Talent Allocation and Post-Reform Growth in Central America

From 1995 to 2015, Costa Rica, El Salvador, and Panama witnessed phenomenal shifts in labor market participation and occupational distribution of women. The occupational changes suggest that many talented women in the mid-1990s were in professions that did not conform to their comparative advantage. I study this evolution of occupational distribution using an occupational choice model. Three forces create frictions to efficient allocation—discrimination in labor markets, obstacles to human capital accumulation, and preferences (or social norms). The analysis shows that the underlying improvement in talent allocation over the past two decades had a quantitative impact on growth in Costa Rica and Panama. Decomposing the aggregate effects reveals that the gains were driven by declines in obstacles to human capital accumulation. Labor market discrimination increased, lending support to the retaliatory hypothesis , and creating headwinds for economic expansion