A successful transition into the knowledge economy depends upon higher level skills, creating unprecedented pressure on university systems to provide labour markets with the skills needed. But what are the political economy dynamics underlying national patterns of high skill formation? The article proposes a framework to theorize the relationship between higher education systems and knowledge-based labour markets based on two dimensions: the type of knowledge economy predominant in a given country and the extent of inter-university competition. It is argued that the former explains what type of higher level skills will be sought by employers and cultivated by governments, while the latter helps us understanding why some higher education systems are more open to satisfying labour market demands compared to others. A set of diverse country case studies (Britain, Germany, South Korea and the Netherlands) is employed to illustrate the theory.