1

Does Employment Really Matter for Shared-Growth

Employment and Gender in the Shared-Growth Agenda

April 25, 2007 Pierella Paci

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What do we know so far?

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(1) Employment is important for ‘pro-poor’ growth

The line of argument develops as follows: • Growth is important for poverty reduction

but it is NOT sufficient;• ‘Pro-poor growth’ requires a reduction in

income inequality as well as an increase in average income;

• Inequalities in labor income are an important source of existing inequality and an important determinants of poverty;

• Thus employment opportunities are important transmission channels between growth and poverty reduction.

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(2) But growth ≠↑ employment opportunities

• The employment content of growth depends on – The average employment elasticity of output– Existing differentials in this elasticity across different

groups of workers (gender, age) and different ‘segments’ of the labor market (skilled/unskilled, formal/informal)

– Workers mobility across different segments . Only if average elasticity sufficiently positive and

within group differentials low and/or mobility high, growth↑ employment;

• For a given increase in number of jobs available, the corresponding increase in employment opportunities depends on concurrent trends in labor supplye.g., if a 10% ↑ in number of jobs coupled with a

10% ↑ in labor force, employment opportunities stay the same.

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(3) ↑ employment opportunities ≠ ↓

poverty• This is because having a job is not sufficient

to guarantee adequate living standards• Over 500 million people are estimated to be

working poor (18% of the those employed) and this number is not declining.What counts is not employment per se’ but the

labor income derived from that employment;need for ‘good’ jobs.

• But ↑ wages require ↑ productivity or ↑ labor market efficiency

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The ‘working poor’ are here to stay

Estimates of the Working Poor (earning less 1$ per day), millions

1990 1998 % Annual rate

China 191.3 131.5 -4.7%

East and South–East Asia 42.6 30.4 -4.2%

Middle East and Northern Africa 2.0 2.0 -0.4%

South Asia 206.1 223.1 1.0%

Latin America & Caribbean 27.5 30.2 1.2%

Sub-Saharan Africa 99.4 115.3 1.9%

Transition Economies 3.3 9.8 13.5%

World 572.2 542.3 -0.67%Source: Majid, ILO (2001)

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The ‘working poor’ are here to stay

•Around 20% of workers in developing countries are poor.

•Only a reduction of <1% in 8 years.

•Reduction is explained mainly by China and South-East Asia.

•Middle Income countries have also reduced working poor (12% to 5%).

•But low income countries have increased (88% to 95%)

•However poverty is measured at household level. Does the increase of employment offset a reduction in salary at household level? No clear answer.

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Challenge 1: Increasing employment opportunities

• Employment elasticity very stable during the last 14 years: 1/3 of growth into employment and 2/3 into productivity

gains

• Persistently elasticity female>male workers.

• Growth does not create employment for the young 14.4% youth unemployment rate compared to mean 6.2%

• Growth should reach • 4.2% simply to cope with the expected labor force growth,

• Additional 3.5% to absorb female labor force increase and

• Additional 5.7% to occupy young labor force increase.

• But WB annual growth forecast to 2015 is only 2.1% Not enough jobs will be created.

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Challenge 1: Increasing employment opportunities

World Elasticity and Forecast Labor Force Annual Growth Rate (2004-15)

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

total female youth total female youth total female youth total female youth

job elasticity 1991-95 job elasticity 1995-99 job elasticity 2000-04 Forecast Labor ForceAnnual Growth Rate (2004-

15)

Ela

stic

ity

and

exp

ecte

d L

abo

r F

orc

e g

row

th

GDP Grow th: 2.8% GDP Grow th: 3.6% GDP Grow th: 3.6%

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Challenge 2: Great variation between regions

•East Asia, ECA, LAC and OECD countries will require additional labor force (or higher productivity) to keep their output growth

•North America can make it provided it goes back to elasticity of the 90’s, instead of the last years “jobless” growth

•North Africa is around there.

