2014.05.20_OECD-ECLAC-PSE Forum_altenburg

Global change, labour market
dynamics and the sectoral structure
of production
SECOND EUROPE–LATIN AMERICA ECONOMIC FORUM
Paris, OECD, 20 - 21 May 2014
Tilman Altenburg,
Deutsches Institut für Entwicklungspolitik/ German Development Institute (DIE)

– Labour market performance depends on systemic
relationships between fiscal policies, exchange rate
polcies, industrial policies, education policies, labour
market policies, social policies etc.
– Focus in this section: links between global change,
labour market dynamics and sectoral structure of
production (=> incomplete picture!)
– ... and a comparative perspective on Europe and LAC
© Deutsches Institut für Entwicklungspolitik (DIE) 2

Europe: stylized picture
Unemployment rates in EU (11%), Euro area (12%) unprecedented in
recent history:
– Financial crisis as a trigger: failure to manage financial markets well
& accumulation of fiscal deficits => recession, deleveraging
– But also deeper structural problems in a global economy in which
wealth is shifting from OECD to emerging markets, mainly Asia
– Real wage increases in many countries > productivity growth
– Eastern & Southern European countries in a sandwich position
– Skills not matching labour market demand, long unemployment
spells indicate structural problems; mismatch esp for unskilled
workers and those who lost public sector jobs.
Essentially, productivity agenda is needed !

LAC: stylized picture
Positive labour market trends in LAC:
– Unemployment down across the region - Brazil from 11.1% (2000-
07) to 5.5% in 2012;
– Informality decreased in 7 out of the 9 countries throughout the
2000s for which consistent data are available;
– Fall in wage inequality and poverty rates (World Bank 2013).
Reason: commodity boom increased fiscal space for social policies (e.g.
cash transfers), further urbanisation, increasing middle classes =>
expansion of non-tradable goods and services (retail, construction
..) … which benefited unskilled labour.

But doubts about the sustainability:
– Traditionally very segmented labour market with huge differences in
productivity (”structural heterogeneity”)
– Large productivity gaps between and within sectors => allocative
inefficiencies, entry barriers (skills, regulatory and others)
– Long-term inclusive growth would require shifting the large parts of
population from low into high-productivity activities
– From 1990 to 2005 this did not happen: labour moved into less
productive activites (“negative structural transformation”; McMillan/Rodrik 2011)
– may have improved since 2005, but not radically.
Current positive labour market trends may mask structural deficits

Geographical concentration of R&D expenditure, 2007
© Deutsches Institut für Entwicklungspolitik (DIE)
Source: National Science Board (2010) cited in OECD.

Geographical distribution of tertiary education
Note: Pupils enrolled in tertiary education worldwide regardless of age. UNESCO (2009, cited in OECD, Shifting Wealth).
© Deutsches Institut für Entwicklungspolitik (DIE)
World
share

EU – LAC: Commonalities
Labour markets in both region look very different (structurally and recent
performance), but similar underlying problems:
Low productivity growth: Insufficient innovation efforts (R&D/GDP)
1.84% EU, 1.1% Brazil, rest of LAC mostly below 0.5%. Patent data
show weak performance in core technologies (IT, new materials,
nano-tech, bio-tech, advanced electronics, low carbon, megacity
innovations). Little ability to attract R&D outsourcing, tap into global
knowledge clusters.
Exclusion/ insufficient inclusion : Large parts of the population lack
the skills to link into knowledge-driven economies (=>
unemployment in Europe, low productivity employment in LAC)
=> Dual challenge of structural change and inclusion

Policy implications
Productivity agenda, harmonising industrial and innovation policies
with research and education policies, labour market and social
protection policies
– Europe’s Lisbon agenda and EU 2020 agenda clearly recognise this
(reach 3% R&D share in GDP; improve conditions for private R&D; reduce
share of early school leavers; increase share of the population with tertiary
education …)
– Recognition of solid manufacturing industry as a basis of wealth.
– Explicit focus on specific technologies: Advanced process
technologies, micro and nano electronics, new materials, industrial
biotechnology, low carbon products and processes, circular economy
innovations, electric and hybrid mobility, smart grids…
– Ambitious industrial policy agenda (more than LAC)

Policy implications
– but Lisbon targets not achieved, little progress. … no political
majorities for redirecting expenditure patterns.
– Government spending in indebted countries likely to remain low =>
greater focus on policy reforms to reduce labour costs, increase and
work incentives, extending the time span people work …
– … not the „high road“ strategy one would like to see, socially
conflictive, but unavoidable when competitiveness has eroded and
fiscal space narrowed.

Policy implications
 Link between competitiveness, structural change and jobs (and
income) complicated.
 Competitiveness goes along with increasing labour productivity =>
labour absorption only increases if growth > labour saving effects
 Trade-offs between “job creation” and “productivity” agendas (at least
temporarily):

Reallocation of resources from less to more productive firms
drives technological progress
Number of firms
Productivity
Firm distribution by productivity
t 1 t 2
technological progress
own

Policy implications
 Protecting sunset industries, SMEs, peripheral regions may preserve
jobs but slow down productivity-enhancing structural transformation
• Benefits to small firms may create incentives for sub-optimal firm sizes
• grants to firms in disadvantaged regions may keep uncompetitive firms
alive; (UK: grants helped local employment creation; but employment growth only
in small less productive firms => overall productivity down (Criscuolo et al. 2012).
– Encouraging high productivity activities makes sense
– Encouraging below average productivity firms makes sense
• if they absorb production factors from even less productive activities
• If they increase productivity of the entire production system via
economies of specilization;
– … but not if resources move towards lower productivity (e.g. when
crowding out of less competitive manufacturing industries pushes
people into informality; or when firms deliberately stay small)

A final word
– Complex trade-offs between job-focused and productivity focused
policies, macroeconomic management, social and education
policies
– No technically optimal combination: How much people are willing to
sacrifice for a competitiveness agenda (in terms of real wage
reduction, longer work hours, hire&fire, environmental trade-offs … )
varies between societies
– Societies need to be aware of the trade-offs and negotiate their own
consensus
 More peer reviews, but careful with country rankings.

Thank you for your attention!
Deutsches Institut für Entwicklungspolitik/German Development Institute (DIE)
Tulpenfeld 6
D-53113 Bonn
Telefon: +49 (0)228-949 27-0
E-Mail: DIE@die-gdi.de
www.die-gdi.de
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