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)

© Deutsches Institut für Entwicklungspolitik (DIE) 2

– 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


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

© Deutsches Institut für Entwicklungspolitik (DIE)

Geographical concentration of R&D expenditure, 2007

Source: National Science Board (2010) cited in OECD.

© Deutsches Institut für Entwicklungspolitik (DIE)

Geographical distribution of tertiary education

Note: Pupils enrolled in tertiary education worldwide regardless of age. UNESCO (2009, cited in OECD, Shifting Wealth).

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):


Number of firms

Productivity

Firm distribution by productivity

t 2t 1

technological progress

Reallocation of resources from less to more productive firms

drives 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)

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Economy & Finance

2014.05.20_OECD-ECLAC-PSE Forum_altenburg