More and Better Jobs for Shared Growth

• Labor is the most abundant asset the poor own and employment allows them to put this asset to use. Thus, the creation of employment opportunities is an important element of any successful inclusive growth strategy. But between 1990 and 2004, on average only one third of the growth in output transferred to growth in employment. The impact was particularly low in Europe and Central Asia (6%).
  
  
• The limited responsiveness of employment to growth, combined with current demographic trends, implies that by 2015 on average the world economy would need to grow twice as fast as forecast simply to absorb its expanding labor force. Africa would need to grow three times faster.
  
  
• However, employment is not always a route out of poverty, especially in Low Income Countries (LIC). Over 500 million people (18% of the employed) worldwide are estimated to be working poor – earning less than US$2 per day – and this share is growing (except in India and China).
  
  
• The primary source of income for the poor is earnings. Thus, for growth to be poverty reducing, employment strategies must focus on improving the returns to labor in the low-paid available jobs as well as enhancing the impact of growth on employment creation.
  
  
• In the highly segmented labor market of LIC and Middle Income Countries (MIC), this requires a multi-pronged development strategy that goes beyond the focus on aggregate employment numbers and aims at creating jobs in selected sectors of the economy while enhancing the quality of employment in others.
  
  
• Empirical evidence from cross-country and country level analysis suggests poverty reduction is  most effectively achieved when growth is associated with increasing output per worker in the primary sector and with job creation in the secondary sectors.

Overview

While growth is a critical element in garnering significant poverty reduction, empirical evidence suggests that its impact on poverty crucially depends on the extent to which growth translates into more and better jobs for the poor. Growth does not always result in job creation: between 1990 and 2004, on average only one third of growth in output translated into growth in employment. The minimum impact was felt in Europe and Central Asia (6 percent) and the maximum in Latin America and the Caribbean (90 percent).

In addition, demographic trends suggest that the next decades will see growing pressure to create employment opportunities in most LICs in response to the sustained growth in labor supply which follows from continuing sharp increases in working aged population and in female labor market participation. Sub-Saharan Africa will have to grow more that three times faster than projected merely to maintain current employment rates.

But the challenge is not only to increase employment opportunities. In LICs, many of the poor are employed but earn below subsistence living. Recent estimates suggest that over 500 million people (18 percent of the employed) in the world are working poor—i.e., earn less than US$2 per day – and this share is growing world-wide, with the exception of India and China. Thus, it is important to go beyond the focus on the aggregate impact of growth on the quantity of employment and implement a multi-pronged development strategy designed to create jobs in selected sectors while enhancing the quality of employment in others.

The World Bank has undertaken a combination of cross-country analysis and country case studies to identify those segments of the labor market where job generation is more effective for poverty reduction than improvements in the quality of available jobs and others where increasing returns to labor is a priority. Evidence from this work shows that aggregate employment changes do not always map well to poverty reduction.  For example, in Nicaragua between 2001 and 2005, there was no change in poverty incidence despite a 4 percent per year increase in employment. On the other hand, between 2000 and 2005 in Bangladesh, poverty nearly halved without a substantial change in employment. These examples demonstrate that creating more low-wage jobs does not necessarily reduce the percentage of people living in poverty and a growth process that increases the earnings of those stuck in lower-wage jobs may be more successful in doing so.  However, the empirical evidence also suggests that increasing employment in the higher-wage sector remains an important poverty-reducing instrument.

Thus key to growth strategies that are inclusive and sustainable is the focus on increasing productivity in the primary (agricultural) job sector and moving employment out of the primary sector into sectors of the economy that pay higher wages. These sectors may vary across countries and the potential benefits of alternative forms of intervention may be affected by the prevailing conditions at county level. Identifying these sectors, the factors that limit the creation of productive employment in them, and the barriers to workers accessing the available employment opportunities in these sectors are all essential to the success of inclusive growth strategies.  To do so it is important to improve the quality and availability of data in this area and to develop a comprehensive and broadly accepted diagnostic tool to be used at country level.

