Industrial Complexity and Formal Employment Growth in Developing Cities: Evidence from Colombia

Concepts de base

The growth of formal employment in developing cities is driven by the ability of firms to access diverse and specialized skills, enabling them to enter new, complex industries.

Résumé

• Bibliographic Information: O’Clery, N., Chaparro, J., Gomez-Lievano, A., & Lora, E. (2024). Industrial complexity and the evolution of formal employment in developing cities. arXiv preprint arXiv:2410.06971v1.
• Research Objective: To investigate the factors driving formal employment creation in developing cities, focusing on the role of local labor market characteristics and industrial complexity.
• Methodology: The study uses administrative data from the Colombian Ministry of Health (PILA dataset) for 2008-2016, covering formal employment across 62 Colombian cities. The authors employ industry complexity and skill relatedness measures adapted from Hidalgo & Hausmann (2009) and Neffke & Henning (2013) to analyze the relationship between a city's industrial base and formal employment growth. They also control for factors like city size, supply and demand shocks, institutional quality, and higher education quality.
• Key Findings:
  • Larger cities tend to have a higher share of formal employment, with this employment concentrated in more complex industries.
  • The growth of formal employment in a city is positively correlated with its "complexity potential," a measure of the skill-relatedness between its existing industries and new, complex industries not yet present.
  • This relationship holds even after controlling for other potential drivers of formal employment growth, such as supply and demand shocks, institutional quality, and higher education quality.
• Main Conclusions: The findings suggest that the ability of cities to create formal employment is constrained by the availability of specialized skills in the local labor market. Cities with a more diverse industrial base and a workforce skilled in related industries are better positioned to attract and support the growth of complex industries, leading to higher formal employment.
• Significance: The study highlights the importance of local labor market conditions and industrial policies that promote skill development and diversification as key drivers of formal employment growth in developing countries.
• Limitations and Future Research: The study is limited to Colombia and a specific time period. Further research should explore the generalizability of these findings to other developing countries and over longer time horizons. Additionally, investigating the causal mechanisms linking complexity potential and formal employment growth would strengthen the policy implications.

Stats

Formal employment in developing countries only accounts for 28% of the working-age population.
In Colombia, the largest city, Bogotá, has between 195 and 216 industries, while the smallest city, Fundación, has between 14 and 27 industries.
There is a 0.88 correlation between the number of industries present in a city and the city's working-age population (in logs).
There is a 0.42 correlation between the average complexity of industries present in a city and the city's working-age population (in logs).

Citations

"We argue that the availability in the local labour force of skill combinations needed in sophisticated activities determines the potential for growth of the formal employment rate."
"Our main result is that complexity potential is robustly associated with subsequent growth of the formal employment rate in Colombian cities."

Idées clés tirées de

Industrial complexity and the evolution of formal employment in developing cities

by Neave O'Cler... à arxiv.org 10-10-2024

https://arxiv.org/pdf/2410.06971.pdf

Questions plus approfondies

How can developing countries attract foreign direct investment that not only utilizes existing skills but also contributes to developing new skills within the local workforce?

Attracting foreign direct investment (FDI) that both leverages and enhances the local skill base in developing countries requires a multi-pronged approach:
1. Targeted Investment Promotion:

Identify and promote sectors with skill overlap: Developing countries should analyze their existing industrial structure and identify sectors where there is a significant overlap between the skills required by potential FDI and the skills present in the local workforce. This targeted approach allows for immediate utilization of existing skills while providing a foundation for further development.
Incentivize skill development programs: Offer attractive incentives to foreign investors who commit to establishing training programs, partnerships with local educational institutions, or knowledge transfer initiatives. This ensures that FDI contributes directly to upskilling the workforce.
2. Strengthening Human Capital:

Invest in education and vocational training: Prioritize investments in education and vocational training programs that align with the skills demanded by targeted industries. This may involve curricula reform, apprenticeship programs, and partnerships with industry leaders to ensure relevance and practical application of skills.
Promote lifelong learning: Establish programs and platforms that facilitate continuous learning and upskilling for workers at all levels. This is crucial in today's rapidly evolving technological landscape, where skills can become obsolete quickly.
3. Creating a Conducive Business Environment:

Reduce bureaucratic hurdles: Streamline regulations and administrative processes related to FDI, making it easier for foreign companies to set up operations and navigate the local business environment.
Ensure political stability and strong institutions: A stable political climate and reliable institutions are crucial for attracting long-term FDI. Investors need to be confident in the predictability and transparency of the business environment.
4. Leveraging Existing Industrial Clusters:

Support the growth of industrial clusters: Encourage the formation and growth of industrial clusters around existing areas of specialization. This creates economies of scale, facilitates knowledge spillovers, and attracts FDI seeking to benefit from these advantages.
Facilitate linkages between FDI and local firms: Promote partnerships, joint ventures, and supplier relationships between foreign firms and local businesses. This fosters technology transfer, skill diffusion, and the integration of local firms into global value chains.
By implementing these strategies, developing countries can attract FDI that not only utilizes existing skills but also acts as a catalyst for developing new skills, ultimately contributing to sustainable economic growth and development.

