Hostname: page-component-8448b6f56d-m8qmq Total loading time: 0 Render date: 2024-04-24T06:31:48.375Z Has data issue: false hasContentIssue false
  • English
  • Français

THE ROLE OF LABOR MARKET FRICTIONS IN STRUCTURAL TRANSFORMATION

Published online by Cambridge University Press:  26 November 2020

Khalid ElFayoumi
Khalid ElFayoumi*
Affiliation:
International Monetary Fund
*
Address correspondence to: Khalid ElFayoumi, International Monetary Fund. e-mail: khalid.elfayoumi@gmail.com.
Get access Rights & Permissions [Opens in a new window]

Abstract

Large productivity gaps across sectors persist and the process of structural transformation is stagnant in many developing economies. This wedge between observed and optimal labor allocations reflects the presence of institutional and market frictions, which impose costs on the optimal reallocation of labor from low- to high-productivity sectors. Using a panel of cross-country sector-level data, I estimate a dynamic panel error correction model that captures the dynamics of sectoral labor flows. The model estimates provide a new set of stylized facts on the dynamics of the structural transformation process and a measure of the magnitude of frictions facing labor flows. In addition, I analyze the contribution of labor regulations and reforms to the pace at which labor flows across economic sectors. Results suggest that policy reforms need to steer between the goal of easing job creation and destruction, while supporting labor supply incentives to reallocate through strong social nets, labor protection, and risk sharing.

Keywords

Labor MisallocationLabor ReformsStructural TransformationMulti-Sectors Growth ModelsError Correction Models
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 5 , July 2022 , pp. 1239 - 1263
Copyright
© Cambridge University Press 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I am grateful to Helmut Lütkepohl, Anta Ndoye, Sanaa Nadeem as well as participants at the Swiss Economic Society Meeting, the ERF workshop in Luxor, the IMF labor group research seminar, and DIW Berlin Winter workshop for helpful feedback and support. I gratefully acknowledge financial support from the Economic Research Forum (ERF) under the project “Structural Change, Resource Misallocation and Growth Dynamics in the MENA Region.” The views expressed in this paper are those of the authors and do not necessarily represent those of the ERF or the IMF.

