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How to create jobs fast: From public works and wage subsidies to social services and capital subsidies

David Robalino's picture
It is well-known that markets tend to neglect the provision of many social services. There is, therefore, a role for governments to subsidize the provision of these services. Photo: Sarah Farhat/ World Bank

Creating jobs is not cheap —as I discussed in this post— and it can also be a slow process. It takes time for an idea to become a business plan and eventually a new or larger business. At the same time, in many developing countries, macro and regulatory policies often discourage entrepreneurship and investments. Reforming these policies takes time and having results on the ground even longer.
In the meantime, in many countries, there is a sense of urgency to address important labor challenges.  It is not only youth unemployment or inactivity but also the fact that many of those who have a job are in very low productivity, very low-quality jobs. Citizens are becoming frustrated and impatient. What can be done in the short-run?

When it comes to accelerating job creation, the answer has often been public works programs and wage subsidies. According to my colleagues working on the design and implementation of public works, it takes on average, 12 months for these programs to start pumping jobs from the time the legislation is approved.
Unfortunately, most of the programs implemented globally operate more like safety nets that create jobs for very low skilled workers, in very low productive activities, paying less than the minimum wage. Additionally, these are all temporary jobs.
As for wage subsidies, the experience has been mixed at best. Programs can be expensive with job openings that come and go with the subsidy. Employers often substitute workers who receive wage subsidies for workers who don't or use the subsidy to hire workers they would have hired anyway. More importantly, when employers cannot expand their productive capacity (e.g., because of lack of demand or capital), bringing additional workers, even with a subsidy, doesn’t pay-off.
An alternative —or at least a complement— to public works and wage subsidies are programs that support the provision of social services and offer capital subsidies or matching grants to existing or potential providers. Indeed, it is well-known that markets tend to neglect the provision of many social services: child and elderly care, counseling, education and training, health services, environmental protection, and clean water and sanitation. The reason is that these services tend to generate social externalities that private businesses do not take into account. There is, therefore, a role for the government to subsidize the provision of these services.
One way to do this is to subsidize the costs of the services in question assuming providers exist and that they can expand their supply. Another way is to subsidize the creation of jobs that offer these services. It doesn’t mean that the government hires workers directly. On the contrary, it shouldn't. But it can subsidize the investments necessary to create social enterprises that employ the workers who offer these services.
The potential for job creation in social sectors seems to be quite large.  We did some back of the envelope calculations using employment data on education, health, residential care, and social work from OECD countries and applied to low and middle-income countries (LMIC).  Assuming that LMIC countries converge to similar numbers of workers in the social sectors per capita, they could create around 60 million new jobs between now and 2030.

This represents over 11% of the total number of jobs that need to be created (around 520 million).
These 60 million new jobs might be at the lower-end of the projections. First, because we are only looking at some specific types of social jobs and second because LMIC countries are not yet at par with OECD countries in terms of the number of social jobs per capita. Getting to that level can create more jobs.

Source: Timothy Clay, calculations from employment data on education, health, residential care, and social work, UN Population Prospects 2017, OECD Stat 2018
The idea is not entirely new. Many governments run programs to support start-ups and entrepreneurs, including social enterprises. However, a challenge with these programs is managing the risk of business failure, usually associated with insufficient sales or revenues when there is not enough demand. To address this challenge, public programs can guarantee demand and support enterprises that offer social services. For instance, in the case of child and elderly care, the government can implement a program targeting children and elderly with certain socioeconomic characteristics living in specific regions. It can then, through a competitive process, select entrepreneurs trying to create or expand businesses that offer child and elderly care, support them with matching grants and advisory services, and allocate a share of the population of beneficiaries to each company. One of the selection criteria can be the number of jobs that can be created by the social enterprise for a given investment level (a subject of my next blog post).

 Follow World Bank Jobs Group on Twitter @wbg_jobs.

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