jezael melgoza - mexico
Guanajuato, Mexico (Image: Jezael Melgoza via Unsplash)

Why do countries experience diverging job growth trajectories in global value chains?

Job growth in GVCs typically stems from simultaneous productivity growth and the expansion of GVC production activities.

 

By Stefan Pahl

Structural change, a process in which resources are shifted from less to more productive activities, has historically been a driver of economic growth and development. Structural transformation has been particularly successful in Asia, but more recently also in sub-Saharan Africa. One important underlying driver of this trend is said to be a country’s participation in global value chains (GVCs) because they are a vehicle for the transfer of technology and facilitate access to export markets and to more sophisticated inputs, thus increasing the country’s productivity and scale of production12. Yet whether increased participation in GVCs leads to higher job creation continues to be debated. A particular concern in this regard is that the production technologies used in GVCs are biased against unskilled labour, i.e. such technologies increase labour productivity but reduce demand for labour. For example, the production technologies used in modern GVCs might require a high degree of precision to maintain quality standards that can only be achieved through capital-intensive, automated production, with little use for the vast unskilled labour force in developing countries3. Recent firm-level evidence from Tanzania and Ethiopia confirms that the productivity of large firms—typically engaged in exports and GVCs—does indeed increase, but that their contribution to job growth is virtually zero.

The figure below illustrates this trend based on a broader set of countries: the growth of the number of jobs in GVCs is not correlated with a rise in productivity in GVC activities. China and Viet Nam are well-known examples of countries that successfully coupled rapid productivity growth (value added per job in GVCs) with high job growth. Other countries such as Romania, the Russian Federation, and Senegal, on the other hand, experienced fast productivity growth but negative job growth.

No correlation between increased productivity and job growth in GVC activities

Note: Growth rates between 2000 and 2014. GVC jobs are jobs associated with the production of goods exported and consumed abroad.

Source: Pahl et al. (2022).

Why do countries experience such diverging trajectories? In this article, which is based on our forthcoming paper in the World Bank Economic Review,4 we use an accounting method to answer this question. We decompose the rise in a country’s GVC jobs (jobs associated with the export and consumption of goods abroad) between 2000 and 2014 into three components: (i) growth in demand for GVC products by relevant consumer markets; (ii) increase of a country’s production activities in GVCs measured by its (value-added) share in GVCs, and (iii) increase in labour intensity of a country’s GVC production activities. While the first two components determine the scale of GVC output, the latter stifles the resulting demand for jobs.

Our main finding is that lower labour intensity in GVC production activities coincides with a rising share of value added in GVC activities, implying that as a country’s productivity rises, it completes more production stages in GVCs, which is consistent with firm-level evidence5. Notable deviations from this general trend exist, however.

Job growth trajectories by consumer market specialization and share of GVC production activities

Two key features of GVCs are that they span several countries and that the direct export destination is often not the final consumer market. The significance of such cross-country linkages was highly relevant in the context of the financial crisis of 2008/20096 and during COVID-19-induced lockdowns. It thus does not come as a surprise that over the longer term, diverging patterns of expenditure growth in consumer markets also had a substantial impact on countries’ job growth trajectories.

The figure below shows that Mexico and Bangladesh have benefitted very little from growth in global demand. This is attributable to Mexico’s dependence on North America and Bangladesh’s dependence on exports destined for European textiles consumption; both North America and Europe only grew slowly between 2000 and 2014. Viet Nam, on the other hand, benefitted far more from a rise in global demand due to its diverse linkages. The share of Viet Nam’s GVC jobs depends almost equally on North America, Europe, Asia (including China) and the rest of the world. The three sub-Saharan African countries in our sample, which have a stronger dependence on Africa and Asia and a low dependence on North America, benefitted even more from the increase in global demand.

GVC job growth by productivity, demand and share of value added in GVCs

Note: Decomposition of GVC job growth between 2000 and 2014. Bars represent the contribution of each component to overall job growth, in log-point changes. Countries ordered from highest to lowest increase in GVC jobs.

Source: Pahl et al. (2022).

