CEDE Seminar - Marcela Eslava

We explore the phenomenon of "jobless industrialization" in late-industrializing countries.

In these economies, unlike the case of early industrializers, the manufacturing sector’s  contribution to overall employment fell short of its contribution to value added by a large gap, even at the peak of industrialization. After showing that joblessness concentrates in the segment of the largest, most productive manufacturing firms, 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. Using establishment level data spanning five decades, we estimate the impact of minimum wages, payroll taxes, as well as capital and product-market distortions on the share of employment absorbed by the manufacturing sector, characterized by larger (and more formal) firms. Revenue and labor market distortions affect high-productivity manufacturing firms the most. The minimum earnings constraint prevents lower-productivity agents from becoming formal workers. These elements lead to a small formal manufacturing sector that contributes relatively more to value-added than employment—thus generating jobless industrialization. Through counterfactual exercises we assess the role of different dimensions of human capital and different regulations, including corporate revenue taxes, payroll taxes and mínimum earnings. Our results shed light on potential policies to address the shortage of modern jobs in these economies.