On the reallocation literature
Labor reallocations constitute a relevant phenomena in advanced and developing countries alike. Faced with the need to accommodate the productive structure to the world requirements, policy makers must decide on the type of interventions to moderate the effects. In this sense, one might wonder whether laissez-faire churning, with little state intervention leads to better outcomes, in terms of productivity and social equality, than a more regulated approach.
The debate on the topic is far from settled. Empirically, evidence remains scattered and, to a large extent, country specific. Our paper, forthcoming in the Journal of Economic Surveys, attempts to bridge this gap. We employ meta-analysis tools to recover estimates of job flows in transition economies from the literature and study their relation with productivity growth and inequality in the short and long run. We argue that transition countries represent a valuable natural experiment, not only due to the scope of the changes, but also for the different pace of reforms.
Our results suggest that the relation between labor reallocation and productivity is rather weak and probably driven by business cycles. However, data reveal a strong pattern for income inequality in the short run. Countries that experienced more churning also had higher values of the Gini index.
From a theoretical perspective, the link between the speed and scope of rapid labor reallocation and productivity growth or income inequality is ambiguous. Do reallocations with more flows tend to produce higher productivity growth? Does such a link appear at the expense of higher income inequality? We explore the rich evidence from earlier studies on worker flows in the period of massive and rapid labor reallocation, that is, the economic transition from a centrally planned to a market-oriented economy in CEE. We have collected over 450 estimates of job flows from the literature and used these inputs to estimate the short-run and long-run relationship between labor market flows, labor productivity, and income inequality. We apply the tools typical for a meta-analysis to verify the empirical regularities between labor flows and productivity growth as well as income inequality. Our findings suggest only weak and short-term links with productivity, driven predominantly by business cycles. However, data reveal a strong pattern for income inequality in the short run—more churning during reallocation is associated with a level effect toward increased Gini indices.