The economic and social transformations in many developing countries over the last decade have often put their economies on higher and more sustainable growth paths. In too many cases, however, poor labor market conditions still lead to high unemployment levels, increased inequality and exclusion. As labor is most often a poor person’s only asset, a growth process that is not associated with job creation may fail to reduce poverty. A well functioning labor market can be the key to a business climate where new firms are created and private agents find the proper incentives to invest and innovate. But sound labor markets that promote the creation of more and better jobs are also needed to guarantee the success of structural reforms, to maintain the social support for those reforms, and to ensure that the benefits are widely distributed. Achieving these targets is crucial to an effective implementation of poverty reduction strategies and, hence, progress towards the Millennium Development Goals.
Against this background, IZA has launched the new Program Area on Employment and Development in collaboration with the World Bank. This new program aims at assisting the international research community in addressing the proposed priority research. A trust fund initiative should provide the necessary resources to finance the program components which are to be developed and undertaken on a competitive basis.
The Program Area benefits from the synergies with other IZA Program Areas, and in particular with the work done on Institutions, Transitions Economics and Migration. More specifically, the Program Area on Employment and Development focuses on the determinants of ‘good’ labor market policies for developing countries and cover various research themes such as anti-poverty effectiveness of labor markets policies, active labor market policies, support systems for unemployed workers, national and international migration and the labor market, labor market institutions and their role for employment and growth, the role of formal versus informal jobs, the role of labor market reforms in relation with trade regimes and globalization, political economy of labor market reforms. More details on the 7 key topics we shall focus on are given below.
Important material can be found on the Labor Markets website of the World Bank. The Bank has developed a proposal for an operationally-oriented research program on "Labor Market, Job Creation and Growth" which identifies seven main topics as key areas for priority research. The proposal has been advanced in discussions with the research community, other international organizations (such as ILO) and bilateral aid organizations in Europe, America and Asia. To move the proposed research agenda, IZA and the World Bank collaborate closely on the development of this Program Area and on related activities, as detailed below.
IZA World Bank Conference on Employment and Development
To launch the project and initiate research and fund raising for this purpose, IZA and the World Bank organized a launch-cum-research conference in Berlin in May 2006. Since then, the event has developed into an annual conference taking place at alternating locations in developed and developing countries. See the list below for information on past and forthcoming conferences:
German Day on Development / Deutsche Tagung für Entwicklung
Hosted by the Executive Director for Germany at the World Bank, and organized by the IZA, DIW Berlin and DIW DC, this event provides an opportunity to discuss research results of leading German research institutes on development issues and to enhance collaboration and communication between researchers in Washington and in Germany. See below for information on past and forthcoming events:
Network members are currently engaged in projects to define child labor, to understand why children work and how they become engaged in worst forms of child labor, to measure the consequences of common forms of work for education, health, and occupational choice, and to evaluate the effectiveness of various child labor and schooling related policy interventions.
For more information see:
- Child Labor Network Website
IZA collaborates with the World Bank and partner organizations in the management of the Jobs Knowledge Platform (JKP).
The JKP aims to share insights, create a community, and inform policy debates about practical solutions to expand job creation and improve job opportunities around the world.
For more information see:
- JobsKnowledge.org website
- Twitter @jobsknowledge
- You Tube channel
The World Bank research program on "Labor Market, Job Creation and Growth" and the IZA program "Employment and Development" have identified 7 main topics as key area for priority research:
1. Diagnosis of labor market conditions and vulnerability in middle and low income countries
Improving our assessment of labor market conditions and policy challenges requires more and better information. In many low-income countries, standard labor market indicators are inappropriate. Most workers cannot afford to be unemployed and may well be engaged in full-time employment, while remaining in poverty. Better diagnosis is particularly needed to identify vulnerability in the labor market. In many countries, the traditional dichotomy of formal/informal employment may not characterize well the vulnerability of workers (more on this below). Vulnerability may also be the result of misguided policies or social norms that lead to social exclusion and discrimination. While in some countries, social exclusion is entrenched, we only have rough and incomplete measures to identify this phenomenon. A more complete set of labor market diagnostics needs to be developed in order to assess labor market performance and to identify vulnerable groups and design effective policies to improve their welfare. Further research is needed in a number of specific areas, including:
• Reviewing diagnostic tools to assess labor market conditions in countries at different stages of development and with different economic and social structures
• Improving identification of vulnerability in the labor market
• Improving identification of vulnerability among children and the youth
• Understanding the gender dimensions of vulnerability in employment
• Identifying and facing up to social exclusion
2. Links between the business environment, labor demand and poverty reduction The challenge of creating more and better jobs largely relies on improvements in the investment climate in which firms find the incentives and opportunity to invest productively, grow, and hire workers. Existing bottlenecks in the investment climate affect the three main channels through which growth can affect poverty reduction: (i) the sustainable growth path; (ii) the employment content of growth (i.e. the elasticity of employment to output growth); and (iii) poverty-reduction effect of employment growth (the poverty elasticity to employment). Moreover, different reforms of the investment climate may affect these three channels in ways that may affect the short term and long term effect of growth on poverty reduction. In many developing countries dominated by traditional economic production, two other important issues relating to labor demand concern rural, non-agricultural activity and the efficient migration of rural workers to urban areas where employment opportunities are growing. These have direct and potentially powerful implications for poverty reduction. Further research is needed in a number of specific areas, including:
• Assessing labor demand in countries at different levels of development and with different investment climates
• Understanding the role of labor in the link between growth and poverty, especially in low-income countries
