Labor Reallocation Research Articles

Watering the Seeds of the Rural Economy: Evidence from Groundwater Irrigation in India

ABSTRACT This study explores the impact of private investment in groundwater extraction for irrigation on the spatial and sectoral distribution of rural economic activity in India. Exploiting a kink in access to groundwater, generated from an absolute technological constraint on the operational capacity of irrigation pumps with depth of the water table, there is evidence of a significant improvement in agricultural production accompanied with modest consumption gains. Groundwater extraction causes a substantial increase in population density, but has no effect on the employment rate or labor reallocation between sectors of the economy. Furthermore, irrigated agriculture appears to provide additional employment opportunities for waged labor from surrounding non-irrigated villages.

Mortgage Lock‐In, Mobility, and Labor Reallocation

ABSTRACTWe study the impact of rising mortgage rates on mobility and labor reallocation. Using individual‐level credit record data and variation in the timing of mortgage origination, we show that a 1 percentage point decline in the difference between mortgage rates locked in at origination and current rates reduces moving by 9% overall and 16% between 2022 and 2024, and this relationship is asymmetric. Mortgage lock‐in also dampens flows in and out of self‐employment and the responsiveness to shocks to nearby employment opportunities that require moving, measured as wage growth within a 50‐ to 150‐mile ring and instrumented with a shift‐share instrument.

How do sectoral elasticities affect the transmission of monetary shocks?

PurposeThe presence of heterogeneity in price stickiness has been previously shown to be the main determinant of the real effects of nominal shocks. The paper presents theoretical results that highlight the significance of labor mobility and intratemporal elasticity of substitution across sectors.Design/methodology/approachThis paper explores output dynamics in a closed economy, relying on a New Keynesian model that accounts for heterogeneity in price stickiness across sectors.FindingsThe key finding from the analytical results is that changes in labor mobility and intratemporal elasticity of substitution across sectors have an equivalent impact on sectoral output when accounting for differences in price stickiness. The model is then calibrated for the US economy using data from the manufacturing and services sectors, providing validation for the analytical results.Originality/valueConventional models often assume either immediate labor reallocation across sectors following shocks or no labor mobility at all. Additionally, these models assume either strong complementarity in consumption or some degree of substitutability. This paper demonstrates the crucial role that labor reallocation and the elasticity of substitution across goods across sectors play in generating well-known economic outcomes.

Agricultural tax reform, capital investment, and structural transformation in China

Identifying the driving forces of structural transformation is crucial for understanding economic development. In the early 21st century, China experienced a rapid labor shift from agricultural to non-agricultural sectors. This shift is often attributed to the industrial sector’s “pull” force, while the agricultural sector’s “push” force remains less understood. This paper investigates the role of the Agricultural Tax Exemption (ATE) reform in promoting inter-sectoral labor reallocation in China, which ended over two millennia of agricultural taxation on farmers. Our results show that the introduction of the ATE reform contributed to a significant increase in the share of non-agricultural workers. Mechanism analysis reveals that this reform encouraged capital investment among farmers and improved agricultural productivity, consequently displacing surplus agricultural workers. Further analysis shows that the labor reallocation induced by the reform had significantly increased employment and output within the secondary sector, although its effect on the tertiary sector was relatively minimal.

Government expenditure and the housing puzzle: Unpacking mechanisms

Shocks in housing demand can trigger economic downturns, prompting governments to boost public consumption to mitigate its impact. The literature has found conflicting effects of government spending on residential investment and housing prices. We hypothesize that differences in the construction sector’s responses may be due to factors unaccounted for in the estimations, such as labor supply response to wage changes, labor reallocation between sectors, and the amount of household debt. Using a dynamic general equilibrium model, we demonstrate that government consumption boosts tradable goods production, resulting in increased labor demand and wages. However, this diverts workers away from construction, potentially deepening the wound in this sector. Specific labor market attributes and economic indebtedness can catalyze worker displacement from the construction sector, thus adversely affecting residential investment and overall credit. As a result, borrowers face considerable welfare losses. Redirecting government spending toward housing sustains residential activity while exacerbating the overall welfare decline. Our analysis provides plausible explanations for the disparate empirical evidence on the impact of government spending on the construction sector.

