1. By Rizwanul Islam 28 February, 2010 Conference Room, BIDS
The Challenge of Jobless Growth in Developing Countries: An Analysis with Cross-Country Data By
Rizwanul Islam
28 February, 2010
Conference Room, BIDS

2. Content Background and purpose of the study
Some conceptual clarifications
Possibility of a trade-off between employment and productivity growth
Employment and output growth: empirical evidence
Decomposition of output growth into employment and productivity growth
Constraints on employment growth
Concluding observations

3. The Background and Purpose of the Study
Low and declining employment growth in relation to output
Growth-poverty nexus:
No invariant relationship between growth and poverty reduction
Strength of the nexus influenced by the employment intensity of growth
Hence the importance of addressing the issue of employment intensity of growth

4. Conceptual Clarifications
What do we mean by jobless growth?
Can output growth be jobless in a literal sense?
Does the term “jobless growth” need to be interpreted in a literal sense?
Different possible combinations of output and employment growth
Low output low employment (stagantion)
Low output high employment (growthless jobs)
High output low employment (jobless growth)
High output high employment (employment intensive growth)

5. Combination of Output and Employment Growth
High growth of employment and low growth of output
(growth-less jobs) II
Low growth of output and employment IV
High growth of output and of employment
(employment-intensive growth)
III
High growth of output with
low growth of employment
(jobless growth)
Employment Growth
Output Growth

6. Possibility of Trade-off between Employment and Productivity Growth
Inverse relation between emp-elast and prody
Hence the possibility of trade-off
But both quantity of L input and prody can contribute to output growth
Consider the following accounting identity
∆Y = ∆ L + ∆ (Y/L)
In a growing economy, both L and Y/L can grow
The combination of L and Y/L would depend on a variety of factors

7. Employment and Output Growth: Empirical Analysis
Focus on Manufacturing
Why manufacturing?
Data source(s): UNIDO industry data, and other data sources
Periods: 1980s and 1990s
Cross-country evidence on the relationship between employment and output growth
Has there been a shift in the relationship between the two periods?

8. Relationship between employment and output growth (1980-89)

9. Relationship between Employment and Output Growth (1990-2002)

10. Employment and Output Growth in Selected Countries of Asia

11. Relationship between Employment and Output Growth: Overview by Region
Asia:
High output and employment growth: Bangladesh, Indonesia (1980s and first half of 1990s), Malaysia, Thailand
High output growth with low employment growth: China, India, Indonesia (after economic crisis)
Decline in the employment intensity of growth: China, India
Bangladesh: Contradictory evidence:
UNIDO data show improvement
Earlier studies (e.g., ADB, 2005, Rahman and Islam, 2006)show decline in employment intensity

12. Employment and Output Growth: Overview by Region (contd.)
Sub-Saharan Africa:
Decline in employment intensity during the 1990s compared to the 1980s: Botswana, Malawi and Mauritius
Improvement in employment intensity of growth: Nigeria and Senegal
Negative employment growth with positive output growth: South Africa ( )

13. Employment and Output Growth: Overview by Region (contd.)
Middle East and North Africa
Large variation: emp-elast in Egypt and 1.27 in Jordan
High employment elasticity ( ): Morocco, Syria, Tunisia and Yemen
Low output growth (less than 5%) is a more serious problem: (Algeria, Egypt, Iran, Morocco, and Tunisia)
Latin America
Argentina and Mexico: very little change in employment intensity of growth
Brazil: decline in employment intensity during the 1990s compared to the 1980s.

14. Decomposition of Output Growth into Employment and Productivity Growth
Periods:
Manufg : and
Overall GDP: , ,
Balanced contribution of employment and productivity growth: Korea, Malaysia, Taiwan, Thailand
In South Asia, the contribution of labour productivity growth is higher than expected
The contribution of Labour productivity increased in Bangladesh, China, India, Indonesia, Malaysia
The pattern of growth in South Asia and China less conducive to employment growth compared to East and South East Asia

15. Constraints on Employment Growth
The notion of “binding constraints” used in growth diagnostic literature (Hausman, Rodrik and Velasco)
Marginal welfare benefit of reducing distortion
Possible constraints on employment growth
The neoliberal approach and the blame on labour market interventions
Choice of technology and capital deepening
Going beyond technology: start from the pattern of growth

