More Competitive Markets Can Lead to Better Skills

In a small town outside Lima, a teenage student about to finish high school walks home from school, clutching her phone and dreaming of a better job. Yet her prospects are not much brighter than those of her parents, who had little formal education. Indeed, while across Latin America and the Caribbean, access to education has expanded dramatically, for many young people finding a good job continues to be a struggle.   

For decades, governments have rightly treated human capital as the engine of development. That logic is sound. As the IDB report Learning Better: Public Policy for Skills Development notes, more schooling and better skills should lead to higher-productivity jobs and higher incomes. But access to better schooling is only one part of the equation. When markets are uncompetitive and dominated by only a few firms, there is less need for skilled workers. There is also less incentive for students to acquire the skills that in competitive markets would lead to higher salaries. Policies that increase competition among firms are thus crucial to both human capital development and improved social welfare—a theme explored in the IDB’s upcoming Development in the Americas flagship report.     

Public spending on education has risen sharply over the past three decades and now averages close to 5% of GDP in Latin America and the Caribbean. This greater investment in education has financed expanded coverage, teacher training, and new tertiary and vocational programs. Yet while these supply-side efforts have multiplied, something in the machinery connecting classrooms to paychecks seems to be broken.

A key ingredient of learning is the daily effort students put into attending classes and completing assignments. For older teenagers and young adults, that effort depends partly on the rewards they expect. In other words, people invest more in education if the labor market makes learning worthwhile. That link appears weak in the region. 

The production of skills, like the production of anything else, depends not only on supply, but also on demand. When firms fail to expand or innovate, their demand for skilled workers stagnates. In theory, the mechanism should be self-reinforcing. Dynamic firms adopt better technologies, boost productivity, and pay more, prompting workers to invest in learning. But when markets are dominated by a few incumbents, or by informal firms surviving on low productivity and low wages, that mechanism breaks down.

The Learning Better report shows how incentives shape performance. Students in Latin America and the Caribbean typically learn only a fraction of what peers in OECD countries do in the same years of schooling. Yet when schools connect learning to clear job prospects—through high-quality technical programs, internships, or information about career opportunities—students respond. Motivation rises when effort has visible rewards.

At the macro level, the IDB’s Strategy+ Transforming for Greater Impact and Scale (2025) document offers insights into why those rewards are often missing. In uncompetitive markets with concentrated industries, measured returns to education may still be positive. But too few firms generate the kind of high-productivity jobs that sustain them.

The IDB’s Strategy+ highlights the importance of a fair, transparent business environment and open competition in both product and labor markets to ensure that investments in human capital are rewarded. Governments can expand coverage, raise test scores, and boost graduation rates, but if the economy cannot absorb skilled workers into productive, well-paid jobs, progress will be slow. By contrast, when firms face pressure to innovate and retain skilled workers, they bid up wages and the social return to education increases. 

Policies that foster competition, reduce entry barriers, and support business creation are thus as essential to human-capital development as those that build schools or train teachers. Indeed, the IDB’s Strategy+ document treats competition and education as complementary levers for growth: one increases the stock of skills; the other ensures those skills are put to productive use.

Fair markets also enhance inclusion. Where entry barriers fall and small firms can grow, workers from poorer households gain access to better jobs. Conversely, when a few firms dominate and regulation protects insiders, inequality persists—no matter how many years students spend in school.

Inclusive growth requires both opportunities for intellectual development and fair markets—a dynamic explored in depth in the IDB’s forthcoming 2025 Development in the Americas report, Markets for Development: Improving Lives through Competition, which delves into the many ways that competition shapes living standards across Latin America and the Caribbean.