Global Value Chains and Employment in Developing Economies

CHAPTER 3 Global value chains and employment in developing economies Claire H. Hollweg (World Bank Group) ABSTRACT The emergence of global value chains – whereby goods that linkages of exporting firms to domestic, input-supplying used to be produced within one country are now fragmented firms. Employment creation and wage gains have been and distributed across global networks of production – has biased towards more skilled workers in developing countries, offered developing countries new opportunities to integrate which contrasts with the predictions of trade theory. The into the global economy. This has also had fundamental skill-biased nature of GVC trade is associated with increased impacts for workers in developing countries. The chapter complexity of global supply chains as well as increased use shows that higher earnings and employment within sectors of skill-intensive inputs, notably services. New emerging and firms is associated with GVC integration, which also sup- trends, including automation and digitization, may further ports other spillovers that operate through labor markets. determine how employment in developing countries will be But it has also had distributional implications of where jobs affected by GVC trade in the future. The findings point to go and the types of jobs they are. Jobs growth has occurred education as well as trade and labor policies as important directly in the export sector, as well as indirectly through factors for strengthening the GVC-labor relationship. • The emergence of GVCs has offered developing countries opportunities to integrate into the global economy, which has had a significant impact on jobs and income in GVC sectors and firms. Integration can have additional benefits for the wider economy as most jobs are generated through upstream domestic supply chains. • Across the developing world, demand for skilled labor is rising. GVCs reinforce this trend by supporting more complex industrial organization and by relying on complementary skill-intensive services inputs. • The impacts of technological change and increased productivity on employment linked to GVCs have been offset by growing consumer demand. 63 64 • Technological innovation, supply chain trade, and workers in a globalized world 1. Introduction and technology dissemination. Whether and how these spillovers occur through GVC trade is important for policy. he emergence of global value chains – whereby goods Third, is GVC trade associated with increased demand for that used to be produced within one country are now skilled labor in developing countries? And if so, through what fragmented and distributed across global networks channels? The factor-endowment theory of trade predicts that of production – has offered developing countries new trade will reduce returns to unskilled labor in advanced econo- opportunities to integrate into the global economy. Countries no mies while raising returns to capital and skilled labor. However, Tlonger need to develop entire industries to export; firms instead the developing world shows rising relative demand for skilled can access global markets by specializing in specific products or labor, similar to advanced economies. Whether these trends are tasks within a value chain. Today, significant parts of the devel- associated with GVC participation is important to understanding oping world are deeply involved in GVCs, with developing coun- the implications of GVCs for workers. tries’ share in global GVC trade estimated at about 33 percent in Fourth, how are technological advancements within GVC 2011 (Kummritz and Quast 2017). trade affecting jobs and skills in developing countries? New Though powered by new technologies, the economic incen- technologies are transforming the production process and alter- tives for GVC trade were largely driven by access to lower-cost ing our world of work (Hallward-Driemeier and Nayyar 2017), and labor. Offshoring happened initially in assembly activities in many policy makers are deeply concerned about the impact of light manufacturing, but GVCs have since expanded to agricul- automation on assembly jobs in important GVC sectors. tural and services sectors, as well as higher technology and more The chapter shows that GVC integration has supported jobs knowledge intensive manufacturing industries. This unbundling and earnings, as well as other spillovers that operate through of production is expected to have implications for labor markets labor markets. Job and wage gains have been achieved not only – where jobs go, who gets them, and what type of jobs they are within the exporting sector, but indirectly through linkages of (Farole 2015). exporting firms to domestic, input-supplying firms. However, There are reasons to expect that the nationwide employment GVC expansion in developing countries is also associated with effects of GVC integration are different in developing than in higher relative demand for skilled workers. The chapter illus- developed countries. For example, workers in developing coun- trates that characteristics of GVCs themselves, by supporting tries often participate in different segments and tasks within more complex industrial organization, as well as services inputs GVCs than do workers in developed countries. Similarly, the that are complementary to value chains, can be skill-biased. introduction of new technologies may impact the GVC partici- The chapter also shows that technological advancements that pation of developed and developing countries differently. GVCs largely get diffused through global value chains are affecting are a channel for the transmission of new technologies from how GVCs support jobs in developing countries. Evidence sug- developed to developing countries, which could also result in gests that changes in efficiency in GVCs has negative impacts additional spillover effects of participation in terms of learning. on employment linked to countries’ participation in the global Trade is also shown to increase the demand for skills, but the production of products, all else equal. Technological innovation implications for workers may be different in developing countries has also lowered the demand for low-skilled workers relatively that are abundant in unskilled labor and tend to participate in more than compared to high-skilled workers. Nevertheless, the lower-skilled segments of value chains. adverse effects of changing production technologies and effi- This chapter focuses on the nationwide implications of GVC ciencies on employment have been offset by increased con- integration for workers in developing countries, in terms of jobs sumer demand, whereby the domestic consumption expendi- and wages, sector of employment, and skills. It also explores tures in large emerging economies such as China and India will technological change from the perspective of GVCs and its impli- generate new demand for labor for the global economy. cation for jobs and skills going forward. The chapter considers The chapter proceeds as follows. Section 2 surveys the empir- that GVC trade may not have the same effects on developing ical literature linking GVC participation to nationwide job and countries as non-GVC trade does, and takes a GVC focus when wage trends in developing countries. Section 3 discusses other looking at these impacts. In doing so, it addresses four poli- spillovers resulting from features specific to GVCs that operate cy-relevant questions. through countries’ labor markets. The potential links between First, how do GVCs impact jobs and earnings in developing GVC participation and the relative demand for skilled labor in countries? Supporting better jobs and higher wages are a pri- developing countries are examined in Section 4, including spe- mary policy objective, which necessitates an understanding cific features of GVCs that could be behind this trend. Section of the relationship between GVC participation and these labor 5 analyzes the potential implications of new technologies for market outcomes. GVCs from the perspective of labor markets. Section 6 identi- Second, does GVC trade have other development impacts fies policy considerations for developing countries to achieve on workers? There is a large literature showing that export- better labor-market outcomes from GVC participation. Section ing and importing raise productivity. Many of these impacts 7 concludes. happen through labor markets, for example through learning Global value chains and employment in developing economies • 65 2. GVCs and nationwide jobs and earnings in Using the structural decomposition methodology, the change developing economies in employment between two different points of time can be explained by several factors, such as the change in domestic final A first step in analyzing the employment impact of GVCs on demand, domestic production technology, exports and imports. developing countries should consider not only the direct impact In addition, this tool can be used to measure how much of the on jobs and wages, but also the nationwide implications for change in employment is caused by each of these factors. Unlike workers across sectors of the economy. previous work, this chapter follows the approach used in Wang et How do GVCs impact jobs and earnings in developing coun- al. (2017) to explicitly separate the impact of international trade tries? While there is a decades-long catalogue of literature on into that related to traditional trade, simple GVCs and complex the labor market impact of trade, the literature on the relation-

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