Structural Change, Employment, and Inequality in Europe: An Economic Complexity Approach

Structural change consists of industrial diversification towards more productive, knowledge-intensive activities. However, changes in the productive structure bear in-herent links with job creation and income distribution. In this paper, by taking an economic complexity approach, we investigate the consequences of structural change defined in terms of labour shifts towards more complex industries on employment growth, wage inequality and functional distribution of income. The analysis is con-ducted for European countries using data on disaggregated industrial employment shares over the period 2010 – 2018. First, we identify patterns of industrial specialisa-tion by validating a country-industry industrial employment matrix using a bipartite weighted configuration model (BiWCM). Secondly, we introduce a country-level mea-sure of labour-weighted Economic Fitness, which can be decomposed in such a way as to isolate a component that identifies the movement of labour towards more complex industries the structural change component. Thirdly, we link structural change to i) employment growth, ii) wage inequality, and iii) the labour share of the economy. Our findings indicate that the structural change measure we propose is associated negatively with employment growth. However, it is also associated with lower income inequality: as countries move to more complex industries, they drop the least complex ones, so the (low-paid) jobs in the least complex sectors disappear. Finally, structural change predicts a higher labour ratio of the economy; however, this is likely to be due to the increase in wages rather than to job creation.