that the majority of firms have increasing difficulties in finding workers with the right set of skills, in particular technical skills (World Bank, 2011).

This section will provide additional evidence on the role of demand as a major determinant of the evolution of the skill premium in Latin America in the 2000s. While proper discrimination among competing hypotheses would require deeper country-level research out of the scope of this paper, especially in terms of political and institutional factors, this section attempts to disentangle whether between-industry factors associated with changes in output and employment patterns across industries with different skill intensity dominate labor demand shifts in the majority of countries. Alternatively, a prevalence of within-industry changes in the composition of skilled and unskilled labor within sectors would favor hypotheses related to technological change or to the presence of skill mismatches in the labor market.

# **_5.2 Skill composition by sector_**

To characterize the source of labor demand patterns, a decomposition of changes in the share of each type of labor in total aggregate labor is carried out. Following Katz and Murphy (1992), it is possible to define: where _E_ is total labor input (in efficiency units), _j_ indexes the economic sectors, _αkjt_ = _Ekjt_ / _Ejt_ is input _k_ ́s share of total employment in sector _j_ at the base year _t_ , and _θjt_ = _Ejt_ / _Et_ is the participation of sector _j_ in total employment, also at time _t._ In order to implement these sector decompositions, ten aggregate sectors are used in each country: a) primary activities (agriculture, forestry, fishing, mining and quarrying); b) low technology manufacturing industries (food, beverage and tobacco, textile and clothing); c) other manufacturing industries; d) construction; e) retail and wholesale trade, repair, accommodation and food services; f) electricity, gas and water supply, transport and communication; g) financial sector, insurance sector and professional services; h) public administration and defense; i) education and health; and j) domestic services.

The first term of the decomposition, the “between effect”, captures the impact of transformations in the sector structure of employment on the relative employment of a given factor (in this case, skilled labor). Suppose that, triggered by changes in international prices, sector _m_ expands while sector _n_ shrinks. If sector _m_ is skilled-intensive while sector _n_ is the opposite, the change in the structure of the economy (in terms of sector employment) would favor skilled labor. The second term, the “within effect” captures changes in employment due to variations in the intensity of use of different types of labor within each sector. This methodology, however, does not account directly for the evolution of labor demand by level of skill, but only changes in equilibrium quantities. There might be exogenous sources of changes in both between and within factors, but also changes driven by changes in factor prices. However, the between effect should be mostly driven by exogenous changes in the sector structure of the economy, while the within effect should captures exogenous factors such as biased technological change, but also adjustments of relative factor use to change in factor 18