Unemployment, Structural Change and Globalization

M. Pianta and M. Vivarelli

UNEMPLOYMENT AND DEVELOPMENT 1: INDUSTRIALIZED AREAS
by M. Pianta

1. Introduction

Employment and unemployment may appear to be mainly a problem of developing countries. International statistics tell us that industrial and service workers living in developing regions account for about two-thirds of the world’s modern sector labour force, and also for about two-thirds of the unemployed. However, these figures are highly misleading. While in the developed world most workers have jobs in the formal sector of the economy, the share of workers with wage contracts is only 15 per cent in low-income and 46 per cent in middle-income developing countries (World Bank, 1995). The rate of "open" unemployment is, hence, a very limited indicator for employment conditions. With a large share of workers in the developing world absorbed in the informal sector of the economy, adverse employment conditions rather take the form of increased underemployment, casual employment or informal selfemployment, which are scarcely registered.

Rather than unemployment statistics, it is the relation between the growth of the labour force and the growth of economic output that sheds some light on the employment situation in the different parts of the developing world. During the last three decades and across all developing regions, the labour force has been growing almost evenly at approximately 2,5 - 3 per cent a year. In order to meet the employment needs of, at least, the new entrants to the labour force without depressing existing wage levels, a typical developing economy would need an annual rate of economic growth in the range of 5 - 6 per cent, if average productivity gains per worker are considered (UN, 1993). This is in sharp contrast with actual economic performances. Between 1965-93, the average annual GDP growth rates in South Asia, the Middle East/North Africa and Latin America were around 4.2 per cent, and in Sub-Saharan Africa around 2.8 per cent, the only exception being East/South East Asia with around 7.6 per cent (World Bank, 1995).

Further pressure on labour markets in developing regions is exerted by the large proportions of the currently employed who aspire to escape the low-productivity jobs of the urban informal sectors, the continuing rural to urban migration, and the rising level of education of the new entrants to the labour force.

Three mayor challenges are therefore facing development countries: the search for an appropriate growth strategy, the balance between formal and informal sectors of the economy, and the need to sustain the creation of high productivity jobs. Let us examine in turn these three problems.

2. The growth strategy

A key requirement to meet the employment needs of the developing world is high and sustained GDP growth, sustained by appropriate industrialization strategies, which may allow a growing proportion of the labour force to obtain higher productivity jobs in the modern sectors of the economy. Different roads may be taken in this process. The most praised one is the East/South East Asia experience where high GDP growth has been associated to greatest integration in the global economy. However, other Latin American and African countries which have recently pursued a similar export orientation strategy have obtained little results (see the entry on "Unemployment and International Competitiveness"). A previous popular strategy - also with modest results - has been the orientation towards the development of the domestic market by ways of import substitution and market protection, as pursued to varying degrees by most countries in Sub-Saharan Africa, Latin America, South Asia and Middle East/North Africa.

Employment growth has an important feedback on economic growth, since increasing work incomes expand domestic demand, sustaining GDP growth and reducing the risks of excessive reliance on uncertain foreign markets. In countries with rising export to GDP ratios, real wages have increased by an average of 3 per cent annually during the period 1970-90, while in countries with falling export to GNP ratios real wages have slightly decreased (World Bank, 1995). However, there is an important time gap. According to the Lewis theorem, real earnings are not likely to start increasing before the surplus labour in the traditional and informal sectors is exhausted (Lewis, 1955). Moreover, according to Kuznets, inequality in the distribution of income is likely to initially increase, as a country starts growing. Both factors prevent domestic markets from flourishing. In this context, balanced productivity growth in both agricultural and industrial output, in the frame of a growth strategy based on export-orientation has proved to be more income effective in some countries than forced industrialisation biased against agriculture. Based on such dual strategy, South Korea - and to a lesser extent "Taiwan, China" and Malaysia - have managed to rise real wages before agriculture shed its large share of labour force, and have prevented a worsening of income distribution, though in South Korea agriculture employed half the labour force during the 1960s.

