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5 facts about jobs and economic transformation in IDA countries

Dino Leonardo Merotto's picture
Economies grow when more people find work, when they get better at what they do, and when they move from low-productivity work to better, more productive jobs. Photo: World Bank

What are the pathways people follow to better jobs? Economies grow when more people find work, when they get better at what they do, and when they move from low-productivity work to better, higher-productivity jobs. Our newest report `Pathways to better jobs in IDA countries’ takes a closer look at how people benefit through jobs in the process of development. It identifies how the available jobs change with economic transformation and shows how the structure of labor markets differs between low, lower-middle, and middle-income countries. It points to key challenges in ensuring that workers can transition between sectors, between locations, and between self- and waged employment.

The study uncovers many findings, some familiar, some new. These will be featured in more detail in future blogs. Meanwhile, here are five important facts drawn from this extensive research, which combines data from over 16,000 episodes of real GDP growth, labor supply information for over 140 countries, and firm-level analysis from Jobs Diagnostics.

1. Economic growth doesn’t always bring enough good jobs.

Our analysis of growth episodes shows that growth in real GDP is no guarantee of an increase in employment in all cases. The relationship between real GDP and employment growth is positive across growth episodes on average, but the spread of employment with GDP growth is wide. Analysis of per capita growth episodes globally suggests that changes in the working-age population, labor force participation, and employment rate explain only about 20% of GDP per capita growth: 80% is explained by growth in labor productivity.
2. Underemployment, not unemployment, is the main challenge.

In many LICs, the problem is not the quantity of jobs but their quality. Most people in LICs work because they cannot afford not to. Employment rates are high. But people in LICs work irregular hours in low-quality, low-productivity jobs. Many are underemployed. On average, in low- and middle-income countries 40% of employed workers work fewer than 35 hours per week. Around a third of employed people work over 45 hours a week, indicating that their hourly productivity is low, so they need to work long hours to survive. Low-income countries with rapidly growing youthful populations need more better jobs, not simply more of the same types of jobs. That requires growth with economic transformation into higher productivity work.
3. Structural transformation drives productivity growth.

The main source of better jobs in LICs is the movement of underemployed agricultural labor into services and industry. Our growth analysis suggests that almost 80% of labor productivity growth in low-income countries comes from the reallocation of labor from lower-productivity agriculture into relatively higher-productivity services and industry. However, overall labor productivity growth within sectors tends to be low because the underdeveloped `modern’ sector of the economy is often unable to absorb the workers released from agriculture into higher-productivity, capital rich, waged jobs.
4. Structural transformation starts with productivity gains in agriculture and is linked to urbanization.

Raising agricultural productivity in LICs and LMICs is critical to catalyze growth and economic transformation. When agricultural productivity is growing, under-employed labor moves out of agriculture and GDP grows faster. The opposite is also true. When agricultural productivity is falling, labor is moving into agriculture: family members stay on the farm, which reduces agricultural productivity and lowers economic growth.
Urbanization, especially in secondary cities, happens with sectoral transformation in low- and lower middle-income countries. The migration of surplus labor from farms to towns and cities raises agricultural productivity and provides a pool of labor in urban centers. In low-income countries, it seems to happen first in the towns within reach of rural people, or on the periphery of the capital: the growth in the share of the urban population in secondary towns and cities is double that of the primary city. In low-income countries that are urbanizing faster than average, labor reallocation from agriculture adds four times as much to per capita income growth as it does in countries with slower than average urbanization.
5. Wage work matters.

A big increase in the share of wage jobs (both formal and informal) seems to coincide with the transformation from low income to middle income status. The richer a country is, the higher the share of waged employment in total employment. For countries with annual per capita income below $600, this share is only about 20%, but it reaches 63% of employment in middle-income countries. The shares of agricultural workers, unpaid family workers, and self-employed workers decline in richer countries. This suggests that the creation of waged employment may be an important aspect of the economic transformation that countries make as they progress toward higher per capita income. This is one of our most significant findings, supporting the conclusion of the 2013 World Development Report that there are important developmental gains from waged jobs (even when they are informal), because they are better than the own-account jobs they tend to replace. We are now investigating this aspect in countries where there is sufficiently long time-series data, and sufficient economic progress from lower middle-income status.
These five facts suggest that pathways to better jobs are linked to economic transformations that reduce economic inactivity and underemployment and reallocate labor from less productive unpaid or self-employed to more productive waged jobs. Low-income countries are too often characterized by the lag in those transformations and a lag between the transformation in GDP and transformations in jobs, and the price is paid by households and workers who remain trapped in low-productivity activities with meager livelihoods. This new publication coupled with new guidance for country Jobs Diagnostics, brings insights for policy makers seeking to identify the specific constraints holding back positive jobs transformations and hindering labor mobility in their country. We believe that the World Bank’s twin goals —ending extreme poverty and boosting shared prosperity— will be achieved faster when the low-income countries design effective interventions to support faster transformations toward higher-productivity jobs and improved livelihoods. Under IDA19, these countries need well financed jobs and growth strategies, and jobs focused IFC investments and lending operations that bring smoother pathways to better jobs within reach of poor people.

Follow the World Bank Jobs Group on Twitter @wbg_jobs.


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