Structural Change, Employment, and Inequality in Europe: an Economic Complexity Approach

TL;DR

This paper examines how shifts towards more complex industries in Europe impact employment, wages, and income distribution, revealing that structural change reduces inequality but may hinder employment growth.

Contribution

It introduces a novel measure of structural change based on industrial complexity and links it to employment, wages, and income distribution in European countries.

Findings

Structural change is negatively associated with employment growth.

Moving to complex industries correlates with lower income inequality.

Structural change predicts a higher labour share driven by increased salaries.

Abstract

Structural change consists of industrial diversification towards more productive, knowledge intensive activities. However, changes in the productive structure bear inherent links with job creation and income distribution. In this paper, we investigate the consequences of structural change, defined in terms of labour shifts towards more complex industries, on employment growth, wage inequality, and functional distribution of income. The analysis is conducted for European countries using data on disaggregated industrial employment shares over the period 2010-2018. First, we identify patterns of industrial specialisation by validating a country-industry industrial employment matrix using a bipartite weighted configuration model (BiWCM). Secondly, we introduce a country-level measure of labour-weighted Fitness, which can be decomposed in such a way as to isolate a component that identifies the movement of labour towards more complex industries, which we define as structural change. Thirdly, we link structural change to i) employment growth, ii) wage inequality, and iii) labour share of the economy. The results indicate that our structural change measure is associated negatively with employment growth. However, it is also associated with lower income inequality. As countries move to more complex industries, they drop the least complex ones, so the (low-paid) jobs in the least complex sectors disappear. Finally, structural change predicts a higher labour ratio of the economy; however, this is likely to be due to the increase in salaries rather than by job creation.