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As usual on Fridays, from Raj Nallari and Breda Griffith's lecture notes.

Unemployment and Under Employment

 What it means to be employed and unemployed in a developing economy context differs from the developed economy meaning.  In the latter, any person without a job but actively seeking work is considered ‘unemployed’. It is generally accepted (Betcherman, 2005, Bourguignon, 2005, Pierre and Scarpetta, 2004) that unemployment rates in developing countries understate the true rates.  Due to income being at or below subsistence for many families in developing economies, one cannot afford to be unemployed. Moreover, social protection such as unemployment insurance either does not exist or has very limited coverage. In such scenarios, individuals will look for work in the informal sector and many have no option but to choose ‘bad jobs’ (Bourguignon, 2005).  According to the WDR (2005), “in many developing countries, more than half of the working population is in the informal economy where working conditions can be poor”. (p. 136)  Despite the caveats, unemployment data are constructed for developing economies, but as would be expected, there is little variation compared to other labor market indicators.  Unemployment in the developed countries was 6.2 percent in 2000—higher in Europe and Japan compared to the US.  As noted by Betcherman, unemployment rates in the developed economies have received a lot of attention from labor economists and increases in the unemployment rate, despite a declining structural component (non-cyclical) correspond to the timing of recessions in most countries.  In the developing economies, data are incomplete in Africa and South Asia where large rural and informal sectors exist. In Latin America, unemployment often refers to urban unemployment only. The available data shown in the exhibit show that unemployment increased in all the developing countries over the study period. Rates are lowest in Asia and Pacific, even lower than developed economies (Betcherman, 2005). 

Unemployment Rates by Region, 1990-2000

¹figure for 1999

Source: Betcherman 2005

Wages

 
Conclusions on wages and worker compensation in developing countries are also difficult to make owing to poor and incomplete data. Often the only data collected are for manufacturing, which in countries with large rural and informal sectors fails to give an accurate picture of worker compensation. It is difficult to compare trends over time and across countries because of productivity, bargaining power of workers and social security (Betcherman, 2005).  Yet trends over time are key when considering economic development. Despite the caveats, the ILO and World Bank collect data on worker compensation, measured by payroll costs, not just wages.  Some of the trends quoted in Betcherman 2005 show the disparity across countries – an average worker in manufacturing in Kenya earned less than $100 a year in the early 1990s compared to an average worker in Brazil who earned over $14,000 per annum. In terms of earnings growth, East Asian countries experienced increases in real wages between 25 and 31 percent in the early 1990s, while real wages declined in South Asia and Sub-Saharan Africa, with mixed trends in the Latin America region. Within regions, the best measure of wage inequality is income inequality. In most countries, labor market income represents the primary source of income.  Data on various inequality measures, and in particular the Gini coefficient quoted in Betcherman (2005) show that inequality varies dramatically across countries, with developing countries exhibiting much higher and increasing levels compared to developed countries,  During the mid to late 1990s, income inequality was highest in Brazil and South Africa followed by China and Mexico. Latin America showed the most regional inequality.  UNDP examined income inequality for 36 countries for the late 1980s and late 1990s. Using the ratio of income share held by the top quintile of the population (the highest 20% of all earners) to the bottom quintile, the ratio ranged from 3.4 in Japan in the 1990s to 25.5 in Brazil

Income inequality, selected countries, mid-to-late 1990s

Source: Betcherman 2005