The trees of occupation are flourishing: employment and substitution effects of regional economic complexity

• Date: 06 September 2024
• Pages: 1816-1831
• DOI: https://doi.org/10.1108/IJM-05-2024-0313
• Published date: 06 September 2024
• Subject Matter: Economics,Labour economics
• Author: Teng Long,Linmu Li

The trees of occupation are

flourishing: employment and

substitution effects of regional

economic complexity

Teng Long and Linmu Li

School of Public Finance and Taxation,

Guangdong University of Finance and Economics, Guangzhou, China

Abstract

Purpose –Can regional economic complexity improve the employment effect, and is the employment

structure also affected by heterogeneity? In order to solve these doubts, this paper plans to carry out

systematic theoretical analysis and quantitative tests on these problems.

Design/methodology/approach –Based on the macroeconomic data of 129 countries from 1995 to 2022,

this paper empirically studies the impact of economic complexity on the employment effect and its mechanism

channel by building relevant models.

Findings –The results show that regional economic complexity can significantly improve the employment

effect of society. At the same time, regional economic complexity has an indirect positive role in promoting

employment from two aspects: accumulating fiscal surplus and increasing the working-age population. The

former can stimulate employment policies by increasing the government’s tax sources, while the latter can

increase production specialization and complexity by stimulating demand and increasing employment.

In addition, regional economic complexity will lead to job market differentiation, making the boundary

between the service sector and the labor market between industry and agriculture and between the informal

employment market and the formal employment more obvious, thus triggering the substitution effect of

employment.

Originality/value –The possible innovations and marginal contributions of this paper are as follows: First,

there are many studies on the influencing factors of employment or unemployment, and this paper provides a

new research direction for the literature on the influencing factors of employment effect by using the concept of

regional economic complexity for the first time. Second, this paper broadens the research perspective of the

employment effect of regional economic complexity, divides the employment substitution effect of various

sectors from the perspective of industrial structure and further analyzes the employment promotion effect of

regional economic complexity.

Keywords Economic complexity, The employment effect, Substitution effect, Creative destruction

Paper type Research paper

1. Introduction

Economic complexity refers to the diversity and complexity of a country’s productive

capabilities, measured by the range and complexity of the products it produces. Economic

complexity promotes economic diversification (Azimi, 2020), technological progress

(Lapatinas, 2019;Oumb�

eet al., 2023), human capital development (Kamguia et al., 2022),

export competitiveness (Ozsoy et al., 2021), industrial upgrading and gender equality

(Nguyen, 2021) play a crucial role in the development process. Countries that prioritize

investments in increasing economic diversity and complexity are more likely to achieve

sustained and inclusive economic growth (Lapatinas, 2019). Economic complexity is often

defined in terms of two concepts: diversity and universality. Among them, diversity refers to

the number of products exported by a country, and universality refers to the number of

countries that export the same product. Hidalgo and Hausmann (2009) argued that a country

IJM

45,9

1816

JEL Classification — P11, E10, E2

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/0143-7720.htm

Received 11 May 2024

Revised 19 July 2024

Accepted 6 August 2024

InternationalJournal of Manpower

Vol. 45 No. 9, 2024

pp. 1816-1831

© Emerald Publishing Limited

0143-7720

DOI 10.1108/IJM-05-2024-0313

must have the production capacity of multiple industrial structures to produce diversified

commodity combinations, and at the same time, the universality of its products reflects the

complexity of the country’s economic structure. Therefore, through the concepts of diversity

and universality, regional economic complexity has found a way for countries to change their

production structure, that is, regional economic complexity can boost various favorable

economic indicators by improving the quality of products produced and shifting to products

with more complex or modern attributes.

Synthesizing the existing literature, research on the determinants of economic diversity

and complexity is also gradually increasing. Gnangnon (2021) used the data of several

economies to study the economic policy of diversification of production capacity and export

scale. Thus, higher regional economic complexity reduces output volatility, and the

magnitude of this effect depends heavily on the income level of countries. Especially for high-

income countries, an increase in the complexity index will significantly reduce short-and

medium-run output volatility. For low and middle income countries, the impact is more

concentrated on long-term output fluctuations (Bahar et al., 2022). Thus, higher regional

economic complexity reduces output volatility.

Similar findings focus on demographic and cultural factors, and regional economic

complexity may also help accumulate social human capital and alleviate unemployment

(Khanh, 2020). Firstly, according to Adam Smith, wealth is closely related to the division of

labor, and as people and enterprises specialize in different activities, economic efficiency is

improved (Hidalgo and Hausmann, 2009). This means that with the increase of regional

economic complexity, the correlation degree and complexity of economic activities have a

significantly positive effect on employment growth, especially in the economic activities in

the under-represented and complex regions. Second, an increase in regional economic

complexity is associated with a higher level of sophistication in exported goods, which

increases employment opportunities. Because products with high complexity often require

more knowledge and skills, which promotes the specialization of the labor market and the

improvement of the technical level. In addition, regional economic complexity can be an

important way to reduce unemployment and increase employment through the adjustment

and optimization of industrial structure. By promoting enterprise assets reorganization,

scientific and technological progress and industrial upgrading, the continuous optimization

of industrial structure can be promoted, so as to attract more labor. For example, industrial

intelligentization, as part of technological change, changes the demand structure of labor by

introducing advanced equipment and technology. Although this may lead to the substitution

of low-educated labor, it also increases the demand for high-educated labor.

This study contributes to the literature in the following aspects: (1) According to our

understanding of the research, the existing research mainly focuses on the influencing factors

of unemployment, and the research in this paper is a pioneering research to find the impact of

economic complexity on employment. (2) This paper introduces financial surplus and labor

market and other mediating factors into the analysis to test the process of economic

complexity’s influence on market employment effect. Through literature review, this study

aims to explore the mechanism of employment complexity promoting employment. (3) This

study divides the employment substitution effect of various sectors from the perspective of

industrial structure, further analyzes the employment promotion function of economic

complexity, and broadens the research perspective of economic complexity on employment

effect. The rest of this article is structured as follows. The second part provides a theoretical

analysis of how economic complexity affects employment. The third and fourth parts are

“Data, Models and Methods” and “Analysis Conclusions” respectively, which mainly describe

how the main conclusions are drawn after data analysis in this paper. Part continuous

describes the data and methods. The fifth part consists of summary and related discussion.

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Journal of

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