The project aims at a better understanding of the sources and implications of skill deficiencies - a condition repeatedly indicated by international comparative surveys of the adult population and students. It combines economic and educational research in answering why the Hungarian school system fails to provide a significant proportion of students with functional literacy/numeracy and practicable competencies, and how these deficiencies constrain low-skilled workers in obtaining gainful employment. In particular, the project addresses issues of (i) student attitudes and their relation to students' social background and regional affiliation (ii) sources of variation in school quality (iii) forces that maintain an exceptionally high level of school segregation (iv) selection and incentives in teachers' labour market (v) impact of education and measurable skills on the careers available to graduates in the labour market. All issues are addressed using individual data from large population and student surveys collected in Hungary and other European countries. The project concludes with proposals for educational and employment policies to tackle skill formation and assistance for low-skilled graduates.