The Role of Employment for Growth and Poverty Reduction PREM learning week 2007 Catalina Gutierrez Pieter Serneels

Employment, poverty and growth Growing consensus: growth translates into poverty reduction through employment Poor people live from their earnings from labor At the individual level, one can move out of poverty by 1.Working more hours (for a constant level of earnings/hour): employment generation 2.Increase effort per hour worked: increase labor productivity in order to increase hourly earnings 3.Moving to a job that gives higher earnings for a given level of productivity: mobility

But –Policies emphasize (1) employment generation, not (2) changes in productivity or (3) labor mobility –There is limited analysis on the links between growth, labor and poverty Why? –Lack of data? –No unifying theoretical framework for analysis segmented versus perfect labor market

How to proceed? 1.Identify a useful theoretical framework 2.Carry out empirical within-country analysis 3.Carry out empirical cross-country analysis

How to proceed? 1.Identify a useful theoretical framework 2.Carry out empirical within-country analysis 3.Carry out empirical cross-country analysis

Theoretical framework Two basic concepts Structural change (Chenery and Syrquin) Creative destruction (Schumpeter) Importance of The structure of the economy Labor mobility Labor institutions and regulations

Starting point: multisector labor market The labor market exists of different segments offering qualitatively distinct types of employment Not everyone (with similar characteristics) gets access to the same type of job Segmentation can occur along different lines: economic sector, formal / informal, rural / urban Need to go beyond dualism because of heterogeneity within a sector Analyze –Each sector –The link between the sectors

An operational framework for within-country analysis Using aggregate data: –decompose growth –decompose poverty Using household and firm data: –Employment and labor income profile –How the labor market works: segmentation, labor supply and demand and skills mismatch

An operational framework for within-country analysis Using aggregate data: –decompose growth: Ghana and Nicaragua –decompose poverty: Nicaragua Using household and firm data: –Employment and labor income profile: Nicaragua –How the labor market works: segmentation, labor supply and demand and skills mismatch

Ghana Macro analysis

Ghana: what we know… Poverty has been reduced substantially Poverty reduction comes from growth, not from re-distribution ( )

Ghana: what we dont know… How sustainable is growth and poverty reduction? –What is the long term perspective? –What is the role of the structure of the economy? –What is the role of labor markets? We analyze what happened to –productivity –employment –changes in the decomposition of the population

Decompose growth Y/N = Y/E * E/A * A/N (Y/N) = (Y/E * E/A * A/N) (Y/N) = S (Y/E) + S (E/A) + S (A/N)

Decompose growth

Conclusion Per capita growth is accompanied by 1.an increase in output per worker (but contribution ) 2.a decrease in the dependency ratio (and contribution ) 3.a decrease in the employment share of the working age population in the first spell (and contribution now +)

Decomposition by sector

Share of the sectors

Decomposition by sector

Conclusion Classic growth story: movement out of primary into secondary and tertiary sectors But: output per worker in both secondary and tertiary sectors is decreasing. Informalization? And: is increase in productivity in the primary sector due to out-movements only or due to technological change?

Nicaragua Macro and micro analysis

Value added growth

Nicaragua: Aggregate Employment and Productivity Profile of Growth

Nicaragua: Employment and productivity profile of growth by sector of economic activity

Sectoral contribution to growth

Linking employment and productivity growth with poverty Identify sectors where the poor are Zoom into key employment/growth sectors Sectoral regression or decomposition approach

Nicaragua: Employment shares by sector and poverty level

Incidence of poverty by sector

Sectoral decomposition of changes in poverty by household head

Zoom in… Manufacturing: Employment generated at very low wages. Maquila employment not for the poor Agriculture: despite increases in income and prices, returns in agriculture still remain the lowest

Conclusions from macro analysis Demographic change presented a window of opportunity for poverty reduction Growth was mainly concentrated in the manufacturing sector Employment growth in manufacturing and Agriculture Employment generated in manufacturing did not benefit the poor. Employment in agriculture contributed to increase poverty, since the lowest returns are in this sector

Using Micro data: the employment and labor income profile of the population How important is labor income in total income, and how does this importance differ between income groups? How important are transfers in reducing poverty? How does the labor and demographic profile of households shape per capita labor income? Is poverty a result of a low earnings rate or of unemployment or underemployment?

Stylized facts Employment categories and earnings: which type of employment do the poor have? Employment status by poverty level: are the poor unemployed, employed or inactive? Structure of total income by quintile: which is the main source of income of the poor?

Employment categories and earnings

Employment status by poverty level

Income structure

Growth in per capita household income by quintiles in 2001 (panel)

Decomposition of changes in labor income

Conclusions from Nicaragua The demographic change presented an opportunity for poverty reduction but… Despite the fact that the new population found jobs.. Employment growth did not benefit the poor Growth was accompanied by increases in manufacturing and agricultural employment but by decreases in productivity in these sectors. Lowe productivity was reflected in lower wages in both sectors. Higher prices in agriculture increased income of self employed partially counteracting this negative effect in the income of the poor self employed in agriculture The poor have no access to manufacturing employment in maquila, which offers good wages

Policy implications Low education is restricting access of the poor the most dynamic sector in the economy: manufacturing. It should become a policy priority Some evidence of segmentation agriculture/non agriculture suggests that rising productivity in agriculture should be at the forefront of policy initiatives