Drought shocks and labour reallocation in rural Africa: evidence from Ethiopia

Abstract We study how rural households in Ethiopia adapt to droughts through labour reallocation. Using three waves of panel data and exploiting spatio-temporal variations in drought exposure, we find that households reduce on-farm work and increase off-farm self-employment in response to both short-term and persistent droughts, without abandoning family farming. Diversification into off-farm activities is driven by drought-related productivity declines in agriculture and contributes to consumption smoothing and food security. Households with better access to financial services are more likely to reallocate labour off-farm. Our results highlight the importance of strengthening the rural non-farm economy to enhance rural households’ climate resilience.

Allocating labor across small firms: Experimental evidence on information constraints

We document interest in labor reallocation among small firm owners in Ghana; 60% and 41%, respectively, self-report willingness to hire or work for the average local firm owner. Firm owners also exhibit high willingness-to-pay for information on a random subset of hiring firms and jobseeking firm owners during a Becker–Degroot–Marschak exercise. Conditionally random variation in access to this information generates immediate labor adjustments within and between firms, though rarely of firm owners themselves, and impacts firm closure 5-months post-intervention. Our findings suggest that labor market information of this kind is both valuable and actionable in our context.

Structural change and economic growth: Causality relationships in the case of Poland

Research background: Structural change and economic growth characterise any process of economic development and have relevant research background. However, the research on identification of a character of relationships between the phenomena are not conclusive. Researchers either find that economic growth induces structural change and the process is demand-driven or that structural change determines economic growth and the dependencies are supply-driven or that the relation is two-directional with overlapping interdependencies. Moreover, the association may be shaped differently depending on specific development conditions of each economy and transform over time. Purpose of the article: The aim of the study is to investigate the relationships between economic growth and structural change in the sectional composition of employment in Poland using state-level quarterly data for 2008–2022. It empirically verifies whether economic growth determines structural change or changes in economic structure influence growth in this specific national context, giving insights into a character of the developmental interdependencies. However, the Polish case is only an example of developmental feedbacks that may specify any catching-up economy. Diagnosing the dominating character of the economic relation is of high importance for any modern transforming country and identifying any limitations to the interdependencies may make it possible to avoid the middle-income trap. Methods: The paper examines the causality using Granger-test and analyses the relationships with VAR models. It uses some alternative measures of structural change, namely Norm of Absolute Value (NAV), Modified Lilien Index (MLI), and Clark Index (CI) to catch labour reallocation across sections of economic activity (NACE Rev. 2). They are then adopted in lead-lag models of relationships with economic growth. Findings & value added: The study browses the classical three-sectoral approach to structural transformation using a more detailed structural layout to capture its modern character. Moreover, it compares alternative measures of structural change to derive more detailed conclusions. Methodologically, the study highlights the need for in-depth research into structural change with finer aggregation and measures with different properties. The paper is focused on a specific situation in the Polish economy, for which the relationships have not yet been verified. However, the findings are more universal and may be interesting for any catching-up economy that plans its development policy and needs to focus either on demand- or supply side-relationships. The results suggest rather unidirectional causality running from economic growth to structural change and thus a demand-driven character of the structural modernisation of the Polish economy. This implies the necessity to build stronger inter-sectoral linkages that enable spillover effects that can accelerate growth and induce mutually reinforcing mechanisms of development.

Economic crisis, urban structural change and inter-sectoral labour mobility

Are recessions drivers of structural change? Here we investigate employment dynamics in the UK and show that a re-allocation of labour between industrial sectors in times of crisis induces an acceleration in structural change. Our key hypothesis is that cities with industrial baskets that exhibit strong potential for inter-industry labour mobility are more resilient as they can shift workers between sectors resulting in employment growth in some sectors — which in turn induces structural change during an economic crisis. Probing this hypothesis, we find that UK cities experienced a sharp increase in the rate of structural change at the city level around 2009 which coincided with an increase in inter-sectoral job transitions during the recession (2008–11) which persisted for years afterwards. To shed light on this, we deploy an econometric model to show that local employment in skill-related sectors, which captures the potential for inter-industry labour mobility, is most strongly associated with city-industry employment growth during the recession period.

