Imagine adding the population of Sweden—somewhat under 10 million— to your labor force year after year for a decade. Insist that the wage workers among them earn increasing real wages and that poverty among the self-employed decline over time. What you have just described is not quite South Asia's record on the quantity and quality of job creation between 2000 and 2010. The region has done better.
Poverty has fallen, not only among the self-employed, but among all types of workers—casual laborers who are the poorest, regular wage and salary earners who are the richest and the self-employed who are in between. This hierarchy of poverty rates among the three employment types has endured over decades. Thus improvements in job quality have occurred predominantly within each employment type rather than through movement across types. The composition of the labor force among the employment types shows little change over time. The self-employed, many of whom are in farming, comprise the largest share, reflecting the predominance of agriculture in much of the region. Casual laborers make up the second largest share in rural areas.
Improved job quality is owed mostly to growth in GDP per capita, but there are country nuances. Per capita growth has been broadly increasing in India and Sri Lanka over several decades and, since the 1980s, in Bangladesh. While it has been broadly declining over the decades in Pakistan, per capita growth has been volatile and there was a sharp upswing between the 1990s and the 2000s. In contrast, job quality has improved due to massive outmigration in slow-growing Nepal which pushed real wages higher for those remaining, while a flood of workers’ remittances accounted for half of the decline in the poverty rate.
The Employment Challenge
The future looks considerably more challenging. A generally youthful population and an expectation that female participation in the labor market will go up from currently low levels implies that the region will be required to add the population, not only of Sweden but Denmark as well—a total of nearly 15 million—to its labor force year after year for the next two decades. Absorbing those entrants in progressively lower productivity jobs in countries where the absence of safety nets precludes open unemployment is always possible. Creating jobs of improving quality instead is the crux of the region’s employment challenge. Continued high growth cannot necessarily be relied upon to help meet the challenge, since country growth rates across decades are famously unstable. This highlights the importance of structural reforms to create better jobs.
Policy reform: the three Es
Electricity: What are the constraints that policy needs to address to meet the employment challenge? Ask managers of firms that have created jobs what most constrains their ability to operate and grow and they will mostly say: electricity, corruption and political instability. Indeed, Afghanistan, Bangladesh and Nepal had some of the highest reported power outages in the world on average during 2000—2010, with virtually 100 percent of firms experiencing them. The use of generators to mitigate the effects of uncertain power supply—a costly solution—is higher in South Asia than for firms with similar characteristics in countries at comparable levels of per capita income elsewhere in the developing world.
Reforms in the power sector should include not only public and private investment to reduce the gap between demand and supply, but also–and importantly— improvements in the governance of the utilities. Indeed, a large proportion of firms in Afghanistan, Bangladesh and Pakistan report that transactions with public utilities involve the payment of bribes.
Education: Improving the quality of learning is a priority in primary and secondary schools, as well as in higher education and training programs. This is where the foundations for the skills employers increasingly demand and miss in graduates, are established. But the greatest payoffs to improving the quality and efficiency of basic education, as well as labor market success, may come from interventions before children enter formal schooling. This is because, as measured by stunting, underweight and wasting, South Asia has the highest prevalence of malnutrition in children under five—higher than Sub-Saharan Africa. Policy Interventions would therefore address poor nutrition and other factors in early childhood which can otherwise lead to irreversible cognitive impairment, Notwithstanding some potentially promising pilots, there are very few programs at scale in South Asia that seek to integrate early childhood interventions.
Entry and exit: Why do employers in formal sector manufacturing in India adjust their workforce far more through creation and destruction of jobs for contract workers rather than regular wage and salary earners? Part of the answer is labor regulations, which managers in India and their counterparts in Nepal and Sri Lanka, report as being a more severe constraint to the operation and growth of their business than firms with similar characteristics in countries at their levels of per capita income. High costs of dismissing regular workers are in effect a tax on hiring them. It makes more sense for formal sector job creation to lower these costs, which protect a small minority of workers. This should be accompanied by a strengthening of labor market programs and institutions that can help all workers, particularly the vast majority in the informal sector, adjust to labor market shocks and improve their future earnings potential.
More and Better Jobs is South Asia will be published in December 2011. Read the overview here.
Former Chief Economist, Eliana Cardoso's original entry on the questions.