The success of this strategy is, however, limited to few countries. Only about half of developing countries increased their export to GDP ratio in the last ten years. Although the aggregate ratio of developing country trade to GDP rose an impressive 1.2 per cent annually over the decade, three-quarters of the increase was accounted for by just ten countries in East Asia and Latin America (World Bank, 1996). The impact of the economic recovery on developing countries aggregate growth and, consequently, employment in high productivity areas, has been modest and mostly remained below the growth levels of the 1970s. In result, income levels in the vast majority of developing countries have remained stagnant or even diminished in real terms (ILO, 1996). This is of special concern since the global growth in world trade has been buoyant during the 1990s. A number of current trends in the external environment suggest, moreover, that growth prospects for countries that are lagging behind and high productivity employment will remain modest or even decline. These trends include a continuing decline in the share of primary commodities in world trade, growing competition in labour-intensive manufacturing markets from newly emerging and populous industrialising countries like China and India, and growing difficulties to attract foreign investments for industrial upgrading.

3. Formal and informal employment

The virtuous circle of employment - GDP growth, with export-orientation which generates employment and income fueling the domestic market, which in turn contributes to further growth in GDP and employment- has been highly praised, especially by international organisations such as the World Bank and the International Monetary Fund. However, it is important to point out that, in fact, it has been working successfully only in a very limited number of developing countries, mostly in East/South East Asia, which fastly embarked on global economic integration. While this region contains almost one billion of the world’s almost 2,5 billion labourers, the large majority of the other developing countries, which also contain close to one billion workers, has been unable to obtain similar results. They have been much more vulnerable to the global economic changes and have experienced a growing informalisation of the labour market, resulting in low-productivity. Such set-backs are rooted in a number of key problems which have hit hardest developing countries outside of East/South East Asia:

• the slow-down of industrialization in the 70s: the unprecedented economic and industrial progress of most developing countries in the postwar era led to massive rural-urban migration, attracted by better urban living conditions and formal employment opportunities. With the global economic crisis following the oil-shocks and the interruption of the industrialization process in most parts of Latin America and Africa, growth of formal modern sector employment slowed down, making the absorption of rural migration difficult;

• foreign debt and stabilisation policies in the 80s: a variety of global macroeconomic factors has further limited the growth opportunities of developing countries in the 80s. They include the debt crisis triggered by high interest rates and the rising value of the US Dollar in which the debt of the developing world was denominated; a fall in the flow of capital; the recession in the OECD countries leading to a decline in exports and worsening terms of trade for the developing world; the spread of protectionism among OECD countries. All this led most developing countries to adopt programmes of economic stabilization and restructuring, often imposed by the IMF and the World Bank, with a reduction of aggregate demand and in particular of government spending. Decreases in both public sector employment and real wages and salaries fueled massive new entries to the informal economy;

• globalisation in the 90s: the emergence of a growing competitive pressure in global markets has led also many developing countries to move towards higher capital-intensity productions and to reduce labour costs, with adverse effects on labour-intensive employment in the formal economy. Again, this has led to expanding the informal sectors of the economy.

A paradox of the last decades is therefore that the pressures for economic liberalisation and globalised markets, instead of leading developing countries to the road of modern labour markets, have in fact generated a massive flow of workers back to the informal sector. The shift from formal to informal employment is generally accompanied by decreasing GDP rates and incomes per capita, an enormous increase of the service sector and a very modest increase of industrial sector employment. The urban informal economy has been rapidly growing throughout the 1980s and 90s in almost all developing countries, except in East Asia, accounting for around 50 per cent of the urban labour force in low-income economies (World Bank, 1995). In a regional perspective, these effects vary, however, significantly (all data from ILO 1997):

• in Latin America, 82 per cent of the new jobs created between 1980-93 were in the informal economy, which grew at an annual rate of 8 per cent, compared to 1.1 per cent in the formal sector. More detailed data are only available for some countries or cities. They confirm the reduction of average income levels in the informal economy. Typically, in Colombia informal employment absorbs over 50 per cent of total urban employment, while contributing just 18 per cent of GNP. Trade and services account for 62 per cent of informal urban employment.