•The prediction for South Asia and Sub-Saharan Africa is cause of concern.

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Challenge 2: Great variation between regions

GDP Required Vs GDP Forecasted to Absorb Labor Force Increase

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

World Australia &N. Zealand

East Asia& Pacif ic

Europe &CentralAsia

Japan LatinAmerica &

Carib.

NorthAfrica & M.

East

NorthAmerica

South Asia Sub-SaharanAfrica

WesternEurope

An

nu

al G

row

th, (

2004

-201

5)

Labor Force GDP required GDP forecasted

Source: ow n estimates based on EAPEP data version 5 (ILO) ,Kapsos, ILO (2005),Forecasts: WB and EIA

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Challenge 2: Mind the gap in SA and SSA!

Excess Net Job Creation over Labor Force Increase (2004-15)

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

Australia &N. Zealand

East Asia &Pacif ic

Europe &Central Asia

Japan LatinAmerica &

Carib.

North Africa& M. East

NorthAmerica

South Asia Sub-SaharanAfrica

WesternEurope

Su

rplu

s jo

b c

reat

ion

(+

) o

r D

efic

it jo

b c

reat

ion

(-)

(20

04-1

5),

Mill

ion

s

Source: ow n estimates based on EAPEP data version 5

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Challenge 3: Employment is not enough

What counts is not employment per se’ but the labor income derived from that employment need for ‘good’ jobs.

• But ↑ wages require ↑ productivity or ↑ labor market efficiency

BUT in many countries:• ↑ productivity ↓ employment (esp. of the unskilled);

• labor market regulations are a barrier to growth ↓ employment (esp. of the unskilled);

How can ‘good jobs’ be combined with ↑ job opportunities?

In order to achieve pro-poor growth labor market regulations need to ensure workers’ rights but also be conducive to growth and formal job creation, and consistent with overall development level (Pro-Poor Growth in the 1990s).

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Is there a solution?

We need to think differently and creatively about:

• The role of labor market as an agent of development;

• The potential role of mobility to improve the transition mechanisms.

This is the biggest challenge.

Example: In a highly segmented labor market, efficiency and productivity may ↑ by reducing the amount of fragmentation. This may ↑ both employment opportunities and wages for the poorest segments of the labor market.

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A cross-country analysis

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Main question and coverage

• What are the cross-country differences in– the way growth translated in employment

increases and productivity enhancement and – the sectoral impact of growth?

• To what does the sectoral pattern of growth and the employment/productivity split matters for poverty reduction?

• What is the role of labor market conditions and institutions in explaining cross-country differences in growth patterns?

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Employment and Shared Growth: the Link

Business Environment

Labor market institutions

GDP Growth

Employment growthGrowth in labor

productivity

Shared Growth

↑ Household Labor Income on Average

and to the Poor

Infrastructure

Access to capital

Trade Liberalization

Access to land

Labor Demand

Labor market Segmentation

Wage increase

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Theoretical framework

Two basic concepts: • Structural change (Chenery and Syrquin): The

economy consists of a number of different sectors and economic growth is to a large extent driven by the relative size and productivity of these sectors

• Creative destruction (Schumpeter): birth and death of firms and jobs is a natural process and a certain amount of churning is needed to generate economic growth

Labor mobility play a key role The structure of the economy, labor institutions

and regulations affect labor mobility

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Beyond the single and dual labor market

• The labor market does NOT exists as a single entity• What does exist is a number of different labor

markets (segments) offering qualitatively distinct types of employment to workers with similar endowments

• All workers seek employment in the ‘good’ segments but ‘good’ jobs are rationedNot everyone gets access the good jobs Workers with similar endowments have different earnings

depending where they work

• Beyond dualism: therefore at least three sectors, possibly more Need to analyze o The functioning of each labor market segment (wage setting

mechanism)o The link between the different segments

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Underlying Analytical Framework

Decision to migrateE(Wu)>E(Wr)

Rural LM:Subsistence Agriculture

Wr

Urban LM:Segmented

‘Bad’ Job Sector

Wb=Wu+minEb residual

‘Good’ Job SectorWg=Wc

Eg determined labor demand

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Zooming on some of the findings so far

In the short run:• overall employment intensity of growth does

not matter for poverty reduction, but• the sectoral pattern of employment growth

and the relative impact on productivity and labor intensity is important.

