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THE ROLE OF LABOR MARKET FRICTIONS IN STRUCTURAL TRANSFORMATION

Published online by Cambridge University Press:  26 November 2020

Khalid ElFayoumi
Khalid ElFayoumi*
Affiliation:
International Monetary Fund
*
Address correspondence to: Khalid ElFayoumi, International Monetary Fund. e-mail: khalid.elfayoumi@gmail.com.
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Abstract

Large productivity gaps across sectors persist and the process of structural transformation is stagnant in many developing economies. This wedge between observed and optimal labor allocations reflects the presence of institutional and market frictions, which impose costs on the optimal reallocation of labor from low- to high-productivity sectors. Using a panel of cross-country sector-level data, I estimate a dynamic panel error correction model that captures the dynamics of sectoral labor flows. The model estimates provide a new set of stylized facts on the dynamics of the structural transformation process and a measure of the magnitude of frictions facing labor flows. In addition, I analyze the contribution of labor regulations and reforms to the pace at which labor flows across economic sectors. Results suggest that policy reforms need to steer between the goal of easing job creation and destruction, while supporting labor supply incentives to reallocate through strong social nets, labor protection, and risk sharing.

Keywords

Labor MisallocationLabor ReformsStructural TransformationMulti-Sectors Growth ModelsError Correction Models
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 5 , July 2022 , pp. 1239 - 1263
Copyright
© Cambridge University Press 2020

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Footnotes

I am grateful to Helmut Lütkepohl, Anta Ndoye, Sanaa Nadeem as well as participants at the Swiss Economic Society Meeting, the ERF workshop in Luxor, the IMF labor group research seminar, and DIW Berlin Winter workshop for helpful feedback and support. I gratefully acknowledge financial support from the Economic Research Forum (ERF) under the project “Structural Change, Resource Misallocation and Growth Dynamics in the MENA Region.” The views expressed in this paper are those of the authors and do not necessarily represent those of the ERF or the IMF.

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