• in Africa, it is estimated that the informal economy accounts for 61 per cent of the urban labour force after expanding at an average annual rate of 6.7 per cent during the 80s, compared with around 1 per cent in the formal sector. For the 1990s, it is expected that 93 per cent of new jobs will be created in the informal economy. Typically, in Ghana, the 65 per cent share of urban informal employment is accounting for only 22 per cent of GDP.

• in South Asia, it is estimated that the informal economy accounts for 40-50 per cent of the urban labour force. Considerably higher shares, such as in Bangladesh (65 per cent), are balanced by considerably lower shares in the newly industrializing countries in East/South East Asia (less than 10 per cent) which, however, can be expected to raise significantly due the Asian financial crisis of 1997. In the latter sub-region the share of manufacturing work in the informal sector is considerably higher than in other developing regions, absorbing up to 72 per cent of the urban informal labour force in Bangkok.

The growing informalisation of the labour markets in developing countries can be considered a form of structural unemployment characterized by forced self-employment and very low levels of productivity and incomes.

4. Creating high-productivity employment

Education and productive skills training.

Investing in human capital, through education and training for work skills, is widely regarded the key to enabling the growth of high-productivity employment. Primary education is essential for providing the basic skills which allow workers to adapt to new technologies and production practices. Training for work skills has a similar positive impact on productivity, and both increase individual earnings and income levels. However, while most developing countries have invested strongly in human capital in the last decades, contributing to unprecedented global increases in schooling, the return in terms of economic growth has been low. There is no empirical evidence that, in general, the increase in the average years of schooling is a guarantee for enhanced economic growth a decade later. Instead, a number of specific factors intervene strongly in this equation, concerning mostly the underutilisation of workers education and skills due to a lack of corresponding labor demand.

Though national development strategies may influence the general course of the labor market, government policies in export-oriented economies have limited capacities to effectively influence the development of labour demand, which primarily reacts to global market requirements. But they are able to design human resource policies which match more effectively the requirements of flexibility and market-driven changes, so that the expansion of human capabilities can deliver its full potential. This concerns mostly the support for productive skills training. Policy options include the direct provision of training with state-sponsored vocational training centers or policies stimulating training by indirect means, such as:

• fiscal and regulatory incentives for promoting on-the-job training. Firms often have a self-interest to actively invest in their employee’s training since they frequently need workers with special skills. Workers have an interest to gain enhanced job security and wage increases. Enterprise-based training in a number of East/South East Asian countries has been associated with a significant rise in output per worker and wage increases;

• establishing a competitive market of training organisations, both public and private, may increase the efficiency of such policies. Actions have included making cost recovery conditional on a minimum rate of trainees finding jobs after completing training, the distribution of training vouchers to specifically targeted worker group and tax credits for employers. This strategy has worked in some Latin American countries;

• enhancing information and knowledge about marketing, new technologies and general business skills, particularly directed to small enterprises and the informal sectors of the economy, in order to increase interest in workers skill training.

Upgrading the informal sectors of the economy.

In spite of the rapid growth of the informal economy, this sector is still not considered a factor for economic growth since it is based on very small economic units with little capital and capacity for accumulation, and operating on labour-intensive technologies for the production of low-quality goods and services (ILO, 1997). However, this does not impede opportunities for GDP growth. The urban informal economy could be enabled to generating new forms of productive employment which allow for synergies with the productive parts of the formal economy. Such new arrangements could be considered forms of flexible out-sourcing of labour-intensive production parts, eventually increasing the productivity of the informal economy and blurring its distance to the formal economy. In competitive global markets which permeate ultra-flexible reaction to changing demands, such arrangements could be a source of competitive advantages in specific sub-sectors of manufacturing.

Evidence from surveys across all developing regions suggests that the urban informal economy concentrates mainly in trade and service types of activity operated by self-employed workers. Employment generation in such economic units is mostly limited to unpaid family members and relatives. Micro-enterprise types of employment concentrating in manufacturing work account for a much smaller share of the urban informal economy, estimated at around 10 per cent in Latin America, but with higher values in some Asian cities. This category accounts for the most productive and profitable sub-sector of the informal economy. Home-based wage labourers, mostly women, often work with rented equipment of a micro-enterprise contractor and can be considered part of its business.

