This paper seeks to shed light on the effects of economic reforms and policy shocks on the dynamics of manufacturing employment and productivity in Argentina during the 1990s. This decade was landmarked by macroeconomic stabilization, deregulation, privatization, labor market reforms and trade and capital account liberalization.
Additionally, the economy was subject to frequent and significant policy shocks, especially in the area of taxation, and to financial and terms of trade shocks as well. This period featured a cumulative decline in manufacturing employment. At the same time, labor productivity grew at a large average rate. Gross job creation, destruction and reallocation displayed significant fluctuations, suggesting that the labor market was highly responsive to price and policy shocks and to structural reforms.
It has been found that a large share of productivity growth in developed countries is accounted for by the continuous reshuffling of labor from technologically backward production units to the technologically advanced ones (Caballero and Hammour, 1996). A large share of this job reallocation takes place at an intra-sectoral level (Davis, Haltiwanger and Schuh, 1996). Negative profitability shocks (such as rises in input costs) are expected to stimulate this reallocation.
The timing, size and efficiency of job reallocation and its contribution to productivity growth is affected by policies and institutions (like firing costs and tariff protection) that isolate existing jobs from profitability shocks and/or increase the specificity of investment (like excessive workers’ bargaining power). Caballero and Hammour (1996, 2000) have suggested that the prevalence of these features in developing countries should lead to sub-optimal reallocations and to technological sclerosis. Further effects of economic reforms and policy shocks on reallocation and productivity may work through the incentives and abilities to expand or contract sectoral production, to introduce technological innovations, and to change the choice of production techniques.
With this motivation in mind, the paper concentrates on analyzing the responses of manufacturing job flows and productivity to shocks to non-wage labor costs, sectoral tariffs and the user cost of capital, and on appraising the effect of structural reforms as a whole on job dynamics and productivity in Argentina. We are particularly interested in shedding light on the following questions:
- Do reductions in payroll taxes promote bigger net job growth?
- Do commercial policies protect obsolete jobs?
- How important are financial shocks for job flows and productivity?
- Which institutions/policies discourage reallocation more?
- Does bigger reallocation lead to bigger productivity?
- Do more flexible labor and goods markets contribute to bigger reallocation?
To answer the proposed questions, the paper starts by applying a “Constrained Panel Data Near Vector Autoregression” analysis to a sample of 2619 firms that were aggregated to 20 2-digit ISIC manufacturing industries for which data on jobs and labor productivity are available for the 1990-2001 period on a quarterly basis. The estimated impulse-response functions are then used to appraise the effect on gross and net job flows and productivity of different policy and price shocks. To evaluate the determinants of the inter-industry pattern of responses to the different shocks, the cumulative impulse responses of job flows and productivity are regressed on vectors of sectoral characteristics that labor intensity, sectoral access to credit, workers’ strength and the trade exposure and orientation.
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