The report investigates whether the difference in firms’ attitudes toward technological upgrading (in particular investment in human and physical capital) explains their difference in term of job creation during a period of rapid trade liberalization.
Like in many developing countries, unemployment is a major problem in Morocco. The official unemployment rate, which is already very high (urban unemployment rate was 19.5% in 2001), reflects only partially the severity of the labor market disequilibrium in the country. Taking account of the scale of underemployment, which refers to a situation where individuals are compelled to work less than the standard working week (40 hours per week), gives an even worse picture.
An even more worrying aspect of unemployment in Morocco is its importance among university graduates. In 2001, their unemployment rate reached around 26%. This reveals both the mismatch between the demand and supply of skills and the inability of the economy to offer jobs for skilled people.
Actually the deterioration of the Moroccan employment situation goes back to the 1970s. This incited the government to switch from the ‘import substitution’ (IS) strategy, initiated after independence, to openness and liberalization of the economy by the mid-1980s. The process was strengthened during the 1990s.
The period of liberalization coincided with an increase in unemployment. However, careful empirical investigations do not support the hypothesis that openness to trade, by itself, has contributed to the deterioration of the employment situation in Morocco. They suggest that the impact of trade liberalization on employment depends on many factors such as macroeconomic cycle, labor market institutions, technological change and firm’s promptness to adapt to changes in its environment.
The report focuses on the latter aspect (e.g. firm’s behavior). In particular, it investigates whether firms that have invested in new equipments and trained their workers were able to preserve, or even to raise, employment in a period of increasing openness to trade.
The theoretical framework assumes that firms have a Cobb-Douglas production function where output is determined by labor, physical capital stock and technological progress that reflects technical efficiency of the production process. Under the assumptions of competitive markets (firms are prices and wage takers) and profit-maximizing by firms, the first order conditions give the firm’s demand for labor. The latter depends positively on the demand for the good and technological progress. It depends negatively on the ratio of wages to capital cost. One originality of the approach adopted in this study is that technology is not assumed exogenous but depends on the level of barrier to foreign trade and firm’s efforts regarding technological upgrading in particular investment in human and physical capital.
The labor demand equation is estimated combining data from the Moroccan Census of Manufacturing with a unique data set from the Firm Analysis and Competitiveness Survey (FACS, 2000) conducted by the World Bank and the Moroccan government on selected firms in 2000.
The empirical analysis looks at the impact of human and physical capital investment by the firm on the change in employment between 2000 and 2001. The two explanatory variables that allow testing our hypothesis are: the ratio of the number of persons-days of training to firm’s total employment and the share of equipments and machinery aged less than 5 years. The other explanatory variables are: the change in the effective tariffs rate by sector, the ratio of wage to the cost of capital and the demand for the final good. After dropping firms with missing responses and combing the two data sets, the sample covers 644 firms of different sizes.
The results strongly support that technological upgrading can help firms creating jobs. Robustness checks with respect to additional explanatory variables, estimation methods and firm size confirm the conclusion. However, it seems that while new machineries are jobs creating irrespective of the firm size, training induces higher employment only in large firms. This implies that some selectivity in the provision of incentives to firms’ might be useful. Should policy makers play a role in this context, they must provide adequate incentives to large firms for investment and training and focus the incentives for smaller ones on investment.