Growth is closely related to structural transformation, the reallocation of economic activity among sectors. A well-functioning labor market plays an important role in this process by enabling workers to find employment in the growing, more productive sectors. We review the literature on labor market frictions that limit worker flows, slow structural transformation, and trap workers in poverty. The three main areas of focus are the extent of sectoral wage gaps, labor market dynamics, and evidence on specific frictions. Evidence in each area points to the presence of frictions that hinder worker reallocation. The literature also suggests policies that may help remediate frictions and improve worker mobility. We conclude by noting several open questions that provide promising avenues for future work.
In panel data on Chinese establishments spanning the 2001 WTO accession, import competition is associated with increases in revenue productivity. We propose a model that interprets this (and additional evidence) as firms choosing to differentiate their products to escape import competition. In the model, the profit from endogenous differentiating is decreasing in trade costs and is an inverted U-shaped function of productivity. We estimate the model and study a counterfactual trade liberalization. In response to import competition, firms differentiate their products and increase their markups, thereby increasing revenue productivity as in the data. Since product differentiation is underprovided by the market, the endogenous differentiation increases welfare relative to a model without firms’ option to differentiate. So, the model rationalizes the positive relationship between import competition and revenue productivity in the data, and it puts forth a new source of gain from trade.
Economic disruptions generally create winners and losers. The compensation problem consists of designing a reform of the existing income tax system that offsets the welfare losses of the latter by redistributing the gains of the former. We derive a formula for the compensating tax reform and its impact on the government budget when only distortionary tax instruments are available and wages are determined endogenously in general equilibrium. We apply this result to the compensation of robotization in the United States.
Time use data facilitate understanding of labor supply, especially for women who often undertake unpaid care and home production. Although assisted diary-based time use surveys are suitable for low-literacy populations, they are costly and rarely used. We create a low-cost, scalable alternative that captures contextually-determined broad time categories; here, allocations across market work, household labor, and leisure. Using fewer categories and larger time intervals takes 33% less time than traditional modules. Field experiments show the module measures average time across the broader categories as well as the traditional approach, particularly for our target female population. The module can also capture multitasking for a specific category of interest. Its shortcomings are short duration activity capture and the need for careful category selection. The module’s brevity and low cost make it a viable method to use in household and labor force surveys, facilitating tracking of work and leisure patterns as economies develop.
We study equilibria in static entry games with single-dimensional private information. Our framework embeds many models commonly used in applied work, allowing for firm heterogeneity and selective entry. We introduce the notion of strength, which summarizes a firm's ability to endure competition. In environments of applied interest, an equilibrium in which entry strategies are ordered according to the firms' strengths always exists. We call this equilibrium herculean. We derive simple and testable sufficient conditions guaranteeing equilibrium uniqueness and, consequently, a unique counterfactual prediction.
Structural transformation in most currently developing countries takes the form of a rapid rise in services but limited industrialization. In this paper, we propose a new methodology to structurally estimate productivity growth in service industries that circumvents the notorious difficulties in measuring quality improvements. In our theory, the expansion of the service sector is both a consequence – due to income effects – and a cause – due to productivity growth – of the development process. We estimate the model using Indian household data. We find that productivity growth in non-tradable consumer services such as retail, restaurants, or residential real estate, was an important driver of structural transformation and rising living standards between 1987 and 2011. However, the welfare gains were heavily skewed toward high-income urban dwellers.
We examine international regulatory agreements that are negotiated under lobbying pressures from producer groups. The way in which lobbying influences the cooperative setting of regulatory policies, as well as the welfare impacts of international agreements, depend crucially on whether the interests of producers in different countries are aligned or in conflict. The former situation tends to occur for product standards, while the latter tends to occur for process standards. We find that, if producer lobbies are strong enough, agreements on product standards lead to excessive deregulation and decrease welfare, while agreements on process standards tighten regulations and enhance welfare.
We review theoretical and empirical work on the economic effects of the United States and China trade relations during the past 20 years. We first discuss the origins of the China shock and its measurement and present methods used to study its economic effects on different outcomes. We then focus on the recent US–China trade war. We review methods used to evaluate its effects, describe its economic effects, and analyze whether this increase in trade protectionism reverted the effects of the China shock. The main lessons learned in this review are that (a) the aggregate gains from US–China trade created winners and losers; (b) China's trade expansion seems not to be the main cause of the decline in US manufacturing employment during the same period; and (c) the recent trade war generated welfare losses, had small employment effects, and was ineffective in reversing the distributional effects due to the China shock.
