Global Value Chains: a way to create more, better and inclusive jobs

Global Value Chains (GVC) are significant vehicles of job creation, employing around 17 million people worldwide and carrying a share of 60 percent of global trade. Simply put, GVCs include all of the people and activities involved in the production of a good or service when the different stages of the production process are located across different countries and geographies. As globalization increases, GVCs are becoming more relevant in international production, trade, and investments. And Global Value Chains also have an important effect on job creation . Several examples around the world show that GVCs produce a structural transformation that can create more jobs, and these jobs usually have higher wages and better working conditions. Global Value Chains can become a win-win for firms, which enjoy greater efficiency, productivity, and profits while they create better jobs. Here are some revealing facts about the potential of GVCs to create more and better jobs.

A chain that creates jobs

GVCs can lead to the creation of more jobs when they catalyze structural transformation or generate new linkages in and around the chain. In Bangladesh, for example, the emergence of the GVC-oriented export apparel sector has contributed to the employment of more than three million people over the past two decades. Similarly, Lesotho’s integration in the global apparel industry has helped transform an agrarian economy, employing 10 percent of the country’s workforce. The 2016 World Bank book Stitches to Riches provides empirical evidence from the apparel sector in South Asia that show how engagement in a GVC can lead to overall structural transformation. The analysis shows that when a country witnesses a 1 percent increase in demand for exports of apparel compared to increased demand in other sectors such as agriculture, there is a 0.3-0.4 percent increase in employment. This increases overall welfare as workers move out of agriculture or the informal sector toward these better paying, higher value-added jobs.
 

GVC benefits female employment

Evidence shows that women benefit disproportionately by taking on a larger share of jobs that are created in labor-intensive value chains . In almost all sectors most intensely traded in GVCs –apparel, footwear, and electronics– it is the lower-skilled, young, female workers who account for the largest share of employment. For example, in the Kenyan and Ugandan floriculture GVCs, women represent 65-75 percent of the labor force, working mostly in the packhouses, which also offer higher incomes than for on-farm labor. In the apparel sector globally, a majority of the workforce comprises women. For example, in Turkey, two million of the three million workers in the workforce in this sector in 2008 were women. In Bangladesh, approximately 80 percent of the three million garment workers in the same year were women.
 

And GVCs help improve working conditions

At the firm level, there is strong evidence that participation in a GVC can lead to the creation of better jobs by way of higher wages and better working conditions  as the participating economy seeks to comply with global standards on health, safety, and treatment of workers. Research across countries shows that exporters, being key proxies for participants in GVCs, pay higher wages than firms serving domestic markets only. Evidence from Slovenia points to a 17.5 percent wage differential; in Chile, the differential is 20 percent; in India, wages are about one-third higher. In the Ugandan floriculture sector, being integrated in a GVC has resulted in the implementation of improved healthcare and sanitation facilities, and childcare standards, all of which have created better working conditions for workers.

GVC participation also enables access to training and skills development, which contributes to higher productivity and higher wages. Findings from a British industry panel dataset show that a 1 percent increase in training is associated with a value added per hour of about 0.6 percent and an increase in hourly wages of about 0.3 percent.

But not all outcomes are always good

Positive outcomes on the labor market from GVC participation are not always clear-cut, and may include potential tradeoffs between the number of jobs, and better and more productive jobs. For example, in value chains that exhibit domestic sub-contracting, there is a potential loss of transparency and control. This can result in creation of non-contractual, low-paying jobs in unsafe working conditions. Dual employment contracts may emerge as firms employ a smaller number of skilled highly paid workers to maintain quality, and rely on a larger irregular, low-skilled, low-paid workforce to remain cost competitive. Gereffi and Luo (2014) cite evidence of this type of simultaneous outcomes in the Moroccan garment sector that operates in the global fashion industry. This technical skill bias can be even more pronounced for female workers, who typically enter the GVCs at the lower skill level. Further, these biases can become more pronounced over time, as firms upgrade, resulting in the need for a smaller higher-skilled workforce, thereby destroying jobs. This potential job loss can be mitigated by strengthening spillovers in other parts of the chain and economy.
 
The eventual outcome on the labor market depends on several factors, including the readiness of the domestic labor force to respond to changing global demand, and flexibility of labor market policy to allow for ease of labor mobility. In the next blog, we will discuss some public policies that can support the positive outcomes of GVC on job creation.

This post is part of a series in preparation of the G20 Leaders’ Summit, featuring four topics: the future of work, employment for women, integration of migrants in the labor market, and ensuring decent work in supply chains. You can read previous posts here.