Published on Jobs and Development

The jobs challenge in the services age: managing Colombia’s premature move away from manufacturing

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Colombia?s economy has been moving away from manufacturing towards services. Photo: Shutterstock
Colombia’s economy has been moving away from manufacturing towards services. Photo: Shutterstock

In the last decade, Colombia has seen its economy move away from manufacturing and towards services. Services grew as a share of GDP from 62 percent in 2009 to 68 percent in 2019. Manufacturing dropped from 16 percent to 12 percent of GDP over the same period (Figure 1).

Figure 1. Colombia’s GDP by economic sector (As % of nominal GDP)
Figure 1. Colombia?s GDP by economic sector (As % of nominal GDP).
Source: Based on GEIH data 2009-2019

Employment saw a similar same shift out of manufacturing and into services. By 2019, 63 and 13 percent of employment was concentrated in services and manufacturing, compared with 60 and 19 percent respectively in 2009 (Figure 2).

Economic sector

Economies typically start to shift away from manufacturing as they approach high-income status (see here). Yet in 2019 Colombia’s Gross National Income, at US$ 6,570, was only about half that which the World Bank defines as high income (US$ 12,375 using Atlas method exchange rates). The shift appears to have started prematurely in Colombia. In fact, by 2019, Colombia’s share of total employment in the manufacturing sector had fallen to about Western Europe’s current levels of 14 percent - far below Western Europe’s levels of 25-30 percent in the 1970s .

Should such a premature shift in employment away from manufacturing into services be a concern, or does it reflect a natural, and possibly efficient, movement of employment into the services sectors?

While Colombia is not the only middle-income economy affected by these sectoral shifts (see here), a recent World Bank Jobs Diagnostic Report for Colombia argues that they present Colombia with two key labor market challenges.

First, the move away from manufacturing makes creating better job opportunities for low and medium skilled workers more difficult. The decline in manufacturing was particularly acute for formal sector work: the manufacturing share of formal wage jobs (those with a contract and social security) declined from 24 to 18 percent between 2009 and 2019 (Figure 3).

The increasing number of jobs in high value-added services sectors, such as in financial or telecommunication services, require levels of education that are higher than secondary education, yet only about half of working-age Colombians have completed secondary education. With fewer job opportunities available in manufacturing, less educated workers are pushed into lower value-added sectors such as construction, trade, or hospitality services. These sectors are less formal, pay less and are more insecure.  

Second, a high concentration of jobs in the services sector exposes the labor market to cyclical downturns. This makes jobs less resilient to crises. Over the last decade, Colombia’s economy experienced first a strong expansion because of rising oil prices, followed by a deceleration as oil prices fell. As most Colombian jobs were already in the non-tradable services sectors, the labor market was strongly pro-cyclical.

During the boom years, the net creation of formal jobs expanded rapidly, and unemployment fell. Once the economy stagnated formal jobs were no longer created, and unemployment rose. A more diversified economy would have resulted in fewer jobs being lost, and the economy better able to withstand the slowdown.

What can be done?

According to the Job Diagnostics Report the Colombian service economy is likely to grow further and to be the main source of job creation, while the manufacturing sector is likely to create fewer better jobs. This may not be all bad news though. The world has changed markedly since advanced economies started to de-industrialize fifty years ago. In an increasingly digitized world, some services are high productivity and more services are becoming tradable - features that were considered unique to manufacturing (see here). Yet many Colombians are stuck in service activities that are neither high productivity nor tradable. Helping Colombian workers to gradually transition from low productivity to higher productivity services is needed.

Policy needs to prioritize the competitiveness of Colombian products at home and abroad. This will ensure that the manufacturing sector does not fall even further behind . This will buy Colombia time as it transitions to an economic model based on high productivity services. To achieve this the Jobs Diagnostics Report argues that policy should focus on:

  • Expanding and modernizing infrastructure to strengthen domestic markets and to reduce the costs of trade with the rest of the world.
  • Reducing tariff and non-tariff barriers as well as simplifying the tariff schedule to help Colombia participate more in global value chains.
  • Streamlining and simplifying Colombia’s fiscal regime so that firms face a more homogenous tax regulatory environment between national and local authorities.

High productivity services sectors are highly skill intensive. Yet many Colombians lack those skills. Furthermore, there are numerous labor regulatory barriers that disincentivize the hiring of workers with fewer skills. The Jobs Diagnostics Report says that precedence should be given to:

  • Revising the labor regulatory regime and the determination of the minimum wage to ensure that the hiring of workers with fewer skills is not disincentivized, particularly outside the urban economic hubs.
  • Increasing human capital investments and the adaptation of schooling and training curricula to better reflect the needs of an increasingly digitized economy.

This is the first blog of a blog series based on the World Bank Group’s report: “Colombia Jobs Diagnostic: Colombia’s Structural Challenges for the Creation of More and Better Jobs”. In our next blog, we will delve into Colombia’s labor market challenge presented by a working-age population that is still mostly unskilled and with insufficient access to quality employment resulting in an underutilized workforce.


Andreas Eberhard-Ruiz

Development Economist with the Jobs Group at the World Bank

Alejandro Rueda-Sanz

Consultant for the Jobs group and Social Protection

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