World Productivity: 1996–2014

We use a new growth accounting method to quantify the drivers of world total factor productivity (TFP) growth during 1996–2014 and uncover four main results. World productivity growth is volatile from year to year. This mainly reflects reallocation of labor across country-industries. The contribution of country-industry level productivity growth to world productivity is relatively constant over time. This constancy masks that the increased importance of emerging economies offsets a productivity slowdown in advanced economies. After 2008, this offsetting effect dissipated and world TFP growth declined. These conclusions are robust to the inclusion of markups in the analysis. (JEL E23, E32, O30, O47)

Worker reallocation, firm innovation, and Chinese import competition

While recent work has documented a nexus between international trade and firm innovation, the underlying mechanisms explaining firms’ innovation in response to import competition are, thus far, poorly understood. To identify the mechanism of labor adjustments and its economic relevance, we use longitudinal linked employer–employee data from Denmark (1995–2012). We first show that import competition triggers a significant increase in the share of R&D workers at the firm level. The majority of the increase in the share of R&D workers is explained by between-firm, not within-firm, worker reallocation. The significance of this reallocation becomes evident when we show that innovation improvements are observed only among firms that experience a large increase in the share of R&D workers, especially if this increase is achieved through between-firm worker reallocation. We then extend our analysis to Portugal where the labor market is more rigid and find contrasting yet consistent results: labor reallocation occurs only within firms and it does not result in increased innovation.

Tariff-Growth Association through Tariff Revenue Redistribution and Labor Reallocation

Tariff-Growth Association through Tariff Revenue Redistribution and Labor Reallocation

What does neo-classic economics get wrong? Social policy, labour market dualisation, and labour reallocation

The literature commonly assumes that social policy hinders labour mobility and reallocation across jobs and sectors. Particularly neo-classical economics posits that there is a trade-off between ‘security’ (social policy) and ‘efficiency’ (labour reallocation and employing workers in jobs where they are most productive). In a sample of 12 OECD countries between 2000 and 2008, this article shows that, as opposed to the common trade-off assumption, social policy supports greater labour reallocation across sectors. Furthermore, labour market dualisation as a result of the growth of ‘cheap labour’ reduces labour mobility across jobs and sectors. A higher share of ‘cheap labour’, defined as workers in low-paid jobs with little or no protection, segregates the labour market between ‘undesirable’ sectors (where cheap labour is employed) and desirable sectors (where wages are higher, and social protection is more expansive). This segregation impedes movement across sectors due to the fear of falling into an ‘undesirable’ sector. The social policy provides a safety net and helps bridge the labour market divide across sectors and hence positively contributes to inter-sectoral mobility.

Modernizing smallholder agriculture and achieving food security: An exploration in machinery services and labor reallocation in China

AbstractThis study discusses the modernization of smallholder agriculture in China, where most farms are small, and farms' parcels are fragmented. The study puts forward a framework of agricultural modernization by vertical division of labor and specialized production in agriculture. We posit that hiring machinery services could be a pathway to connect smallholders with modern agriculture and achieve food security in China. Using household‐level data from China, this study examines how hiring machinery services affects farm productivity and rural households' welfare. Findings show that mechanization services increased rural Chinese families' food security and agricultural productivity. Hiring machinery services improves smallholders' income by influencing the input efficiency of maize production and increasing participation in off‐farm work. Our findings highlight the importance of technology to improve smallholder agriculture and food security, not only in China but also in other South and Southeast Asian countries.

