A basic feature of development dynamics is the reallocation of labour from low– productivity to higher–productivity activities (generally more capital–intensive and also often more skill–intensive). The expansion of skilled labour supply that accompanies rising per capita incomes is both cause and effect of this shift in skills demand. Over long periods, if skills supply and demand grow apace, skill premia would show little secular change; over shorter periods, however, inevitable lags may show up as growing or shrinking premia.

A policy reform like trade liberalisation can accelerate structural change in an economy, causing an exogenous shift in relative factor demands. For some developing countries, the result may be an increase in skills demand associated with the adoption of newly available foreign technology and lower cost imported capital goods. This demand shift may be permanent or only temporary, but in either case the skills supply should eventually increase in response to ...