Center for Effective Global Action

Why does manufacturing employment in emerging markets peak at half the levels advanced economies reached? We investigate this question through a quantitative trade model with structural change and rural-to-urban migration. Emerging markets have a comparative advantage in manufacturing, so trade alone should make them industrialize more, not less. Instead, we show that what holds them back are large rural-urban labor market wedges, which may reflect migration frictions or skill barriers. We estimate the wedges from wage gaps and migration flows. Without them, the median emerging economy does not prematurely deindustrialize, and instead reaches a peak manufacturing employment share roughly 10 percentage points higher than the data. By contrast, the rise of China contributes little to premature deindustrialization. Consistent with the model, we provide quasi-experimental evidence that a labor-saving agricultural technology increased industrialization in Brazil only in municipalities with young, mobile populations.