Jobless Industrialization

About this event

Less developed economies (LDCs) often struggle to absorb large numbers of workers into ‘modern’ jobs. This is a common thread underlying several well-known challenges of these economies: low average income, high informality, and a high concentration of employment in micro-enterprises and self-employment, especially among those living in poverty. Leveraging rich historical microdata from Colombia at the peak of industrialization and a general equilibrium model with occupational choice, we assess the role on such challenges of the misallocation of workers to traditional production. Misallocation emerges from the interaction of correlated distortions across modern producers and distortions between modern and traditional producers, in an environment with low levels of human capital. Detailed microdata from 1970s Colombia, representative of the formal and informal workforce and businesses, allows us to estimate the parameters of technology and demand, the distributions of human capital and firm productivity, and firm-specific distortions modern firms face. The latter include the minimum wage and firm-specific payroll taxes reported in the data and attributable to policy, as well as revenue and capital-specific wedges. Using these estimates to inform our quantification and counterfactual exercises, we find that improvements in embodied human capital and technology are most effective for simultaneously increasing aggregate income, and reducing modern joblessness and inequality. While distortions affecting modern firms—-whether firm-specific or linked to a flat minimum wage—-are also significant, their impact on income is less pronounced and reducing them favors modern entrepreneurs the most, widening income gaps against the poorer, own-account, workers.