– ↑ employment in manufacturing ↓ poverty but – ↑ employment shares in agriculture ↑ poverty. – ↑ productivity in agriculture ↓ poverty.

• The impact of labor market conditions on employment v/s productivity intensive growth is still in the process of being analyzed.

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-2-1

01

23

% c

han

ge in

hea

dco

unt

pove

rty

-.2 -.1 0 .1 .2% change in Y/E

Total Output per worker

-2-1

01

23

% c

han

ge in

hea

dco

unt

pove

rty

-.1 0 .1 .2 .3% change in E/A

Employment rate*

-6-4

-20

24

% c

han

ge in

hea

dco

unt

pove

rty

0 .02 .04 .06 .08% change in A/N

Inverse of Dependency Ratio

-.2

-.1

0.1

.2.3

% c

han

ge in

Y/N

-.1 0 .1 .2 .3% change in Y/E

Total Output per worker

-.2

-.1

0.1

.2%

ch

ange

in Y

/N

-.1 -.05 0 .05 .1% change in E/A

Employment rate*

-.1

0.1

.2.3

.4%

ch

ange

in Y

/N

-.02 0 .02 .04 .06% change in A/N

Inverse of Dependency Ratio

* The employment rate is defined as the ratio of total employment and working age population

Poverty and GDP per capita vs.Labor and Demographic Components

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-10

12

3%

ch

ange

in h

eadc

oun

t po

vert

y

-.4 -.2 0 .2 .4 .6% change in Y/E agriculture

Agriculture

-10

12

3%

ch

ange

in h

eadc

oun

t po

vert

y

-.2 0 .2 .4% change in Y/E manufacturing

Manufacturing

-2-1

01

23

% c

han

ge in

hea

dco

unt

pove

rty

-.5 0 .5 1% change in Y/E construction

Construction

-.2

-.1

0.1

.2.3

% c

han

ge in

agg

rega

te Y

/N

-.4 -.2 0 .2 .4 .6% change in Y/E agriculture

Agriculture

-.2

-.1

0.1

.2.3

% c

han

ge in

agg

rega

te Y

/N

-.2 0 .2 .4% change in Y/E manufacturing

Manufacturing

-.4

-.2

0.2

.4%

ch

ange

in a

ggre

gate

Y/N

-.5 0 .5 1 1.5% change in Y/E construction

Construction

Poverty and GDP per capita vs. Sectoral Output per Worker

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-2-1

01

23

% c

han

ge in

hea

dco

unt

pove

rty

-.4 -.2 0 .2 .4% change in E/A agriculture

Agriculture

-2-1

01

23

% c

han

ge in

hea

dco

unt

pove

rty

-.2 -.1 0 .1 .2 .3% change in E/A manufacturing

Manufacturing

-2-1

01

23

% c

han

ge in

hea

dco

unt

pove

rty

-.5 0 .5 1% change in E/A construction

Construction

-.2

-.1

0.1

.2.3

% c

han

ge in

agg

rega

te Y

/N

-.4 -.2 0 .2 .4% change in E/A agriculture

Agriculture

-.1

0.1

.2.3

.4%

ch

ange

in a

ggre

gate

Y/N

-.2 -.1 0 .1 .2 .3% change in E/A manufacturing

Manufacturing

-.3

-.2

-.1

0.1

.2%

ch

ange

in a

ggre

gate

Y/N

-.5 0 .5 1% change in E/A construction

Construction

Poverty and GDP per capita vs. sectoral shares of the Labor Force