The Low-Skill, Bad-Job Trap

IMF Working Papers, July 1, 1994

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The paper explains how a country can fall into a “low-skill, bad-job trap,” in which workers acquire insufficient training and firms provide insufficient skilled vacancies.
In countries where a large proportion of the workforce is unskilled:
- Firms have little incentive to provide good jobs (requiring high skills and providing high wages).
- If few good jobs are available, workers have little incentive to acquire skills.
The paper examines the need and effectiveness of training policy in breaking this trap.
The paper provides a possible explanation for why western countries have responded so differently to the broad-based shift in labor demand from unskilled to skilled labor.

Interaction between labor demand and labor supply:
- Low-skilled workforce → low incentives for firms to create skilled vacancies.
- Few skilled vacancies → low incentives for workers to invest in training.
Market failures emphasized:
- Training supply externality.
- Vacancy supply externality.
Labor market outcomes discussed:
- Skilled labor versus unskilled labor dynamics.
- Wage-employment experience and earnings differentials tied to job quality and skill composition.

Need and effectiveness of training policy:
- Training policy is analyzed as a potential instrument to address the coordination failures between firms’ vacancy decisions and workers’ training choices.
Explanation for heterogeneous responses across western countries to shifts in labor demand:
- Differences in how countries addressed training and vacancy creation may account for divergent labor-market outcomes.

Subject: Education, Labor, Labor demand, Labor supply, Skilled labor, Wages
Keywords: Central and Eastern Europe, earnings differential, Europe, job vacancy, Labor demand, Labor supply, market failure, Skilled labor, training function, training supply externality, vacancy decision, vacancy supply externality, wage-employment experience, Wages, WP