The role of labor market frictions in structural transformation

Growth is closely related to structural transformation, the reallocation of economic activity among sectors. A well-functioning labor market plays an important role in this process by enabling workers to find employment in the growing, more productive sectors. We review the literature on labor market frictions that limit worker flows, slow structural transformation, and trap workers in poverty. The three main areas of focus are the extent of sectoral wage gaps, labor market dynamics, and evidence on specific frictions. Evidence in each area points to the presence of frictions that hinder worker reallocation. The literature also suggests policies that may help remediate frictions and improve worker mobility. We conclude by noting several open questions that provide promising avenues for future work.