While governments in poor countries struggle to achieve sustained economic growth, the presence of competitive labour markets is essential for its benefits to trickle down to the bottom of the working pyramid. Understanding the impact that policies may have on the market power of employers in the labour market is crucial to evaluate their distributional consequences and design policy tools that promote inclusive economic growth. The objective of this project is to evaluate the impact of foreign direct investment (FDI) on labour market power and structural transformation.
The project focuses on Ethiopia and builds a unique dataset that combines information on manufacturing firms, workers, and small (mostly informal) enterprises. The research team use variation in FDI penetration across sectors and local labour markets to identify its effect on labour market power as measured by wage markdowns (the extent to which wages fall below the marginal revenue product of labour) as well as sectoral shares of employment in reduced form. They then build a quantitative general equilibrium model featuring capital and labour market imperfections, calibrate it to the Ethiopian data, and use it to implement counterfactual policy analyses.
The project will contribute to our understanding of the effects of FDI on labour market imperfections and structural change, with implications for the allocation of labour across sectors and regions. This is especially relevant for Ethiopia and other sub-Saharan countries that have put structural transformation and private sector development at the core of their national development strategies. More generally, this study will shed light on the relationship between labour market power and structural transformation, focusing on the effects of FDI, and combining methods from different fields of economics, from industrial organisation to quantitative macroeconomics. The combination of all these different approaches and tools will set a new standard in the literature on structural transformation and the effect of industrial policies via changes in labour market distortions.