Several hypotheses may be behind changes in relative demand for skills. A first explanation is related to changes in output by sector of activity. Latin American economies have registered important shifts in the structure of production by sector in the last two decades. In the 1990s, almost all countries in the region experienced a drastic transformation of their economies, coincidentally with a period of trade liberalization, privatization, and modernization of their economies. As a consequence, the region experienced a surge in the importance of service sectors at the expense of agriculture and manufacturing, except in Central America where the “maquila” model gained ground and thus revitalized the manufacturing sector (see Figure 5.1). In contrast, during the 2000s, most of the countries shared an increase in the size of the mining and construction sectors, notably in the Andean countries, a situation exacerbated by the growing importance of China in the world economy, and the surge in the demand for natural resources that favored their terms of trade (as discussed in the previous section). For the rest of the sectors, the situation has been dissimilar: a) in the Southern Cone (Argentina, Paraguay, Uruguay), there was a reversal towards agriculture thanks to benign terms of trade from world commodity prices; b) while most countries continued their deindustralization process, Argentina and Uruguay were again the exception with a slight recovery of the sector; and c) services declined its relative importance in the region to make room for other sector expansions, except in Central America where it continued an upward trend (notably in Costa Rica and Panama).

These changes in the structure of production and employment could be generated, in turn, by various factors such as trade and industrial policy, and the evolution of international prices (terms of trade). An expansion of an unskilled-intensive industry may act as a positive factor demand shifter for unskilled labor. In terms of employment, these trends should be reflected in an increase in the use of unskilled labor and a shift towards sectors employing unskilled workers most intensively. The previous section showed that terms of trade can explain part of the observed evolution of changes in skill wage premia (just for tertiary workers), potentially operating through changes in the structure of production.

The second explanation is related to technological change. Information and communication technology may have required sophisticated skills to operate them in the 1990s and thus could have initially been more complementary to high-skill workers (see Acosta and Gasparini, 2007, for the case of Argentina), but technological diffusion to a larger population group may in part explain the trend reversal in the demand for skilled labor. If this is the case, firms would no longer pay a high premium for technology-related knowledge. The evidence for some countries in the region indicated a generalized increase of the use of skilled labor within all sectors in the 1990s, which can be interpreted as a manifestation of skill biased technological change (see for instance Gasparini and Cruces, 2010, for Argentina).

Finally, it is also possible that skill mismatches in the labor market are playing a role as well. The limited progress achieved in terms of school results as measured by standardized tests in Latin America suggests that the fall in returns to education may be related to deficient educational quality (as measured by international test scores such as PISA) (World Bank, 2011). This would imply that additional years of education did not necessarily improve workers’ general knowledge and skills. Alternatively, the skills provided in the formal education sector may be of relatively good quality but may not be those most needed in the labor market. Employers’ surveys in the region already identify 17