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It’s Jobs, Stupid!

Otaviano Canuto's picture

The World Bank has been tracking the world's progress against poverty since the late eighties, but the release of 2008 data was the first time in which all regions of the developing world showed a decline in the number of people living below poverty lines! Furthermore, that phenomenon was seen in the vast majority of countries within each region over the previous ten years, regardless of whether one used national or international income levels considered to be thresholds of poverty.

There is so much yet to be accomplished, but widespread figures showing people leaving poverty raised hopes, but also an important question: Could one point to any common factors accounting for such a broad shift, cutting across such heterogeneous economies and policies? In Brazil, for instance, it is acknowledged that more effective social policies have played a role, but how much so? What about East Asia, where the policy focus has been elsewhere? How about some countries in South Asia and Eastern Europe, where remittances from abroad have become significant sources of resource transfer to local poor people? Finding what has worked is important, of course, in order to do it more and better in as many places as appropriate.

In this week’s Economic PremiseWhen Job Earnings are Behind Poverty Reduction ­- ­Gabriela Inchauste and other World Bank colleagues report results of research on the forces behind that generalized poverty reduction. The study examined closely the experience of a sample of sixteen countries of different regions and per-capita income levels – like Moldova, Thailand, Colombia, Honduras, Ghana, Bangladesh, Nepal, Paraguay and others.

A primary explaining factor has been structural in nature: demographic change. As a consequence of birth-rate declines some years ago, falling dependency rates – that is, a higher proportion of employable adults among all household members – have made it easier to increase income and consumption per person in those countries.

A second set of factors relates to non-labor income accrued by poor people. In the sample covered by the research, remittances – private transfers from migrants abroad – have been relevant in countries like Nepal, Moldova and Honduras. In their turn, public transfers – government spending on subsidies and transfers to the poor – have also helped to reduce poverty, not only in Latin America but also in Romania.

However, the most important across-the-board factor contributing to poverty reduction has been the growth in labor income. As the authors remark : “in 10 out of 16 countries with substantial poverty declines, labor income explained more than half of the change in moderate poverty, and in another 4 countries, it accounts for more than 40 percent of the reduction in poverty.” It’s true that, when focusing on changes on extreme poverty (less than US$2.5 a day), transfers were particularly relevant in Latin American countries, Romania and Thailand, where social protection systems target the bottom of the distributional pyramid. The overall dominance of increased labor income as the major lever to decrease poverty is nonetheless clear-cut.

The authors examine in detail what accounted for the labor income increase in Bangladesh, Peru and Thailand. A better educational composition of the workforce, reflecting investments in education in previous decades, was among those factors. Additionally, changes in the occupational structure, with workers shifting from farm and subsistence work to jobs with higher market-valued productivity in manufacturing and service sectors, also helped.

However, the observed growth in incomes of the poor was mainly due to an increase in the demand for labor in the areas where the poor work.  In both Bangladesh and Peru, labor incomes of the poor (those in agriculture and/or the less educated) increased faster than for the rest of the population. In Thailand, the improvement in the educational composition of the poor was met by higher demand for an educated workforce.

Country-specific features and policy choices matter, as manifested in the strong effects of public and private transfers in some countries. But ultimately, as highlighted in the latest World Bank “World Development Report,” ending extreme poverty and boosting shared prosperity will hinge on good-job-creating growth. 

Follow the latest from Otaviano Canuto at twitter.com/OCanuto and keep up with the World Bank's efforts to help countries fight poverty and close gaps in income and opportunity at twitter.com/WBPoverty. For more Economic Premise notes, go to worldbank.org/economicpremise.