3. Benefits/costs of structural reforms and globalization for workers This is closely related to the previous topic. The international evidence suggests that macro, trade, and structural reforms can involve large reallocations of resources – including labor – across firms, sectors, and locations, often with adverse effects on labor markets. In Equatorial and Central Africa, these reforms were accompanied by persistent open unemployment, declining participation, and sometimes, by stagnating real wages. In Latin America and Caribbean countries, the impact of reforms on jobs has been much smaller but often at a cost of substantial wage losses. In many low income countries, increased trade openness is exposing them to greater opportunities but also more exposure to fluctuations of international markets. Further research is needed in a number of specific areas, including:
• Identifying the channels by which different types of reforms affect labor market outcomes
• Identifying the medium-term job growth prospects of structural reforms
• Identifying the optimal sequencing of reforms for job creation
• Identifying the best mechanisms of income support and re employment for affected firms and workers
4. Causes and consequences of formality and informality
All labor markets include diverse types of employment in terms of “formal” jobs, “informal” jobs, and variations in between. In many developing and transition countries, informal employment has been growing more rapidly than more formal employment. This has raised many questions for labor market analysis and also for policy-making. It also has close links with the earlier theme on diagnosis and vulnerability. It is obvious that the reality is more complex than the traditional view of an informal “sector” where the poor, unable to find formal jobs, eke out a subsistence living through very low productivity labor. While this characterization applies in some cases, empirical studies in Latin America have shown that some workers seem to be voluntarily moving to the informal sector to improve their lot. Moreover, workers in sectors traditionally considered as “formal” are increasingly employed in temporal, precarious jobs, blurring the line between formal and informal employment. We know little about informality, what drives it, and what its links are to formal labor markets. Further research is needed in a number of specific areas, including:
• Investigating the dynamics of the formal/informal economy
• Re-thinking social protection for informal workers
• Identifying the effects of labor regulations and social protection programs on informality
5. Effects of labor market policy and institutions
Research suggests that economic growth requires the capacity to reallocate resources, including human resources, from declining to expanding sectors, and from low- productivity to high-productivity activities. However, in many countries labor regulations appear to be ill-suited to facilitate this process. In many developing countries, hiring and firing regulations are much stricter than in high-income countries, hindering the reallocation of labor across uses; on the other hand, few have adequate programs to support the unemployed. Yet it should be recognized that labor market regulations, albeit imperfect, constitute a form of social protection and cannot simply be dismissed. To move beyond a trade-off between labor market flexibility and worker security is necessary (i) to identify the benefit/costs of existing regulations/social protection mechanisms and (ii) to identify potential alternatives, which yield higher benefits at a lower social and economic cost. Further research is needed in a number of specific areas, including:
• Identifying the impacts of labor regulations on total employment levels and growth, formal sector employment growth, informal-formal decisions, productivity growth, consumption smoothing, and risk management strategies
• Identifying the effect of labor market regulations on particular groups of the labor force
• Assessing the role of international labor standards in trade and development (e.g. on child labor)
• Understanding the political economy of labor reforms
• Identifying alternative protection mechanisms with lower economic costs
• Understanding how to promote social dialogue
6. Best practices in skills development and skills upgrading
Important skill shortages are identified in most developing countries. In many countries of South Asia and Sub Saharan Africa, illiteracy rates are still very high, and enrollment in secondary education is still fairly low in many low and middle income countries. Not surprisingly, many employers in these countries consider skill shortage as one of their main constraints in the operation of their business and potential for growth. Increasing the quality of the labor force is essential to increase the productivity and the earnings of workers. Yet, in many countries, state-provided training services have been inadequate and disconnected from the requirements of employers. Interventions in skill formation should take into account that (i) most training takes the form of on-the-job training; (ii) medium- and high-skill workers are more likely to be trained by firms than low-skill workers; (iii) many workers in developing countries are self-employed; and (iv) economic analysis has often shown that the returns to human capital investments in workers are highest when workers are supported in furthering their general (school-provided) education. With all of these considerations, it is remains unclear what the best models are for skills development and skills upgrading of the labor force. Further research is needed in a number of specific areas, including:
• Identifying efficient government interventions in training programs and policies
• Identifying the role of labor force skills in determining economic outcomes in a context of globalization
• Attempting answering crucial questions like: what are the best training models to build a skilled labor force? What are the appropriate public and private roles? How should the training system interact with the education system, facilitating the entry of young people into the labor market?
7. International migration and labor markets in origin and host countries
The demographic development between the main regions of the world is characterized by large disequilibria as a result of differences in the timing and scope of fertility and mortality trends. As some of these differences will get more pronounced in the decades to come, this will accentuate the divergence in labor force growth between regions. Europe and Japan will have low or even negative growth, and other regions, such as MNA or India, will have continued high growth. For the rich countries in the developed world, a constant or declining labor force implies lower GDP per capita growth, unless a declining labor supply is fully compensated by higher productivity growth. But the latter risks to be negatively impacted by an older and less entrepreneurial population. Labor force stagnation also implies a higher burden through social security programs such as pension and health, which is largely independent of how these programs are funded. On the other hand, the developing countries with continued strong labor force growth will be extremely hard pressed to create the millions of additional jobs needed to accommodate the new entrants. This disequilibrium calls for demographic arbitrage and ideas on how to structure capital as well as labor flows as a win-win-win situation (for sending country, receiving country, and migrants). This includes managed temporary or permanent migration, the better use of remittances in labor-sending countries, and appropriate social policy programs which make return migration individually attractive and fiscally sustainable for the sending country. Further research is needed in a number of specific areas, including:
• Understanding demographic disequilibria and skill gaps
• Assessing migration policies in receiving countries
• Assessing migration policies in sending countries
• Understanding the role of portability of social benefits
The Consequences of Increased Enforcement of Legal Minimum Wages in a Developing Country: An Evaluation of the Impact of the Campańa Nacional de Salarios Mínimos in Costa Rica (slightly revised version accepted for publication in: Industrial and Labor Relations Review)