In developing countries, firms produce using technologies farther away from the frontier, and workers have lower education and formal training. It has long been argued that skills and technology are complementary (see, for example, Foster and Rosenzweig 1996). As a result, the lower skill endowment of workers may reduce the incentives of firms to invest in technology, and vice versa, the more backward technologies used by firms may reduce the incentives of workers to invest in training. If these complementarities are sufficiently strong, then matching or coordination frictions in the labor market could trap economies in an equilibrium characterised by low investment in skills and low rates of technology adoption. The aim of this project is to propose a formal test for the presence of such “investment traps”, and to implement it through a two-sided intervention targeting both firms and workers.
Identifying this type of trap has far-reaching policy implications. If matching or coordination failures are holding back technology adoption and investment in skills, then a properly targeted one-time intervention on either side of the labour market could have transformational effects, by pushing entire sectors of the economy away from the trap and onto a superior growth path. To see why this is the case, consider an intervention that trains workers in new productive skills. In the presence of an investment trap, such supply-side “push” would also lead firms to adopt new technologies that are complementary to the skills of the newly trained workers. This could spur a self-reinforcing virtuous cycle and lead to farther investment in training and technology. The evidence from this project will directly speak to the design of industrial policies such as skills training programs, or incentives for firms to adopt new technology. In particular, our results will inform the design of a new industrial training model that our partners at the Ministry of Trade, Industry and Cooperatives of Uganda are seeking to implement.
The first step in this project, currently in progress and funded by the IGC, is an exploratory survey of a representative sample of medium and large firms in Uganda. The goal of the survey, conducted in partnership with BRAC Uganda, is to provide preliminary evidence on whether firms are constrained in their technology investment by the lack of skilled workers, and if so, for which specific technologies, skills and sectors such constraints are stronger. We will then use the results of the survey to inform the design of the new industrial training model, and to build a large-scale intervention around the roll-out of such training programme. The intervention will be aimed at studying how workers respond to exogenous changes in the availability of skilled jobs in terms of their decisions to invest in training, and how firms respond to exogenous changes in the availability of skilled workers in terms of their technology adoption decisions. Ultimately, this two-sided experiment will allow us to test whether matching or coordination failures create a significant labor market constraint to investment and growth.