Growth in a dual economy

Abstract

Growth and structural transformation of the manufacturing sector in developing countries are sometimes considered to be the result of the expansion of the “modern” (large-scale) sector relative to the “traditional” (small-scale) sector. Examining the sources of labor productivity growth in Mexican manufacturing, however, does not provide support for such a conclusion. Although we find that labor productivity levels vary almost in direct relation to establishment size, labor productivity growth shows no systematic variation by size class. In fact, small establishments have had the same rate of labor productivity growth as larger ones, partly because of the “exit-effect” (i.e. the exiting of low-productivity, small plants). Moreover, most of the variation in labor productivity across plant class sizes is found to be due to differences in capital intensity. The variation in total factor productivity (TFP) levels across size classes tends to be small.