Trade Adjustment Costs in Developing Countries: - World Bank ...

112Marc-Andreas Muendler4. EMPLOYMENT REALLOCATIONA conventional way to measure employment reallocation is the Katz and Murphy(1992) method. The method decomposes labor demand changes into shiftsbetween industries, associated with variations in sector sizes, given sectoraloccupation profiles, and within industries through changing occupationalintensities. The former shifts between industries relate to the changing allocationof employment across sectors, whereas the latter shifts within industries reflectthe change in relative skill intensities of occupations or alterations to the sectoralproduction process.4.1 Between and within industry demand shiftsApplying the Katz and Murphy (1992) method to employment in the Brazilianformal sector over the years 1986–2001 reveals the main patterns of labor marketadjustment. The decomposition into between and within sector variation indicateshow two important sources of change contribute to workforce changeover.Between-industry shifts are arguably driven by changes in final goods demands,sectoral differences in factor-nonneutral technical change, and changes in thesector-level penetration with foreign imports. Within-industry shifts can berelated to factor-nonneutral technical change, factor price changes for substitutesor complements to labor, and international trade in tasks which allocates activitiesalong the value chain across countries.The Katz and Murphy (1992) decomposition relates back to Freeman’s (1980)manpower requirement index and is designed to measure the degree of betweenindustrylabor demand change under fixed relative wages. The decompositiontends to understate the true between-industry demand shift in absolute termswhen relative wages change. Though possibly overstating the within-industryeffects, the Brazilian evidence suggests that within-industry demand changes arean important source of employment changeover in Brazil especially since 1990.Beyond the Katz and Murphy (1992) framework, I therefore offer statistics thatdocument time variation in the occupational profile within industries, and theskill changeover within occupations.Under the assumption that the aggregate production function is concave (sothat the matrix of cross-wage elasticities of factor demands is negative semidefinite),Katz and Murphy (1992) show that an appropriate between-industrydemand shift measure ΔD k for skill group k iswhere X jk is the employment of skill group k in industry j, w is a k×1 vector ofconstant wages, and dX j and X j are the k×1 vectors of employment changes andlevels in industry j, respectively. Equation (1) is simply the vector of weightedsums of industry employments for each skill group k, with the weights given bythe percentage changes in overall employment in every industry j. The measureis similar to standard labor-requirement indexes Freeman (1980), only that(1)