1. Skill formation and exports: are we generating the required qualifications for development? Rossana Patrón María Inés Terra University of Uruguay Paper prepared as a part of the project Poverty, Trade Policy and Complementary Policies financed by Cepal

2. 1. Motivation There is increasing demand of qualifications. At global level the most dynamic activities are those associated to skilled intensive sectors. Educational systems in developing countries present inefficiency problems: low coverage, low quality and low completion rates. So the problem is: Early dropouts generate an inflow of new workers with low qualifications, contrary to the global and local patterns of labour demand. The aim is to investigate the economy-wide effects of the mismatch between creation and demand of skills

3. 2. The model General description Households make a consumption-leisure choice Sectors and factors: Traded sectors charge different prices in domestic and foreign markets All production functions are subject to constant returns to scale There are competitive markets for goods and factors Static version of the model, where endowment growth is exogenous

4. The rate of endowment growth in the economy is given by where, and are the stocks of skill, medium and unskilled labour

5. Thus, the accumulation process is driven by Education sector

6. 3. The Uruguayan situation 3.1 The education sector Table 1 Educational attainment by income quintiles and selected ages, Uruguay (percentages) - Only 64.3% of the population complete compulsory education (9 years of schooling) - Coverage is very unequal across income groups

7. Table 2 Composition by educational attainment (complete or incomplete) in extreme income quintiles, Uruguay While more than half of the people in the richest quintile has tertiary education, the majority of people in the poorest quintile has primary education as the highest level of attainment.

8. 3.2 Skills and production Labour by schooling level is classified as: a) Unskilled: basic education complete or incomplete (9 years of schooling or less). b) Medium-skilled: higher education incomplete (10 to 14 years), corresponding to post compulsory education with less than 3 years of tertiary education. c) Skilled: 15 years or more, corresponding to a university degree (with a degree of minimum length of 3 years) or further studies.

9. Table 3 Composition of employment by labour type and sector (percentages) Panel a: Services sector is the main employer in the Uruguayan economy, and almost all skilled workers are employed in the services sector (93%). Panel b: The composition of sectors by labour type is very different, however, the participation of semi-skilled labour is similar across sectors.

10. Table 4 Employment, production and export by sector (percentages) The services sector is mainly oriented to the domestic market, accounting for only the 18% of the country exports. Goods sector account for the 82% of exports.

11. Table 5 Ranking positions by several variables, selecting top 15 sectors by skill content Eight (out of 15) sectors included are services The sectors with more skill content are almost non-traded: Teaching activities and Health and social services Eight out of the top 10 contributors to the GDP are included in the list

12. Table 6 Ranking positions by several variables, selecting top 15 sectors by GDP growth 1997-2005 There are 5 of the top 10 major contributors to GDP (Telecommunications and postal services, Rental equipment, TICs and R&D, Livestock and related services, Real state and Teaching activities); There are 5 of the top 10 contributors to exports (Sugar and confectionary, Meat processing, Dairy products, Crops and related services, Oil refinery); There are 5 of the top 10 sectors with higher skill content (Telecommunications and postal services, Rental equipment, TIC´s and R&D, Fertilizers and chemicals, Oil refinery, and Teaching activities)

13. Data summary Table 7 Profile of aggregated sectors (percentages) EmploymentSkill contentGDPExports Primary5587 Manufacturing1481774 Services traded16252218 Services non-traded6620541

14. 4. Simulation scenarios An increase in the external demand is simulated. Time horizon 20 years. Projected based on recent trend: Three scenarios: Composition of the inflow of workers ESC0 Remains unchanged ESC1 Increase in the participation of skilled labour (reduction of HE dropouts) ESC2 Increase in the participation of semi-skilled labour (reduction of BE dropouts)

15. 5 Simulation results Table 8 Rise in export of services – Effect on wages

16. Table 9 Rise in export of services – Effect on output of productive sectors

17. 5 Conclusions 1) The analysis of the Uruguayan data on skills, trade and growth shows some important facts. Firstly, even when the main exporting sectors have high content of unskilled labour, there are some skill intensive sectors with a high exporting profile, for which the development of human resources is a key element in a context of increasing external demand. Secondly, as all sectors demand a significant share of semi-skilled labour, it seems that there is an important pressure on the creation of intermediate qualified workers. Thirdly, some of the skill-intensive sectors have shown an important dynamism during recent years and are included in the list of fastest growing sectors, which is independent of external demand.

18. 2) The analysis of the data suggest that both skilled and medium-skilled labour are key factors for growth, which are resources of deficient formation in Uruguay. The analysis of the situation of the Uruguayan education sector shows a problem at the secondary level of the education sector was identified, where only two thirds of individuals complete a compulsory level. 3) Educational policies, by determining the production of skills, affect the countrys pattern of trade and have distributional effects, as the simulation exercise shows: An increase in the external demand of skilled intensive services, will cause a rise in wage gap with the current pattern of skills formation, however, any enhancement of resource formation (skilled or semi-skilled labour) favours equity. Educational policies aiming at improving the efficiency of the education sector will contribute to a better matching between demand and supply of qualifications, allowing the expansion of dynamic sectors with a reduction in inequality.

19. Skill formation and exports: are we generating the required qualifications for development ? Rossana Patrón María Inés Terra University of Uruguay Paper prepared as a part of the project Poverty, Trade Policy and Complementary Policies financed by Cepal