Skill Acquisition and Private Firm Creation in Transition Economies

Abstract

This paper studies relations between availability of skilled workers and creation of private firms in transition economies using a dynamic general equilibrium model. It shows how the lack of skilled workers lowers the rate of creation of private firms by increasing wages and hence lowering profitability of these firms. The lower number of private firms leads to a shift of the labor force into the informal sector and slows the recovery of the aggregate output and labor productivity. The paper also demonstrates how policies that discourage skill acquisition by workers, such as excess wage taxation and ad hoc cuts in expenditures for education, have a negative ompact on the economy.

JEL Classification: E0, J4, J31, P21