How should employment policies in developing countries react to the new model of structural change?The “Kuznets paradigm” for jobs and structural change no longer holds. Kuznets expected the workforce to gradually shift from informal agriculture to better jobs with higher productivity and wages in well-organized formal manufacturing and (eventually) services.
But in sub-Saharan Africa, we see the workforce shifting from agriculture to informal jobs in services and manufacturing. There are few formal jobs. Even in the manufacturing sector, informality predominates. We can see it clearly in Ethiopia and Tanzania. This contrasts with what happened a generation ago, in places like Taiwan and Vietnam, where formal manufacturing jobs were key to structural transformation. In Ethiopia, for example, manufacturing jobs are growing – they have gone from 3% to 10% of jobs over the past decade. But formal manufacturing jobs are stagnating. Manufacturing is experiencing an exacerbated dualism. There is a cluster of large formal enterprises with high productivity and few jobs – and thousands of small, informal, low productivity enterprises with lots of jobs.
Conventional assumptions would explain this by market failures that affect small businesses – such as high labor costs and capital market failures. But there is little evidence of a “missing link”. And at the high end of the business distribution, formal manufacturing capital intensity in Tanzania and Ethiopia is higher than in the Czech Republic. This is incompatible with their factor endowments, where low-skilled labor is plentiful and capital scarce and expensive.
The explanation may be that advanced technologies tend to be shared among economies. For example, formal manufacturing firms in Ethiopia and Tanzania import technologies that predominate in global markets and reflect global factor endowments. As a result, the global collapse in demand for low-skilled jobs in manufacturing is reoccurring in sub-Saharan Africa. Figure 1 shows you what could happen.
The starting point is that there are two sets of technologies – capital-intensive technology on the left and more labor-intensive technology on the right. First, low-income countries use the latter. With the market price at Po, the labor-intensive technology is more profitable. But then the system is shocked by a decline in the cost function for capital intensive technologies (eg due to automation). The result is a new world market price (Pi), which is below the entire cost function (not lagged) for labor-intensive factories.
Figure 1: Analysis of technological choices in a world characterized by skill / capital intensive technical changes. Source: Diao, Ellis, McMillan, Rodrik (2020)
Thus, low-income countries (LICs) no longer have a comparative advantage in the labor-intensive manufacturing sector. Their production falls (due to the loss of market share) and jobs are even more lost (because the lost production was relatively labor intensive). Note also that the new cost curve for the capital-intensive segment is steeper than the old one, reflecting the increased marginal importance of skills and other expensive add-ons, such as public infrastructure, to the growth of the economy. production. It is therefore more difficult for LICs with limited skills and poor infrastructure to switch to this model.
What are the alternatives to employment growth induced by the manufacturing sector? Can other sectors absorb large amounts of low-skilled labor? Can they exploit world markets so that their growth is not hampered by the constraints of domestic demand? Unfortunately, it is difficult to see how agriculture and market services tick these boxes. Jobs in agriculture will have to shrink, as productivity grows faster than demand. High productivity market services have few jobs and do not match the skills endowments of LIC economies. Even success stories like India and the Philippines have faced skill constraints.
I conclude that the key question of the economic development strategy is: “Where will the good jobs come from?” “. Good jobs need to be productive – but not necessarily the MOST productive – jobs.They must be consistent with the endowments of skills. And they cannot be created by informal businesses with low productivity. It seems inevitable that domestic services will become a crucial part of the answer.
To support the growth of good jobs, growth policy, employment policy and social policy will need to be integrated, with complementary interventions for labor supply and demand.Education and skills will remain crucial. But we also need a new industrial policy. The matrix in Figure 2 illustrates the possible entry points. So far, we have focused our industrial policies on high productivity sectors, supporting innovation and trade agreements for global market access. Meanwhile, social policies have focused on the low productivity population, including education and training programs and redistributive transfers.
Figure 2: Rethinking development policy. Source: Rodrik
Instead, we should focus on the mid-productivity activities that can produce a lot of better jobs.In doing so, the potential for creating good jobs in domestic services will appear significant. Supporting this process means tackling complex issues. Uncertainties rule out the likely effectiveness of simple Pigouvian employment subsidies. Rather, we should consider personalized trade incentives, explicitly designed to create jobs, for example using flexible conditionalities, and not necessarily focused on export champions.
Overall, governments should incorporate the broad externalities of better jobs into their funding decisions for training and incentives for investment and technology choice.This is a âstructuralistâ or âproductivistâ approach, which merges the equality / inclusion agenda with the employment and economic growth agenda.
This blog is based on an opening speech at the 5th Jobs and Development Conference on September 2, 2021.