Does Employment Really Matter for Shared-Growth

1. Does Employment Really Matter for Shared-Growth Employment and Gender in the Shared-Growth Agenda April 25, 2007 Pierella Paci

2. What do we know so far?

3. (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.

4. (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 supply • e.g., if a 10% ↑ in number of jobs coupled with a 10% ↑ in labor force, employment opportunities stay the same.

5. (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

6. The ‘working poor’ are here to stay

7. 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.

8. 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.

9. Challenge 1: Increasing employment opportunities

10. 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.

11. Challenge 2: Great variation between regions

12. Challenge 2: Mind the gap in SA and SSA!

13. 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 BUTin 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 Growthin the 1990s).

14. Is there a solution? We need tothink 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.

15. A cross-country analysis

16. 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?

17. Employment and Shared Growth: the Link Access to land Access to capital Business Environment Labor market Segmentation Labor market institutions Infrastructure GDP Growth Labor Demand Trade Liberalization Growth in labor productivity Employment growth ↑Household Labor Income on Average and to the Poor Wage increase Shared Growth

18. 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

19. Beyond the single and dual labor market • The labor marketdoes NOT existsas 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 rationed Not 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 • The functioning of each labor market segment (wage setting mechanism) • The link between the different segments

20. Underlying Analytical Framework Decision to migrate E(Wu)>E(Wr) Urban LM: Segmented Rural LM: Subsistence Agriculture Wr ‘Bad’ Job Sector Wb=Wu+min Eb residual ‘Good’ Job Sector Wg=Wc Eg determined labor demand

21. 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.