Providing Better Diagnostics and Indicators for Job Creation

In order to increase the understanding of the binding constraints to improved employment opportunities and their implications for the inclusive growth potential of a country, the Bank is leading a major international effort designed to (i) improve the quality of data on employment and earnings; (ii) enhance the relevance of standard indicators to the specific context of LICs; and (iii) build capacity for diagnostic work and evidence-based policy making in this area. The World Bank now has a guide of labor market indicators of relevance to LICs and is in the process of developing software to provide analysts throughout the world with a quick and reliable way to produce these indicators. It is also preparing an operational guide to employment diagnostics and a review of best-practice policy interventions which has succeeded in improving employment opportunities at country level. Also under development is a store of labor market data from around the world.  This outreach to country level analysts is expected to grow in the years ahead.

In pursuing the creation of more and better jobs, the World Bank recognized that some major constraints to the creation of more and better jobs may lie outside the labor market as it is traditionally conceived. It therefore promotes a country-level multi-sector analytical framework that encompasses all key aspects of the economic, political, and institutional context for job creation. This has been summarized by the acronym MILES: M as in macroeconomics; I as in investment climate and infrastructure; L as in labor market regulations and institutions; E as in education and skill developments; and S as in social protection. A sound Macro-economic framework and a conducive Investment climate are crucial for the decision by entrepreneurs to expand their business and to create new jobs. Sound Labor market regulations and institutions are also essential for both the employer and the worker to engage in a productive and longer-term working relationship. Productive jobs are invariably based on good formal Education and appropriate skills for all age groups while, finally, a strong and balanced Social protection system protects the income of workers from shocks to employment.

From Analysis to Operations

Over the last two years the Bank produced 110 Analytical and Advisory Activities (AAA) with a focus on employment and a number of major regional flagship reports have been completed. AAA have been particularly concentrated in Eastern Europe and Central Asia (ECA) and Latin America and the Caribbean (LAC), but have also addressed the challenge of job creation in other regions. Three recent issues of the World Development Report (on investment climate, equality and development, and youth, respectively) have also focused on job creation. This large volume of knowledge and expertise has fed into World Bank Country Assistance/Partnership Strategies and has informed lending operations and evidence-based policy making at country level, via the PRS process and inclusive growth strategies.

Nearly 11 percent of all World Bank investment projects during this period had the explicit objective of improving labor market outcomes. Such projects spanned all regions but were particularly numerous in ECA and Africa. Nearly half of them were designed to boost micro-enterprise development (26 percent) or increase the skills of workers (19.4 percent). By way of contrast, World Bank lending in labor code revisions, unemployment insurance schemes, or employment subsidy programs has been minimal (0.7 percent, 1 percent, and 1.6 percent, respectively). The Bank has also addressed labor market issues through development policy loans.  Twenty-five of the 232 development policy loans approved between January 2002 and August 2006 included employment-related conditions, with particular emphasis on enhancing labor market flexibility, changing wage determination mechanisms and promoting active labor market programs.

Internal and External Partnerships

In recognition of the high and growing demand for knowledge generation and dissemination on employment-related issues, the Social Protection Network (HDNSP) and the Poverty Reduction Group (PRMPR) have produced a Joint Proposal for Operationally-Oriented Research on Labor Market, Job Creation and Growth and developed parallel and complementary work programs in these areas building on their respective comparative advantages. In operationalizing this initiative, the World Bank has joined forces with the Institute for the Study of Labor (IZA) – the world’s largest network of labor market researchers – to create a new IZA research program on Employment and Development.

The programmatic and multi-sectoral character of the task of creating more and better jobs for inclusive growth has also made for rewarding partnerships with a number of agencies – including the ILO, UNICEF, UN, and bilateral donors. The World Bank is also an active participant to the Policy Coherence Initiative developed by ILO.

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For more information about the World Bank and Employment, please see: www.worldbank.org/labormarkets and www.worldbank.org/employment.

Updated March 2008

Contact:
Alejandra Viveros, (202) 473 – 4306
aviveros@worldbank.org