TRADE: Jobless Industrialization; Professor Martí Mestieri (Centre de Recerca en Economia Internacional (CREI))

Abstract

Together with relatively low levels of income per capita, many of the world’s low- and middle-income economies feature high levels of informality, poverty rates, feeble middle classes, and high inequality. Their inability to absorb large numbers of workers in “modern” (high-paying, formal) jobs is a common thread linking these features. These faces of the development problem can be traced back in history to a “jobless industrialization” in countries that industrialized relatively late. Unlike the case of early industrializers, at the peak of industrialization in these countries, manufacturing contributed to overall employment much less than to value-added, a gap that has persisted over time. We document jobless industrialization and show that joblessness has concentrated in the segment of the largest, most productive manufacturing firms. Motivated by this heterogeneity we explore the role of distortions against more productive businesses, vis-à-vis factor-biased technology and weak human capital, to explain jobless industrialization. A large literature has found that (implicit or explicit) size-correlated distortions are important in explaining the firm size distribution and low aggregate productivity in less developed economies. Can these distortions and their role be traced back to the peak of industrialization? Can they explain jobless industrialization and productivity gaps then? We develop a general-equilibrium model featuring heterogeneity across firms, self-selection into occupations and formality, and distortions in labor, capital, and product markets that apply to formal activity only. We inform the model with a long time-series microdata spanning more than 500 years going back to the peak of industrialization for Colombia.  Our data includes establishment-level data for formal producers, as well as information on total employment and value-added segmented by sector into formal and informal, going back to the peak of industrialization. Using these data, we estimate the impact on the share of employment absorbed by modern firms of potentially size-correlated distortions, including minimum wages, payroll taxes, capital, and product-market distortions. Revenue and labor market distortions affect high-productivity manufacturing firms the most. The minimum earnings constraint prevents lower-productivity agents from becoming formal workers or entrepreneurs. These elements lead to a small, formal modern sector contributing relatively more to value-added than employment. Because manufacturing is more intensive in modern production this translates into jobless industrialization. Counterfactual exercises show that eliminating these distortions has a negligible effect on the economy's structure in terms of value-added but leads to a significant increase in the employment accounted for by workers in modern (formal) production and leads to a meaningful reduction in inequality.