The way in which the urban informal economy has grown during the 80s suggests that self-employment and very small economic units in the trade and service sub-sectors will prevail in the foreseeable future. This type of activity has much lower entry barriers in terms of level of skills or capital required than the micro-enterprise type. It is better suited to absorb the new entrants to the labour force and rural migrants. On the other hand, with greatly depressed incomes in informal trade and service activities due to the growth of this sub-sector, the increase in the number of economic units might have limits. Moreover, advances in primary education of new entrants and the skill-capital of retrenched formal sector labourers could favour the extension of the larger economic units of the micro-enterprise type. Their growth seems more limited by the lack of capital and the burden of regulatory costs or their evasion, than by the lack of skills.

In order to support micro-enterprises of the informal sector to create productive employment and generate the capital needed for development, policy has primarily to target existing regulatory costs. Despite widespread assumptions, regulatory costs on the informal sector can be significant. In Argentina for example, they account for as much as 21 per cent of their yearly expenditure. Evasive strategies by micro-enterprises often entail themselves high costs and forgone opportunities. Secondly, their access to capital needs improvement. Often, the investments required are very small and provide for rapid returns.

Overcoming the mentioned bottlenecks does not guarantee by itself high-productivity employment growth. Education and skills training is wasted if labour demand for skilled workers does not exist. It would just fuel outward migration. The development of the informal sector cannot sustain itself if it is not accompanied by the strengthening of the productive sectors of the formal economy. It would just act against the extension of formal labour relations. These problems can only be resolved in the frame of a countries overall development strategy.

Empirical data on unemployment in the developing countries are either non existent or highly incomplete. In most countries there are no reporting systems. Where data are available, they refer to the urban open unemployment rate, that is workers who report their loss of formal employment at a given time and are waiting for a new job. These data are published in the yearly World Labour Report of the ILO. However, in most developing countries unemployment benefits are so insufficient that they do not constitute an incentive for job loss reporting. When people lose the job, they normally are forced to immediately find employment in the informal sectors of the economy. It is typical, especially for the low-income developing countries, that informal and formal employment together absorb the entire labor force. Thus, reported rates of unemployment tend to be very low, as can be seen in Table 1. Higher unemployment figures do not necessarily indicate worse employment situations, but may indicate a stage of development allowing for better unemployment compensation. The highest unemployment rates reported in Table 1 are for countries classified as upper middle-income countries by World Bank standards.

Table 1 shows, on the base of data compiled by ILO, the annual growth of GDP per capita for the period 1980-1994 and the annual growth of the labour force for the period 1980-1996 in the developing countries of Africa, Latin America and Asia, along with highly incomplete data on unemployment as a percentage of the labour force in 1995. The relation between the annual growth of the labour force and the annual growth of GDP per capita is a valuable indicator for the extent of disguised unemployment in developing countries. Where economic growth has significantly lagged behind labour force growth over the period 1980-1994, employment opportunities can be expected to have substantially reduced, along with real wages, often resulting in the growth of disguised unemployment.

As can be seen from Table 1, the lack of sufficient economic growth over the period 1980-1994 has considerably worsened the unemployment situation for almost all developing countries, as the labour force has continued to grow at a sustained pace. However, there are important differences between the developing regions as well as within regions.

Table 1: Annual growth of GDP per capita and of labour force, unemployment rates, by developing countries

In Africa, only 2 out of 30 countries for which a economic growth/labour force growth comparison is possible report a positive relation. Especially Mauritius needs mentioning, where GDP rates have been growing twice as fast as the labour force, indicating high productivity employment and rising wages, pushing the country in the category of upper middle-income as defined by World Bank standards. In contrast, the two biggest African economies of South Africa and Nigeria report negative relations aggravated by negative GDP per capita growth rates. Only 9 out of 30 countries register at least a positive economic growth.