Environmental regulation and employment: Evidence from China's new Environmental Protection Law

Realizing environmental protection and employment stability when facing strict environmental regulations is an essential issue of concern for many developing countries, including China. Based on a dataset of Chinese listed companies and a dataset of Chinese individual labor-force surveys, this paper uses an estimation technique pairing propensity score matching with a difference-in-differences estimator to examine the impact of the new Environmental Protection Law (EPL) on the supply and demand of labor at the micro level and the reallocation effect of interindustry labor at the macro level. The results show that the new EPL generated employment losses at the micro level. The policy reduces firms’ labor demand by lowering firms’ output and total investment expenditures and, in the process, does not stimulate firms’ innovative behavior. Moreover, implementing the new EPL reduces the wage income of workers, which in turn reduces the labor supply. Conversely, at the macro level, the new EPL promotes the transfer of labor from polluting to cleaner industries, realizes the reallocation of labor between industries, and thus promotes the transformation and upgrading of regional industrial structure.

Land Security and Mobility Frictions

Abstract Frictions that impede the mobility of workers across occupations and space are a prominent feature of developing countries. We disentangle the role of insecure property rights from other labor-mobility frictions for the reallocation of labor from agriculture to nonagriculture and from rural to urban areas. We combine rich household and individual-level panel data from China and an equilibrium quantitative framework featuring sorting of workers across locations and occupations. We explicitly model the farming household and the endogenous decisions of who operates the family farm and who potentially migrates, capturing an additional channel of selection in the household. We find that land insecurity has substantial negative effects on agricultural productivity and structural change, raising the share of rural households operating farms by over 40 percentage points and depressing agricultural productivity by more than 20%. Comparatively, these quantitative effects are as large as those from all residual labor-mobility frictions. We measure a sharp reduction in overall labor-mobility barriers over 2004–2018 in the Chinese economy, all accounted for by improved land security, consistent with reforms covering rural land in China during the period. JEL Codes: O11, O14, O4, E02, Q1.

Structural change, labour reallocation, and productivity growth in post-reform China

Abstract Why has the structural bonus been so small during China’s post-reform era? This article explains the puzzle by exploiting the heterogeneity in structural-change patterns across Chinese provinces. Using an original database covering production and factor inputs in 8 sectors and 31 provinces over 1993–2016, I show only those provinces where labour was reallocated from agriculture to manufacturing and services benefited from a structural bonus on labour productivity growth. In the other provinces, this structural-change effect was minimal or negative. Regarding the structural-change effect on total factor productivity (TFP) growth, I find both labour and capital reallocation played a limited role. Labour reallocation has little potential in boosting aggregate TFP growth, as marginal labour returns are similar across sectors. Capital reallocation has a far greater potential but remains restrained, suggesting substantial reallocation frictions. China’s TFP growth is mostly explained by within-sector technological progress, which has been dissipating since 2008, leading to declining TFP growth.

Infrastructure and Structural Change in Africa

Abstract Past investments in electricity, Internet, and road infrastructure, in isolation and bundled, have contributed to structural transformation and economic development in Africa. Using new data on the expansion of the road, electricity, and Internet networks over the past two decades, the paper shows that having access to both paved roads and electricity has led to a significant reallocation of labor from agricultural to both manufacturing and services. Adding access to fast Internet has had a major impact on structural change, with an even larger impact on reallocating labor away from agriculture. The paper then uses a spatial general-equilibrium model to quantify the impacts of future regional transport investments, bundled with electricity and Internet investments, on economic development in countries in the Horn of Africa and Lake Chad region.

The impact of climate change on the Palestinian sectoral reallocation of labor

ABSTRACT The research leverages yearly variations in climate variables, such as rainfall and temperature, across the West Bank from 1999 to 2018 to assess their influence on individuals’ decisions to stay in the agricultural sector. The main findings suggest that an increase in rainfall in the previous year is associated with a higher proportion of workers in the agricultural sector, especially in regions where agriculture is the primary economic activity. Temperature variation is also an important factor. An increase in the maximum temperature will generally have a negative effect on the supply of labor in the agricultural sector, while an increase in the minimum temperature may have a positive effect. However, this effect varies across different regions of the West Bank, reflecting the diverse agricultural practices and irrigation methods employed. The study also examines two potential mechanisms through which climate change affects labor decisions: agricultural labor migration to the Israeli labor market and how climate shocks affect agricultural wages.

Trade, labour reallocation and productivity growth in the indian manufacturing sector

Trade, labour reallocation and productivity growth in the indian manufacturing sector