# 2.3 How do GVCs shape the trade-jobs nexus?

A country’s type of GVC engagement matters for employment growth through exports. The World Bank (2020) proposed a GVC taxonomy that differentiates between four types of GVC participation: (1) commodities; (2) limited manufacturing; (3) advanced manufacturing and services; and (4) innovative activities. The classification is based on the extent of backward GVC participation of the manufacturing sector, the types of goods and services exported, and measures of innovation (see Appendix 3). Our analysis finds that the way in which countries engage in GVCs seems to matter for the magnitude of export-employment elasticities in the sample of 48 OECD and non-OECD countries (Figure 4). The link between exports and employment for countries participating in commodities (0.06 percent) and innovative tasks (0.02 percent) is less than half the magnitude of countries at the advanced manufacturing and services stage (0.14 percent). A similar and even stronger relationship is found for labor incomes.

**Figure 4: Export-employment, export-income elasticities and skills supply, by taxonomy group**

<!-- Start of picture text --> Export-employment and export-income elasticities Employment shares by skills, 2018<br>0.25 100%<br>16 20<br>30<br>0.20 80% 43<br>0.15 60%<br>72 64<br>0.10 40% 56<br>48<br>0.05 20%<br>0.00 0% 13 17 14 9<br>Commodities Limited Advanced Innovative Commodities Limited Advanced Innovative<br>manufacturing manufacturing activites manufacturingmanufacturing activities<br>and services and services<br>Employment Total labor income Low-skilled Medium-skilled High-skilled<br><!-- End of picture text --> Source: Own computations. Data: OECD TiE and TiVA data, covering 48 countries (see Appendix 2) and 45 sectors for the period 1995-2018. Note: Export-employment (export-income, resp.) elasticities at the country-sector level have been estimated using employment (in natural logs) as dependent variable and the instrumented trade variables (in levels and natural logs) as independent variable. For more information on the instruments, see Appendix 1. The panel data regressions control for country-sector, country-time, and sector-time fixed effects. Only results significant at the 10% level and above the critical value for the Kleibergen-Paap test statistic are reported. GVC taxonomy group by World Bank (2020). Skills (right panel) are determined by ILO statistics depending on their skill levels with high-skilled referring to levels 3 and 4, mediumskilled to level 2 and low-skilled to level 1. See https://ilostat.ilo.org/resources/concepts-and-definitions/classification-occupation/.

Several explanations can be offered for the skewed inverted U-shape of elasticities along the GVC taxonomy groups. Once countries upgrade from exporting mainly commodities (notably agricultural staples) to participation in limited manufacturing GVCs, this boosts export-induced demand for jobs in the manufacturing sector, as workers move out of informal (subsistence farming) into low-wage manufacturing jobs in apparel, electronics and other labor-intensive sectors. Higher exports of countries specializing in advanced manufacturing and services GVCs are linked to the highest employment growth within sectors due to additional demand for jobs alongside low-tech manufacturing jobs, especially in medium-tech manufacturing but also business services (such as trading and transport). Countries specializing in innovative GVC tasks, however, see their elasticities decline. Possible factors for the lower potential of exports to create jobs in these countries include the higher capital intensity of high-tech manufacturing production sectors, increased automation of routine tasks replacing certain types of workers, and offshoring of low-skill intensive tasks to low-cost countries. The composition of labor supply by skill-intensity of occupations for the different country types confirms the described pattern, showing a notable expansion of high-skilled occupations along taxonomy groups (right panel).

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