Mobility of Workers Key for Diffusion of Industries

March 18, 2016

Diversification is critical to a country’s long term economic growth plan, especially as many older industries shrink in a world of globalization and rapid technological evolution. But establishing new industries in a region requires access to workers with the right skills and know-how. By definition, local workers lack experience in these new industries. So how do “pioneer” plants, the plants that are the first of their kind in a region, overcome this difficulty? Do they train locals or hire experienced workers from elsewhere? New research at the Center for International Development (CID) at Harvard University finds that pioneers are much more likely than other plants to hire their better-paid, higher-skilled workers from outside the region, lending evidence that mobility of workers is crucial for new industries to diffuse.

CID Director Ricardo Hausmann and senior research fellow Frank Neffke examined new plants founded in Germany from 2000-2004 and used social security records to track recruitment in these plants for 5 years. They found that the recruitment strategies of pioneer plants differ markedly from those of new plants in regions where the industry is established. Pioneers hire their workers significantly more often from outside their regions. This effect was particularly large for manufacturing industries.

They examined the resurgence of the eastern German manufacturing sector. After German reunification, eastern Germany lost more than 60% of its manufacturing employment and the massive outflow of workers from the East has been amply documented and discussed. What is much less known, however, is that, at the same time, more than one million people moved East. Hausmann and Neffke argue that these workers may have been instrumental in the industrial resurgence and transformation in eastern Germany. The pioneers that brought these new manufacturing industries to the East relied on western Germany for as much as four out of five of their college-educated experienced workers.

Neffke points out that workers acquire skills on the job that are much more specific than what they typically learn at school. “Even with Germany's vocational training system, which is widely acclaimed for teaching workers relevant skills, education apparently does not substitute for work experience,” said Neffke.

The authors believe these findings also have strong implications for developing countries.

According to Hausmann, “the evidence from Germany shows that even within a country with good schooling, good banks and good institutions, for new industries to emerge in a region, it is extremely useful to be able to tap into the know-how of experienced workers from elsewhere. It was not enough for East Germany to improve its institutions. In order to diversify, it still had to rely on over a million experienced West German workers. For countries that lack industry experience within their borders, lack of international labor mobility may be critical in slowing progress.”