Annual Report 2018 slide image

Annual Report 2018

42 Economics ENVIRONMENTAL REGULATION, TECHNOLOGY ADOPTION AND THE LABOR MARKET: EVIDENCE FROM THE PROHIBITION OF BURNING SUGARCANE IN THE STATE OF SAO PAULO The study of the rapid dissemination of mechanical harvesting that followed the prohibition of pre-harvest burning of sugarcane in the state of Sao Paulo shows that the adoption of an agricultural technology necessary to satisfy new environmental standards can lead to a structural transformation in emerging economies. In this process, one factor is fundamental: qualified workers. OBJECTIVE • To estimate the effects of the prohibition of pre-harvest burning of sugarcane in the state of Sao Paulo on the mechanization of agriculture and possible effects on the structure of the labor markets in the growing regions. RESEARCH METHOD • • To characterize the evolution of mechanization in this industry, we created a Clean Har- vest Adoption Index, with data obtained from remote sensing to detect the type of sug- arcane plantation and harvesting. The index consists of the fraction of the planted area with clean harvesting, i.e., without burning and thus without polluting the air, in relation to the baseline fraction harvested cleanly in 2000 and 2010. To find a causal relationship between the adoption of mechanized harvesting (induced by the end of burning) and the evolution of the labor market in these regions in the past decade, we used an instrumental variables model, where the instruments for mechanized harvesting are engineering characteristics related to the harvesting cost, in particular the slope of the land. To help understand how environmental regulation and adoption of technology affect the demand for different types of workers, we adopted a model with a small open economy having two perfectly competitive industries - rural and urban - using two finite and freely mobile production factors - skilled and unskilled workers. After introduction of a Pigouvian tax on pollution, the rural industry adopts the clean technology any time its costs are sufficiently low in relation to the tax. In these cases the model predicts that the adoption of the clean technology will increase local demand for skilled workers. When such workers are scarce in the economy, this increased demand generates an inflow of skilled workers from the urban industry. Skilled workers are defined as university graduates, and migrants as those who recently moved to a sugarcane production area coming from metropolitan areas. 2. 3. 4. Higher average wages per hour, an effect concentrated in the manufacturing sector, although it also happened in the other sectors. The higher wages can re- flect a marginal increase in the productivity of labor in these areas or a change in the composition of workers. A large increase in the number of skilled workers for each unskilled worker used for production. This appears to be a major change in the demand for skilled labor in this sector. Increased migration of workers from urban areas, mainly consisting of skilled workers from metropolitan regions. At the same time, the number of migrants from non-urban regions was not affected, suggesting that the increased de- mand for skilled workers due to the technical change with bias to qualification attracted this type of worker from nearby urban areas. It is likely that the rural areas of Sao Paulo have benefited from proximity to the supply of skilled workers in urban areas of the state. CONTRIBUTIONS OF THE STUDY The main contribution of the project to the literature on the consequences of en- vironmental regulation in local labor markets is the investigation of the potentially broader positive impact of that regulation in the context of an emerging country. In the developing world, the reallocation of workers between sectors (in particular at- tracting workers away from the traditional agricultural sector with low productivity) can be beneficial to the local economy. APPLICATIONS OF THE RESULTS AND POSSIBLE EXTENSIONS OF THE STUDY A recurring result in the literature on how productivity shocks affect the composi- tion of the local economy is that technologies that demand less labor in the agri- cultural sector lead to industrialization of the economy. The technology examined in this study fits in this category, and we obtained results in line with the literature. Nevertheless, we want to understand how that growth of the industrial sector oc- curs. For this purpose, we are working on an input-output matrix to determine what other sectors of the economy are related with the agricultural sector. The prelimi- nary evidence suggests that the industrialization that occurred in the municipalities where this new technology was adopted happened in the same sugarcane produc- tive chain, i.e., something like industrialization of the agricultural sector. RESULTS • The study showed that the adoption of clean harvesting had the following consequences in the average municipality: 1. Reduced participation of employment in the agricultural sector, increased participa- tion of employment in the service sector, and a strong increase in the manufacturing sector, indicating that the adoption of the new clean technology led to a structural transformation in these sectors. AUTHOR: Francisco J.M. Costa. RESEARCHER: Francisco Luis Lima Filho. ORGANIZATION: EPGE Brazilian School of Economics and Finance (EPGE). Annual Report 2018 43 RESEARCH
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