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 Estimates of the Working Poor (earning less 1$ per day), millions % Annual rate China % East and South–East Asia % Middle East and Northern Africa % South Asia % Latin America & Caribbean % Sub-Saharan Africa % Transition Economies % World % Source: Majid, ILO (2001)

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 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 ).

14 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.

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 Business Environment Labor market institutions GDP Growth Employment growth Growth 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

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 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 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 oThe functioning of each labor market segment (wage setting mechanism) oThe link between the different segments

20 Underlying Analytical Framework Decision to migrate E(Wu)>E(Wr) Rural LM: Subsistence Agriculture Wr Urban LM: Segmented ‘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.

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