Arnold Kling  

Maladaptation to Higher Productivity

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Dani Rodrik writes,

In economies that don't exhibit large inter-sectoral productivity gaps or high and persistent unemployment, labor displacement would not have important implications for economy-wide productivity. In developing economies, on the other hand, the prospect that the displaced workers would end up in even lower-productivity activities (services, informality) cannot be ruled out.

Thanks to Mark Thoma for the pointer.

There is a parallel here with some of my attempts to model the Recalculation Story. When productivity goes up in some sectors, displaced workers end up in lower-productivity activities--unemployment.

This is an easier story to tell if you do not know any economics. Once you know economics, it becomes harder.

(a) When productivity goes up in one industry, why doesn't that industry simply expand so as not to have to shed workers?

Rodrik's answer in the case of developing economies is that those with a comparative advantage in resource extraction do not have that option. In resource extraction, higher productivity means that the same rate of output can be sustained with less labor, but that does not mean that you can use the same labor to get more output. My answer in the case of an advanced economy is that demand is not sufficiently elastic.

(b) when workers are shed in one industry, why do they not find themselves employed productively elsewhere, perhaps at a lower wage?

I think that the answer is that there is a shortage of entrepreneurialism. In developing countries, that shortage may reflect problems of culture and governance. In an advanced economy, the new patterns of production that must be created are highly complex, and the skill sets required may take a long time to develop. It may not be possible to shift the same workers out of excess-labor sectors into expanding sectors. Instead, the transition may involve workers with obsolete human capital exiting the labor force, with new vintages of labor gradually filling the expanding sectors.

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CATEGORIES: Labor Market

COMMENTS (5 to date)
geckonomist writes:

For developing countries: Various articles in the Economist argue that the productivity of Chinese workers has been going up massively for years, much faster than their salaries.
But I haven't read anywhere that total formal employment in that country has shrunk or that the overall productivity stagnated. On the contrary.

I bet that former developing countries like Singapore, South Korea, Malaysia, etc. show a similar productivity/prosperity pattern.

And for the alleged lack of entrepreneurs in developing countries: you seem to have omitted the informal sector- millions and millions of small entrepreneurs- from your hypothesis.

Thomas DeMeo writes:

I don't understand the obsession with the labor component in your recalculation story. Most of the recalculation involves capital, management, technology and regulation. Labor is just along for the ride.

Pick any company that is leading the way these days(Apple/Google), and labor recalculation is not the story.

Marc A Cohen writes:

I hate it, but I see the truth in your prediction that people will have to leave the workforce and be replaced by those with the correct skills. But what happens to those people who no longer have the right skills, and are forever unemployed? Anyone for a game of Corkball?

Doc Merlin writes:

More importantly, the supply of resource bearing land isn't sufficiently elastic either, as its mostly under fixed government control.

Dave Schuler writes:
I think that the answer is that there is a shortage of entrepreneurialism.
Risk-taking is the heart of entrepeneurialism. You need to take risks to get big. Once you're big there are other alternatives and avoiding risk is a better strategy.

Want more entrepeneurialism? Get rid of big companies.

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