- For decades, schooling has contributed strongly to regional growth, yet productivity gains have remained comparatively modest, highlighting a persistent asymmetry in Latin America and the Caribbean.
- Recent evidence from Central America, Mexico, and the Dominican Republic helps explain part of that gap: employers increasingly seek combinations of experience, digital skills, English, and other capabilities rather than credentials alone.
- Labor and training policies can help close these gaps by targeting occupations workers can realistically reach, addressing barriers to mobility, and aligning training more closely with labor demand.
Over the past decades, evidence from Latin America and the Caribbean points to a persistent disconnect: while the region has expanded educational attainment, the substantial gains associated with that progress do not appear to have translated into comparable improvements in productivity. Education does indeed remain a fundamental driver of development, yet schooling alone does not seem to be enough, and may instead represent just the first link in a much longer chain shaped by other factors that are equally critical.
The numbers help illustrate this disconnect. Latin America and the Caribbean grew by an average of 1.8% a year between 1960 and 2019. According to the Inter-American Development Bank (IDB) 2026 Latin American and Caribbean Macroeconomic Report, schooling accounted for 1.0 percentage point of that growth, labor for 0.6, and capital deepening for 0.1. Total factor productivity—the efficiency with which an economy combines its resources—contributed the remaining 0.1 point (Figure 1).
For educational gains to translate into higher productivity and better jobs, several conditions need to be in place. Workers need the right skills and opportunities to move into productive employment, while firms must continue developing those skills on the job.
How Informality Limits Productivity
If schooling is only the first link in a much longer chain connecting education to productivity and better jobs, informality can weaken several of the links that follow. In 2025, informal employment still accounted for 51.2% of all employment in the region, only 4.0 percentage points below its 2004 level. When informal work is concentrated in low-productivity firms and jobs, workers tend to have less access to technology, training, and mobility, while firms have less capacity to invest, innovate, and teach. In this way, weak skill formation and persistent informality can reinforce each other, further limiting the extent to which educational gains translate into productivity.
Learning Does Not End at Graduation
Human capital develops in stages. Educational attainment reflects time spent in school and the credentials people earn, but credentials alone do not capture what people can actually do—the skills they have mastered and can apply. And learning does not stop there: the workplace adds another layer through practice, technology, training, feedback, and increasingly complex assignments.
The region has made more consistent progress in attainment than in mastery. This is demonstrated in the PISA mathematics exam, an OECD assessment of 15-year-old students' learning outcomes. Among the eight Latin American and Caribbean countries observed in PISA mathematics in both 2012 and 2022, six recorded lower scores, with a median change of -10.4 points. PISA 2025 broadens this picture: among those same eight countries, seven posted lower mathematics scores in 2025 than in 2022, with a median change of about -5.5 points. Eight countries do not establish a complete regional trend, but the comparison reinforces an important distinction: years of schooling and actual learning need to be measured separately.
The workplace matters as well. An estimated search model for Mexico suggests that workers accumulate human capital faster in formal jobs than in informal ones. Productive firms need people who can adopt technology and support expansion, while workers need firms where they can use their abilities, deepen them, and earn a return on them. Weakness on either side constrains the other.
Employers Hire Combinations of Skills
One way to understand what employers actually look for is through online vacancies, which provide a window into the skills demanded in jobs advertised through digital channels. An analysis based on data from the IDB Labor Observatory (covering about 2.08 million audited postings in Costa Rica, the Dominican Republic, Guatemala, Honduras, Mexico, and Panama from the third quarter of 2022 through the first quarter of 2026) found that employers look for combinations of skills rather than credentials alone.
The data show how employers combine different skill requirements. Experience appeared in 75% to 88% of postings, digital tools in 28% to 45%, and English in 8% to 31%. These requirements also tended to cluster: between 34% and 60% of postings combined at least three. Employers are looking for skill bundles, not diplomas alone (Figure 2).
Meeting the education requirement may still leave important skill gaps, and one course rarely closes them all. Training providers should therefore use labor-market evidence to define occupation-specific skill bundles and track whether training leads to better employment outcomes.
Can Workers Actually Reach the Jobs Being Created?
Skills must also match the occupations where jobs are being created. Across 43 occupational groups, the mismatch between vacancies and the current occupations of informal workers is significant. On a scale where higher values indicate a greater difference between the distribution of vacancies and workers across occupations, the mismatch reaches 61.7 in the Dominican Republic and 60.6 in Mexico. When historically reachable occupations are taken into account, those scores fall to 50.7 and 51.6, suggesting that workers may have more potential pathways than their current job titles reveal (Figure 3).
Potential reachability, however, does not necessarily translate into actual movement. Over the period from Q3 2022–Q1 2026, only 4.5% of workers who started in informal employment in the Dominican Republic and 11.5% in Mexico moved into formal jobs (Figure 4).
The gap between a possible route and an actual transition reveals barriers that conventional education indicators miss, from incomplete skill bundles and limited experience to lack of information access and practical constraints such as childcare or transportation. Public employment services and training institutions should therefore focus on occupations workers can realistically reach, and judge success by formal entry, retention, wages, and productivity, not by course completion alone.
When these frictions accumulate, they become macroeconomic. Weak matching slows the movement of labor toward more productive firms and sectors, while a smaller pool of job-ready workers reduces the returns to technology adoption and expansion. If better jobs remain out of reach, workers also have less incentive to invest in additional skills. The result is a familiar pattern: schooling can rise while total factor productivity barely moves.
Why Formalization Alone Does Not Increase Productivity
Formalization can help break this cycle when it changes how firms produce and how workers learn. Lowering avoidable compliance costs may encourage registration, but legal status alone does not create management capability, finance, technology, market access, or worker training. Evidence from Brazil shows that firms may remain low-productivity even after formalizing.
This evidence suggests that formalization policies should therefore connect incentives to tools that help firms upgrade, including management support, finance for productive investment, technology adoption, worker training, and supplier-development programs. Success should be measured through productivity, wages, training, firm survival, and sustained formality—not legal status alone.
How Can Skills Translate into Growth?
A first priority is to measure mastery, not just educational attainment—in other words, what people can actually do rather than simply how long they have studied or which credentials they hold. Education ministries and statistical agencies should therefore track key skills across population groups and territories. Better evidence can, in turn, make credentials more informative and reveal where the largest gaps remain.
That evidence should also help reshape training. Working with employers, education and training providers can define the capabilities required in each occupation, expand work-based learning, and use vacancy, wage, and placement data to keep programs aligned with labor demand. The relevant test is whether training helps workers make a job transition, not how many courses are delivered.
Public employment services can then use vacancy and transition data to identify occupations workers can realistically reach, while modular retraining, recognition of prior learning, and support for transportation or childcare can address barriers along the way. At the same time, formalization policies should strengthen the productive capacity of small firms by combining simpler compliance with access to management, finance, technology, and training.
In conclusion, more schooling certainly remains necessary, but it cannot deliver its full potential if workers end up in jobs that neither use nor deepen their capabilities. Turning skills into growth ultimately requires more productive firms, attainable skill requirements, and realistic pathways into jobs where learning continues.