Published on Let's Talk Development

Jobs, plateaus, dividends, skills and data

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Jobs have been at the center of my life since I took up my own new job as World Bank Chief Economist on October 1. This began within hours of my joining the Bank, when I participated in the press launch of the World Development Report 2013 on Jobs. Following that, my interactions at the Tokyo Annual Meetings of the World Bank and IMF also brought the jobs issue into high relief, with ministers and policymakers from around the world reacting to the WDR, especially in some of my corridor conversations with them.
I have a longstanding interest in labor-related issues, the role of labor laws, and on the impact of privatization on jobs. So I was pleased by the clairvoyance of the World Bank in choosing jobs as the topic for the 2013 World Development Report, much before the Bank knew that it would choose me to be the Chief Economist.
One intriguing concept in the WDR is the plateau idea, which runs counter to what many would expect. The WDR says that, when it comes to regulatory control of labor through laws, there is a plateau. As with plateaus, in the middle, it doesn’t matter much what you do, but on the edges [or extremities] it can have a large consequence. If you are under-regulated or if you are over-regulated, you are close to the two edges of the plateau; and there the action you take can have a sharp effect on the economy [by either restricting new job creation or by violating basic worker rights and fostering instability by going to the other extreme]. One kind of reaction to this finding, which I think reflects a misunderstanding, is to say that, by implication, the WDR is asserting that such laws and regulations don’t matter.
The WDR finding is important, but as anyone who does research knows that, from physics through chemistry to economics, there is no such thing as an ultimate finding. With the WDR we’ve amassed an impressive body of research and if that’s the latest, you run along with it until we get something else. But as with all research, you must always be on the lookout for more and the next round.
Let me show one bit of enriching that you can do with the plateau idea. There are many dimensions to labor regulation. You can, for instance, measure it along hiring and firing laws; and you can measure it along the extent of right to do collective bargaining. If the plateau idea is right this will mean a three-dimensional plateau, the way real plateaus are. Now think of a nation’s position in this policy matrix. It is a like a person standing on the plateau. It is entirely possible that photographed from one side this person will appear to be on the edge of the plateau and photographed from another side she will be in the middle. This immediately enriches the concept developed in the WDR, showing that different nations may find that on some dimensions regulation is of no consequence and on other dimensions they are of large consequence. In India, through the Industrial Disputes Act, hiring and firing of workers for firms that have over 50 workers is stringent (and it’s even stricter for companies of 100 people or larger). But in other areas India is flexible. So it’s possible that on some dimensions India is close to the edge and any further tightening would be damaging, but there may be other dimensions over which the country was not close to the cliff and the regulation does not have an effect on development.

Demographic dividends as well as questions related to skills were two other issues that piqued considerable interest. Age profiles of countries and changing age structures of economies matter too. Some countries benefited tremendously when they went through a phase where the working age population was peaking, as in Ireland in the 1980s and 1990s, when the economy did very well. China has done well too by this. South Asia is on the foothills of the demographic dividend hill—the working age cohort has begun to rise and will continue to do so for another two decades. A lot of Africa is also witnessing a rapid rise in the working age population.
This demographic dividend can hold huge potential in terms of a country’s savings behavior, since savings in a society are done by the working age people. Children are dissevers; they earn nothing and so are very old people. So when this age group of young workers rises, a nation’s savings rate tends to rise and that’s again a big potential for growth because savings tend to go up and investment also rises. The large body of wage earners holds other potential benefits for a country as well.
But we know from the Arab Spring and other events in the world that this can turn deadly if you’re not providing these people with meaningful jobs or the possibility of satisfying self-employment. If these [young] people can be gainfully employed, it’s a huge potential, if not you can risk political instability coming out of the whole experience of the demographic dividend. In this connection lots of questions regarding skill development came up as well, include from ministers and other policy experts. They wanted to know more about how it was affecting countries.
Another burning issue related to Open Data. The World Bank plays a very major role but we need to go further. Take the example of India where there’s an asymmetry of data collection. Inflation is very well tracked and documented, and this is made freely available regularly to the public. On employment, on the other hand, the data are patchy and come with a time-lag. This is for the understandable reason that employment is often informal and hence difficult to measure in emerging and developing economies. But a consequence of this is that employment does not figure adequately in public debates. So in discussing the Philips curve, we have to make do with one axis missing. This skews the political economy of the policy debate. It is critically important for us to develop better data systems and ways to track difficult indicators such as informal employment all over the world. The World Bank is excellently placed to contribute to this. It is already engaged in this venture and we need to work to take it further. This can only improve public discourse and public policy.


Kaushik Basu

Former Chief Economist & Senior Vice President of the World Bank

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