Labour market flexibility, distance to frontier and human capital accumulation: Evidence from developing countries

Abstract

The present paper aims to explore whether policies enhancing labour market flexibility result in convergence to world technology frontier, and provide proper incentives to increase investment in human capital. Because of the interdependent relations among labour market flexibility, distance to world technology frontier and human capital investment, the Panel VAR methodology which account co-evolutionary relations in dynamic system is used. The data for 31 developing economies over the period 2000-2015 is used for the purpose of the study. Impulse response analysis shows that distance to frontier increases with labour market flexibility shock, while human capital investment decreases with labour market flexibility shock. Additionally, labour market flexibility decreases with the distance to frontier variable shock and distance to frontier decreases with the human capital investment shock. Results suggest that rigid labour market policies should be put in place first in developing countries to provide right incentives to invest in schooling, training, firm-specific skills and innovation resulting in convergence to the world technology frontier. © 2020 Inderscience Enterprises Ltd.