References

Alogoskoufis, G., and Smith, R. (1991) On error correction models: Specification, interpretation, estimation. Journal of Economic Surveys 5(1), 97–128.CrossRefGoogle Scholar
Alvarez, J., et al. (2018) Firms and the decline in earnings inequality in Brazil. American Economic Journal: Macroeconomics 10(1), 149–89.Google Scholar
Bai, J. J., Carvalho, D. R. and Phillips, G. M. (2015) The impact of bank credit on labor reallocation and aggregate industry productivity.CrossRefGoogle Scholar
Caselli, F. (2005) Accounting for cross-country income differences. Handbook of Economic Growth 1, 679–741.CrossRefGoogle Scholar
Cheremukhin, A., et al. (2017) The industrialization and economic development of Russia through the lens of a neoclassical growth model. The Review of Economic Studies 84(2), 613–649.Google Scholar
Ciccone, A. and Papaioannou, E. (2008) Entry regulation and intersectoral reallocation.Google Scholar
Costinot, A. and Donaldson, D. (2012) Ricardo’s theory of comparative advantage: Old idea, new evidence. The American Economic Review 102(3), 453–458.CrossRefGoogle Scholar
Duarte, M. and Restuccia, D. (2010) The role of the structural transformation in aggregate productivity. The Quarterly Journal of Economics 125(1), 129–173.CrossRefGoogle Scholar
Erosa, A., Koreshkova, T. and Restuccia, D. (2010) How important is human capital? A quantitative theory assessment of world income inequality. The Review of Economic Studies 77(4), 1421–1449.CrossRefGoogle Scholar
Fabricant, S. (1942) Employment in Manufacturing, 1899–1939.Google Scholar
Gengenbach, C., Palm, F. C. and Urbain, J.-P. (2009) Panel unit root tests in the presence of cross-sectional dependencies: Comparison and implications for modelling. Econometric Reviews 29(2), 111–145.CrossRefGoogle Scholar
Gollin, D., Lagakos, D. and Waugh, M. E. (2014) Agricultural productivity differences across countries. The American Economic Review 104(5), 165–170.CrossRefGoogle Scholar
Gollin, D., Parente, S. and Rogerson, R. (2002) The role of agriculture in development. American Economic Review 92(2), 160–164.CrossRefGoogle Scholar
Haltiwanger, J., Scarpetta, S. and Schweiger, H. (2014) Cross country differences in job reallocation: The role of industry, firm size and regulations. Labour Economics 26, 11–25.CrossRefGoogle Scholar
Herrendorf, B., Rogerson, R. and Valentinyi, A. (2013) Growth and Structural Transformation. Tech. rep. National Bureau of Economic Research.CrossRefGoogle Scholar
Herrendorf, B. and Schoellman, T. (2017) Wages, Human Capital, and Structural Transformation.CrossRefGoogle Scholar
Hnatkovska, V. and Lahiri, A. (2018) Urbanization, Structural Transformation and Rural-Urban Disparities in China and India.Google Scholar
Hsieh, C.-T. and Klenow, P. J. (2009) Misallocation and manufacturing TFP in China and India. The Quarterly Journal of Economics 124(4), 1403–1448.CrossRefGoogle Scholar
Hsieh, C.-T. and Klenow, P. J. (2014) The life cycle of plants in India and Mexico. The Quarterly Journal of Economics 129(3), 1035–1084.CrossRefGoogle Scholar
Inklaar, R., Lashitew, A. A. and Timmer, M. P. (2017) The role of resource misallocation in cross-country differences in manufacturing productivity. Macroeconomic Dynamics 21(3), 733–756. doi: 10.1017/S1365100515000668 CrossRefGoogle Scholar
Krugman, P. (1994) The myth of Asia’s miracle. Foreign Affairs, 62–78.CrossRefGoogle Scholar
Laitner, J. (2000) Structural change and economic growth. The Review of Economic Studies 67(3), 545–561.CrossRefGoogle Scholar
Lopez-Martin, B. (2019) Informal Sector Misallocation. Macroeconomic Dynamics 23(8), 3065–3098. doi: 10.1017/S1365100517001055.CrossRefGoogle Scholar
Maddala, G. S., et al. (1997) Estimation of short-run and long-run elasticities of energy demand from panel data using shrinkage estimators. Journal of Business & Economic Statistics 15(1), 90–100. doi: 10.1080/07350015.1997.10524691. eprint: https://www.tandfonline.com/doi/pdf/10.1080/07350015.1997.10524691.https://www.tandfonline.com/doi/abs/10.1080/07350015.1997.10524691.Google Scholar
Malpezzi, S. (1999) A simple error correction model of house prices. Journal of Housing Economics 8(1), 27–62.CrossRefGoogle Scholar
McMillan, M. S. and Harttgen, K. (2014) What is Driving the’African Growth Miracle’? Tech. rep. National Bureau of Economic Research.CrossRefGoogle Scholar
McMillan, M. S. and Rodrik, D. (2011). Globalization, structural change and productivity growth. Tech. rep. National Bureau of Economic Research.CrossRefGoogle Scholar
Mortensen, D. T., Pissarides, C. A., et al. (1999) New developments in models of search in the labour market. Centre for Economic Policy Research.CrossRefGoogle Scholar
Ngai, L. R. and Pissarides, C. A. (2007) Structural change in a multisector model of growth. The American Economic Review 97(1), 429–443.CrossRefGoogle Scholar
Nichell, S. (1985) Error correction, partial adjustment and all that: An expository note. Oxford Bulletin of Economics and Statistics 47(2), 119–129.CrossRefGoogle Scholar
Nickell, S. (1981) Biases in dynamic models with fixed effects. Econometrica 49(6), 1417–1426. issn: 00129682, 14680262. http://www.jstor.org/stable/1911408 CrossRefGoogle Scholar
Pagan, A. (1985) Time series behaviour and dynamic specification. Oxford Bulletin of Economics and Statistics 47(3), 199–211. issn: 1468-0084.CrossRefGoogle Scholar
Restuccia, D. and Rogerson, R. (2008) Policy distortions and aggregate productivity with heterogeneous establishments. Review of Economic Dynamics 11(4), 707–720.CrossRefGoogle Scholar
Sargan, J. D. (1964) Wages and prices in the United Kingdom: A study in econometric methodology. Econometric Analysis for National Economic Planning 16, 25–54.Google Scholar
Schindler, M. and Aleksynska, M. (2011) Labor market regulations in low-, middle-and high-income countries: A new panel database. 11-154. International Monetary Fund.CrossRefGoogle Scholar
Siebert, H. (1997) Labor market rigidities: At the root of unemployment in Europe. Journal of Economic Perspectives 11(3), 37–54.CrossRefGoogle Scholar
Spilimbergo, A., Prati, A. and Ostry, J. D. (2009) Structural Reforms and Economic Performance in Advanced and Developing Countries, Vol. 268. International Monetary Fund.CrossRefGoogle Scholar
Yasar, M., Nelson, C. H. and Rejesus, R. M. (2006) The dynamics of exports and productivity at the plant level: A panel data error correction model (ECM) approach. Contributions to Economic Analysis 274, 279–305.CrossRefGoogle Scholar