Could the focus on skill-based development and attraction of complex industries exacerbate existing inequalities within developing cities, potentially leaving behind those in the informal sector?

Yes, a narrow focus on skill-based development and attracting complex industries without adequate consideration for those in the informal sector could exacerbate existing inequalities within developing cities. Here's why:

Skill Bias: Complex industries often demand specialized skills and higher education levels, which are typically less prevalent among informal sector workers. This can create a two-tiered labor market, where those with the right skills benefit from higher wages and better opportunities, while those without are left behind in low-paying, insecure informal jobs.
Limited Access to Upskilling: Informal sector workers often face significant barriers to accessing quality education and training opportunities. They may lack the time, resources, or information to participate in upskilling programs, further widening the skills gap.
Displacement and Gentrification: The influx of skilled workers and higher-paying jobs associated with complex industries can drive up living costs and displace existing residents, including informal workers, from their neighborhoods. This gentrification process can further marginalize vulnerable populations.
Mitigating Inequality:
To prevent exacerbating inequalities, policymakers should consider these measures:

Inclusive Skills Development: Design skills development programs that cater to the needs of informal sector workers, providing accessible pathways for them to acquire relevant skills and transition to formal employment.
Support for Informal Businesses: Implement policies that support the formalization and growth of informal businesses, such as access to microfinance, business development services, and simplified registration processes.
Social Safety Nets: Strengthen social safety nets, including unemployment insurance, healthcare access, and affordable housing programs, to protect vulnerable populations from the negative consequences of economic restructuring.
Progressive Taxation and Redistribution: Implement progressive taxation policies that generate revenue from higher-income earners and complex industries, and use this revenue to fund social programs and infrastructure investments that benefit all segments of society.
By adopting a more inclusive approach that considers the needs of all citizens, developing countries can harness the benefits of skill-based development and complex industries while mitigating the risk of exacerbating existing inequalities.

How can the principles of economic complexity and skill-based development be applied to address challenges in other societal domains, such as healthcare or education, in developing countries?

The principles of economic complexity and skill-based development, while often applied to industrial and economic policy, hold significant potential for addressing challenges in other societal domains like healthcare and education in developing countries. Here's how:
Healthcare:

Building Complex Healthcare Ecosystems:

Identify and develop specialized medical capabilities: Analyze the healthcare needs of the population and prioritize the development of specialized medical capabilities in areas with high disease burden or limited access to care.
Foster interdisciplinary collaboration: Encourage collaboration between different medical disciplines, research institutions, and technology providers to develop innovative healthcare solutions tailored to local contexts.
Invest in data infrastructure and analysis: Develop robust health information systems and data analytics capabilities to track disease patterns, monitor interventions, and inform evidence-based healthcare policies.

Skill-Based Healthcare Workforce Development:

Targeted training programs: Implement specialized training programs for healthcare professionals in high-demand areas, such as epidemiology, infectious disease control, and chronic disease management.
Task-shifting and community health workers: Train and empower community health workers to provide basic healthcare services, extending the reach of the healthcare system to underserved populations.
Continuing medical education: Establish platforms for continuous professional development and knowledge sharing among healthcare workers, ensuring they stay abreast of the latest medical advancements.
Education:

Developing Complex Educational Systems:

Diversify educational offerings: Move beyond traditional academic tracks and offer a wider range of vocational, technical, and entrepreneurial training programs that align with the evolving needs of the labor market.
Promote interdisciplinary learning: Encourage interdisciplinary approaches to education, fostering creativity, critical thinking, and problem-solving skills that are essential for success in the 21st century.
Invest in educational technology: Leverage technology to expand access to quality education, particularly in remote areas, and personalize learning experiences based on individual student needs.

Skill-Based Education Workforce Development:

Attract and retain qualified teachers: Improve teacher training programs, offer competitive salaries, and create supportive working environments to attract and retain qualified educators, particularly in underserved areas.
Develop specialized pedagogical skills: Train teachers in innovative teaching methodologies, such as project-based learning, inquiry-based learning, and differentiated instruction, to cater to diverse learning styles.
Foster collaboration and knowledge sharing: Create platforms for teachers to collaborate, share best practices, and learn from each other, fostering a culture of continuous improvement within the education system.
By applying the principles of economic complexity and skill-based development to healthcare and education, developing countries can build more resilient, adaptable, and equitable systems that cater to the evolving needs of their populations and contribute to long-term societal progress.