Modern services led growth and development in a structuralist dual economy: Long-run implications of skilled labor constraint

Motivated by the South Asian experience, this paper examines the role of expansion of skilled labor force for modern services led growth and development in economies with low average educational attainment. The model economy consists of two capital‐using sectors—a service sector that employs only skilled labor and an industry sector that does not require skilled labor. The service sector represents modern skilled‐labor intensive services whereas the industry sector represents a typical South Asian industry. Supply of unskilled labor is unlimited but skilled labor is relatively scarce and grows at a finite rate. Increase in the skill premium only partially explains growth of skilled‐labor supply while the rest depends on autonomous factors, which may be influenced by education policies of the government. The main result specifies a set of necessary and sufficient conditions for existence of a unique steady state characterized by balanced sectoral growth at a rate determined by the autonomous part of skilled labor growth. A low wage share and stagnant investment conditions in the industry sector are conducive for both existence and local stability of this steady state. The model shows that supply‐side factors may completely determine steady state growth rates in structuralist models despite presence of unemployed resources.