This chapter focuses on market failures in skill acquisition arising from (i) credit constraints and (ii) imperfectly competitive wage determination combined with complementarities between labour and capital.

The chapter begins by demonstrating how, in the absence of market imperfections, workers acquire efficient levels of skill in the context of a standard growth model. Here Gary Becker's conclusions, regarding the adequacy of the free market in generating sufficient training, are correct.

Next, the chapter shows that when workers face borrowing constraints, workers will not invest sufficiently in skills. Nevertheless, it is shown that this market failure, on its own, will not lead to a deficient long-run growth rate of the economy.

The situation is very different, however, when the labour market is imperfectly competitive, so that workers are paid less than their marginal product. Under these conditions workers have suboptimally low incentives to acquire general skills. When labour and capital are complementary in production, this will reduce the profitability of investment and lead to a sub-optimally low capital stock. In short, deficient training may lead to deficient investment, leading to even more deficient training, and so on. In this way, an economy can get stuck in a low-skill/low-investment trap.

The chapter also considers institutional arrangements to stimulate training and discusses some empirical evidence that seems to fit the presence of labour market imperfections particularly well.