development Report (1995) that skill formation has contributed in reducing the skilled-unskilled wage gap in some developing countries lack solid theoretical bearing. The paper suggests that institutional reform programs, designed for the removal of labour market distortions, should be given high priority along with skill improvement measures to improve the skilled-unskilled wage inequality in the developing countries