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Fridays Academy: The Labor Market, Economic Growth and Poverty Reduction

Ignacio Hernandez's picture

Like every Friday, from Raj Nallari and Breda Griffith's lecture notes.


Employment Elasticities and Average Annual GDP Growth, 1991 to 2003 Developing Regions


Employment Elasticities and Average



We now turn to study the regions. The East Asia region witnessed the most growth over the period, with average annual GDP growth of almost 10 percent, while Latin America experienced the lowest and declining growth rate, reflecting in part deep financial crises across several countries during the study period. In terms of employment intensity of growth, economic growth in Latin America was much more employment intensive than growth in East Asia (employment elasticities ranged from 0.45 to 0.7 in Latin America compared with 0.14 to 0.16 in East Asia), suggesting that growth in East Asia was driven by increased labor productivity. The high employment elasticities shown for the Middle East, in excess of 1, suggest that labor productivity actually declined over the majority of the study period.  Similarly the high employment elasticities for North and Sub-Saharan Africa suggest a high employment intensity of economic growth reflecting the region’s very high population growth rate.    



Employment Elasticites and Value-Added Growth – Regional Averages; 1991-2003


Employment Elasticites and Value-Added



While we have so far has differentiated between increases in labor productivity and employment intensity in contributing to overall growth and growth in sectoral value-added, both employment growth and productivity growth should be jointly pursued in order to maximize the potential for realizing economic development. Moreover, information would also be needed on other labor market indicators—quality of jobs, demographics (labor supply), labor demand, and so on, to examine fully the link between labor market improvements and economic development. Economic growth will be poverty-reducing when there is a strong link between labor market improvements and economic development.



Informal Labor Market


Employment intensity and labor productivity offer no information on the quality of jobs created.  Yet the type of job created in a developing economy context—where the usual concepts of the labor market do not apply—is important, especially when so much of the labor market is in the informal sector.  The mismatch between job gains and losses in a developing economy context often translates into a swelling of the informal sector.  Minimal unemployment benefits mean that dismissed workers cannot afford to be ‘unemployed’ and therefore have no choice except to seek work in the informal sector, taking up ‘bad’ jobs.  


Labor mobility across regions and borders contributes to labor reallocation.  In an important example of this, rural migration to urban centers has traditionally been viewed as a positive engine of development. Increasing labor flexibility in the short run also relies on the adaptability of the labor market through for example, adjustments in real wages.  Oftentimes in a developing economy context, real wage flexibility is constrained by unanticipated high or hyper inflation (Pierre and Scarpetta, 2004).  


Macro and structural reforms in the labor market should strive for greater equity and efficiency to level the economic playing field for workers and broaden access to the labor market.  As noted in the WDR 2006 the “playing field may be uneven if protection for formal sector workers, while bringing valued benefits to some, slows processes of restructuring and job creation for other workers” and maintains a large informal sector where ‘bad’ jobs dominate.