independently and jointly, are relatively consequential. I discuss this in more detail by comparing the changes in real labor earnings. Unlike GDP per capita, real labor earnings in the model match transparently to the data.

The calibration of the model ensures that the labor earnings of all cohorts match the data in 2015. Besides, the earnings of the young in all years and those of the middle cohorts except in 1995 in the model are the same as in the data. Panel B of table 6 reports the relative labor earnings under the various counterfactual scenarios and in the data.

The figures in columns (1)-(8) of panel B are close to those in panel A. However, the actual figures in columns (9) and (10) vary considerably across the two panels highlighting the survey nature of the household data. The discrepancies are particularly substantial for Costa Rica. Like GDP per capita, labor earnings have grown substantially over the decades. Since 1995, the growth ranges from 50 percent in El Salvador to more than 600 percent in Costa Rica. Though smaller, the shift over the last decade is also not trivial.

First, let me consider the joint effect of the three channels. Together they provided support for earnings expansion in two of the three economies. For Costa Rica, this represents 24-35 of the actual increase. The channels are even more active in Panama. The thrust they generate accounts for more than the actual change. In contrast, the changes in barriers and preferences over time have led to a fall in earnings. The negative impact boils down to 6 and 41 percent of the actual change since 1995 and 2005 respectively.

Now, let's look at the channels individually. The findings are in line with the previous discussion. In Costa Rica, the human capital channel overpowers the negative effects generally spawned by the others. The labor market channel generates significant drag on earnings in Panama. However, the other channels more than offset it. The human capital channel is factors more effective than the preference mechanism. With one exception – changes in human capital barriers since 1995, all channels drag earnings down in El Salvador. The relative importance of the channels has evolved. The preference channel dominates the labor market barriers in producing the aggregate drag since 1995. However, the latter has proved innocuous in the last decade while the other two have been equally influential.

To summarize, there are two key insights from the above exercises. First, in general, changes in human capital barriers have aided economic expansion. On the other hand, changes in labor market barriers have cut into these gains. The impact of the preference channel varies across countries and periods. Second, the aggregate effects of the three channels are quantitatively relevant relative to the actual shifts.

# **6.2   Labor force participation**

The model also provides insights on how labor force participation rates (LFPR) respond to exogenous changes in barriers and preferences. Development policy often targets the rates specifically. Table 7 reports the counterfactual changes in the participation rates of young women (panel A) and men (panel B). Recall that the counterfactual exercises can only affect the occupational decisions of the young. All figures are in percentage points (pp) and correspond to changes over the 2015 level. Thus, a positive number indicates an increase over the actual rate.

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