Reliable testing data for new infectious diseases like COVID-19 is scarce in developing countries making it difficult to rapidly diagnose spatial disease transmission and identify at-risk areas. We propose a method that uses readily available data on bi-lateral migration channels combined with COVID-19 cases at respective migrant destinations to construct a spatially oriented risk index. We find significant and consistent association between our measure and various types of outcomes including actual COVID-19 cases and deaths, indices of government policy responses, and community mobility patterns. Results suggest that future pandemic models should incorporate migration-linkages to predict regional socio-economic and health risk exposure.
This paper studies the welfare effects of encouraging rural–urban migration in the developing world. To do so, we build and analyze a dynamic general-equilibrium model of migration that features a rich set of migration motives. We estimate the model to replicate the results of a field experiment that subsidized seasonal migration in rural Bangladesh, leading to significant increases in migration and consumption. We show that the welfare gains from migration subsidies come from providing better insurance for vulnerable rural households rather than from correcting spatial misallocation by relaxing credit constraints for those with high productivity in urban areas that are stuck in rural areas.
Addressing public health externalities often requires community-level collective action. Due to social norms, each person’s sanitation investment decisions may depend on the decisions of neighbors. We report on a cluster randomized controlled trial conducted with 19,000 households in rural Bangladesh where we grouped neighboring households and introduced (either financial or social recognition) rewards with a joint liability component for the group, or asked each group member to make a private or public pledge to maintain a hygienic latrine. The group financial reward has the strongest impact in the short term (3 months), inducing a 7.5–12.5 percentage point increase in hygienic latrine ownership, but this effect dissipates in the medium term (15 months). In contrast, the public commitment induced a 4.2–6.3 percentage point increase in hygienic latrine ownership in the short term, but this effect persists in the medium term. Non-financial social recognition or a private pledge has no detectable effect on sanitation investments.
Millions of children are at risk for developmental deficits in low and-middle-income countries (LMICs). Reviews find that psychosocial interventions for children aged <3 years improve short-run child cognition and language (0.28–0.47 SD). Similarly, a meta-regression analysis of 54 preschool interventions for children aged ≥3 years found significant improvements in children’s cognitive skills (0.15 SD), executive functioning, social–emotional learning, and behavior (0.12 SD). Only 18 of these interventions were from LMICs, with 2 from India, which has the world’s largest population of children attending preschool (36 million children enrolled in Integrated Childhood Development Services [ICDS]). Interventions have had benefits in math and language. However, a survey of 298 Indian preschools found generally poor quality. Although short-run impacts of some interventions fade, some rigorous studies with long-term follow-ups found later benefits in educational attainment, reduced crime, and increased income.
What do recent advances in economic geography teach us about the spatial distribution of economic activity? We show that the equilibrium distribution of economic activity can be determined simply by the intersection of labor supply and demand curves. We discuss how to estimate these curves and highlight the importance of global geography—the connections between locations through the trading network—in determining how various policy relevant changes to geography shape the spatial economy.
We apply deep learning to daytime satellite imagery to predict changes in income and population at high spatial resolution in US data. For grid cells with lateral dimensions of 1.2 km and 2.4 km (where the average US county has dimension of 51.9 km), our model predictions achieve R2 values of 0.85 to 0.91 in levels, which far exceed the accuracy of existing models, and 0.32 to 0.46 in decadal changes, which have no counterpart in the literature and are 3–4 times larger than for commonly used nighttime lights. Our network has wide application for analyzing localized shocks.
This paper analyzes earnings inequality and earnings dynamics in Sweden over 1985–2016. The deep recession in the early 1990s marks a historic turning point with a massive increase in earnings inequality and earnings volatility, and the impact of the recession and the recovery from it lasted for decades. In the aftermath of the recession, we find steady growth in real earnings across the entire distribution for men and women and decreasing inequality over more than 20 years. Despite the positive trend, large gender differences in earnings dynamics persist. While earnings growth for men is more closely tied to the business cycle, women face much higher volatility overall. Earnings volatility is also substantially higher among foreign-born workers, reflecting weaker labor market attachment and high risk of large negative shocks for low-income immigrants. We document an important role of social benefits usage for the overall trends and for differences across subpopulations. Higher benefits enrollment, especially for women and immigrants, is associated with higher earnings volatility. As the generosity and usage of benefit programs declined over time, we find stronger earnings growth among low-income workers, consistent with higher self-sufficiency.
A Universal Basic Income (UBI) is often seen as an attractive policy option to replace existing targeted transfer and subsidy programs. However, in a budget-neutral switch to a UBI there is a trade-off between the generosity of the universal transfer, and hence its poverty impact, and the implied increase in tax burden. We summarize our results for fourteen low- and middle-income countries. We find that, with the exception of Russia, a poverty reducing, budget-neutral UBI would entail a significant increase in the net tax burden of top deciles. The efficiency cost and political resistance for such a policy would likely be too high.