16. Constraints on Employment Growth (contd.)
There is no conclusive evidence on the adverse effects of LM interventions on employment
Bean (1994, JEL): Evidence do not show that generous unemployment benefits in Europe was the cause of persistent unemployment
Nickel (1997, JEP): Unemployment benefits do not have an adverse effect on unemployment rates
Forteza and Rama (2002, ADB report 2005) covering 119 countries: minimum wages and mandated benefits do not hinder economic growth

17. Constraints on Employment Growth (contd.)
Kapsos (2005, ILO WP): Rigidities in the labour market do not have a negative effect on employment elasticity
The coefficient of the World Bank’s employment rigidity index is not statistically significant and the sign is opposite (cross section, 100 countries)
Rigidity of employment index is the average of three indices:
difficulty of hiring
difficulty of firing
rigidity of hours

18. Pattern of Growth and Employment
Sector composition of output: Manufacturing and others
Growth of manufacturing in relation to GDP growth has been much higher in countries of ESEA compared to those in South Asia
Sector composition of output: within manufacturing
In Malaysia and Korea, share of labour intensive industries increased up to 1990
In Thailand, this happened till 2002
India witnessed a decline in the share of labour-intensive industries

19. Pattern of Growth and Employment (contd.)
Bangladesh:
The share of both top five labour intensive and top five capital intensive industries increased
The share of ready made garments increased very rapidly
The share of a major labour intensive industry, viz., leather and leather products declined
Sri Lanka:
Similar to Bangladesh

20. Pattern of Growth and Employment (contd.)
Pattern of demand: external
Theory of comparative and the impact of trade openness
India: Trade openness has not resulted in an increase in the share of labour intensive sectors in exports
Pakistan: Increase in the share of capital intensive exports alongside high growth labour intensive exports
Pattern of demand: domestic
India: expenditure elasticity of demand for labour intensive products higher for lower and middle income growps
Difference in average expenditure on consumer durables more marked than for basic items

21. Pattern of Growth and Employment (contd.)
Pattern of demand: domestic
Bangladesh: Income elasticity of demand for labour intensive goods lower for richer people
Some labour intensive goods (e.g., gur, firewood) are “inferior goods” for the richer people
(See Table in the following slide)
Implication of the domestic pattern of demand: Importance of the level of income of the poor and the distribution of income

22. Income elasticity of demand
Income Elasticity of Demand for Selected Consumer Goods in Bangladesh ( )
Items
Income elasticity of demand
Top 10% of the households
All households
Gur
-0.001
0.164
Firewood
-0.031
0.179
Lungi
0.100
0.231
Shirt and pant
0.353
0.616
Mill made cloth
0.149
0.306
Handloom cloth
1.453
0.338
Leather shoes
0.328
0.516
Kitchen items
0.502
0.438
Regrigerator, pressure cooker, etc.
1.169
0.566
Furtniture
0.623
0.743
Note: Estimated from Household Income and Expenditure Survey data of

23. Concluding Observations
The term jobless growth should not be interpreted literally
Employment intensive growth implies high growth of both output and employment
The relationship between employment and output growth is not invariant
Empirical evidence points to a decline in the employment intensity of growth in many developing countries
Growth in ESEA has been more employment intensive than in South Asia
In some countries (e.g., China and India), high output growth associated with low and declining employment intensity

24. Concluding Observations (contd.)
In a dynamic economy, employment and labour productivity can grow together
Countries of ESEA has done better than those of South Asia
Pattern of growth (sector composition) is important for employment intensive growth
In countries of ESEA, sector composition has been more conducive to employment
Trade openness does not necessarily lead to an employment intensive pattern of growth
Income distribution and the income of the poor are important from the point of view of growth of labour intensive sectors

25. Concluding Observations (contd.)
Policy
Importance of overall policies shaping the pattern of income distribution
Possible distortions in incentive structure
Capital made cheaper (India)
Policy environment (including stimulus measures) encouraging the consumption of capital-intensive items (China, Indonesia)
Absence of any measure to encourage the use of labour
Identification of constraints operating on the supply side for the labour intensive sectors
Possibility of positive support