The highest variation, however, arises from increased shares of value added in GVCs, i.e. a country’s value-added share relative to that of all other countries engaged in the same chain. Senegal’s contribution was in fact negative, i.e. the value added of other countries engaged in the same GVCs increased relative to Senegal’s. Workers in those other countries have started earning higher wages or are completing additional production stages in the relevant GVCs, such as adding processing to harvesting activities in agro-food GVCs. Senegal’s value-added share in food GVCs dropped considerably, losing out in both traditional consumer markets in Europe and in fast-growing GVCs in China and India. Viet  Nam and Bangladesh, on the other hand, were successful in increasing their share of value added in GVCs. While Bangladesh specialized in relatively slowly growing textiles GVCs for European consumers, it experienced fast job growth due to its ability to capture rising shares in precisely those GVCs. Viet Nam captured rising shares across the board: it entered many new manufacturing activities in GVCs alongside more traditional agricultural activities. For example, its share of value added in textiles destined for the U.S. market quadrupled and Viet Nam made similar advances in electronics GVCs. Such positive developments were not limited to Asia only; Ethiopia also observed strong increases in its value-added shares. While variation was large, it is important to note that the relative shares of value added in GVCs increased in all 25 developing countries included in our sample (with the exception of Senegal) at the cost of more developed countries (i.e. countries in Western Europe, North America and Japan). This finding highlights that developing countries increased their activities in GVCs, albeit at different speeds, challenging the notion that China’s success in manufacturing has left little room for other developing countries to integrate in GVCs7.

Productivity growth and the expansion of GVC production activities typically go hand-in-hand

Productivity increased in all countries over time as the labour needed per unit of output in GVC production declined. This increase in productivity moderates job growth for a given growth in demand, as illustrated in the figure above. At the same time, a rise in labour productivity may result in higher wages in the medium- to long run. It may furthermore lead to the capture of larger shares of value added in GVCs as reported in Chor et al. (2021). This relationship is influenced  by opposing forces. Over time, countries may follow their (static) comparative advantage by focusing on their most productive stages in the chain, while abandoning less productive (non-core) stages. The offshoring of non-core activities will, ceteris paribus, emerge as a negative correlation between productivity growth and share of value added in GVCs. On the other hand, improved productivity in a country may drive down production costs relative to other countries that are potential competitors in the chain. This will raise demand for the country’s output as lead firms in GVCs substitute inputs with cheaper ones, resulting in a positive correlation between productivity and share of value added in GVCs.

In line with the latter, the figure below presents a positive correlation between the two, which is confirmed in further econometric analyses.8 Countries with larger improvements in productivity also capture increasing shares of value added in GVCs. This cross-country result is consistent with firm-level evidence from China9. It is important to note, however, that substantial deviations from this general trend are not unusual, which can partly be explained by countries’ specialization in GVCs. Food, textiles and wood GVCs are characterized by a much weaker correlation between productivity growth and rising value-added shares in GVCs. The opposite is true for machinery, electrical equipment, motor vehicles and computers. Low-income and least developed countries tend to specialize in the former set of GVCs, which hampers the potential for simultaneous growth in both productivity and jobs. Senegal exemplifies this with its strong specialization in food and textiles, which is associated with limited growth in the share of value added in GVCs and overall negative job growth.

Positive correlation between growth of productivity and share of value added in GVCs

Note: Log-point contributions to GVC job growth between 2000 and 2014 based on figure above (for a broader set of countries).

Source: Pahl et al. (2022).

GVCs for job growth in productive activities?

There is an obvious potential for productivity growth by incorporating workers into GVCs. GVC jobs are more productive and oftentimes experience rapid productivity growth. Countries that successfully increase their participation in GVCs and thus their level of employment do so by concomitantly improving their productivity and their share of value added in GVCs. Accordingly, GVC job growth seems to reflect a country’s overall improvement in its production capabilities10. Capability development in upstream sectors, such as auxiliary services, can be an important lever to foster competitiveness in GVCs11. This calls for targeting firm-level drivers of capability development and upgrading, including input and output markets as well as channels for learning12. In more practical terms, one promising avenue could be a focus on matching local (upstream) firms with, for example, larger foreign firms that can provide the necessary type of training or on targeting specific organizational and managerial capabilities.

A second policy-related factor are the conditions under which GVC production take place and which type of GVCs foster productive jobs, i.e. identifying enabling conditions. Sector-level specialization and end-market patterns have been highlighted in this article, but a better understanding of the dynamics of productivity, scale and the biased nature of technology upgrading in GVCs is needed. This includes further studies on the governance and durability of firm-to-firm relationships and associated flows of inputs, (intangible) knowledge and technologies1314 alongside macro analyses.

This piece is based on Pahl, S., Timmer, M.P., Gouma, R., Woltjer, P.J. (2022). Jobs and Productivity Growth in Global Value Chains: New Evidence for Twenty-five Low- and Middle-Income Countries. Forthcoming in World Bank Economic Review.

  • Stefan Pahl is Economist at the Department of Policy Research and Statistics (PRS) of the United Nations Industrial Development Organization (UNIDO).

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

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