In Asia, the situation is much better, though there are important sub-regional differences. Especially populous South Asia needs mentioning, where the employment situation has considerably improved. India and also Sri Lanka report a positive economic growth/labour force growth relation, while in Pakistan the gap has narrowed down significantly. The situation looks much worse in the Philippines. The city states of Hong Kong and Singapore report economic growth/labor force growth relations at a level which might indicate that very high labour productivity growth combines with a job-less-growth situation.

The regional aggregates on the base of World Bank figures, shown in Table 2, give a more differentiated picture of labour force and GDP growth rates over time and for the different economic sectors, from which employment consequences can be deduced. The relation between GDP growth and labour force growth needs to be much more strongly positive to indicate a robust effect on employment.

Table 2: Growth and composition of labour force and GDP, by regions

For all developing regions taken together, it appears that the employment situation might have slightly worsened in the 1990s, compared to the previous decade. The already feeble differential between GDP and labour force growth has narrowed further, from 0.6 to 0.4 percentage points.This is, however, influenced by the very negative situation in the transition economies of Eastern Europe and Central Asia. In a regional perspective, the strong differences for employment outlooks appearing from Table 1 are confirmed. The distance of East/South East Asia from the rest of the developing regions is growing. However, by sequencing in time, it appears that Latin America has recovered from the economic slump of the 1980s and has been improving employment opportunities in the 1990s. It is also noteworthy that the Middle Eastern/North African region is inverting the trend of a deteriorating employment situation while Sub-Saharan Africa is falling further behind.

Also the sectoral perspective indicates growing regional differences in the development of the employment situation. Continuos robust industrial sector GDP growth combined with slow growth of the industrial labour force, indicating an improving employment and income situation, is registered only for the East/South East Asian region. In South Asia, the dynamics of industrial employment creation have slowed down. In Latin America, industrial GDP growth rates are combined with a decreasing industrial labour force, indicating enhanced industrial restructuring with negative employment effects. Consequently, an increasing share of the labour force concentrate in the service sector, whose GDP growth is not matching the increase of the sectors labour force, indicating employment on a very low level of productivity and income. In Sub-Saharan Africa, the employment situation worsened across all sectors.

Figures 1 and 2 show the relation between labour force growth and GDP growth in the periods 1980-90 and 1990-95 in the main regions of the world, which exhibit extremely different patterns. No clear relation can be established between labour force growth and GDP growth during the period 1980-90; South Asia and East/South East Asia have a positive performance in which a substantial labor force growth is associated to high GDP growth, resulting in employment growth. The other developing regions show high labour force growth sustained by strong population increases, associated to low GDP growth, leading to unemployment (however disguised) and poverty. High income countries, on the other hand, have the lowest growth of labour force and GDP increases higher than the poorer developing regions.

In the 1990s, shown in Figure 2, the picture changes significantly. High income countries, hit by the recession, have a much lower GDP growth, not different from the poorer developing countries. Labour force growth is very low in the high income region, but remains very high in the poorer developing areas. East and South East Asia, on the other hand, stand out with the highest GDP growth rates and much lower labour force increases, approaching those of the richer countries.

So in a decade the combination of economic and labour force growth has changed in all regions of the world. Still no strong relation emerges, but if we look at developing countries alone, a negative association can be somewhat identified: faster labour force growth driven by population increases, appears to slow down economic growth. The result is lower employment growth both in the poorer countries, where labour demand increases much more slowly than the labour force, and in the East Asian countries where the slow down of the workforce reflects not only the reduced demographic dynamism, but also the lower employment intensity of growth compared to the previous decade.

References

* The most important sources for the analysis of employment and unemployment in developing countries are the reports of international organisations:

ILO 1996, World Employment Report 1996/97, National Policies in a Global Context, Geneva, International Labour Office

ILO 1997, World Labour Report, Industrial Relations, Democracy and Social Stability, Geneva, International Labour Office

UN 1993, World Social Report, New York/Geneva, United Nations

UN Development Programme 1996, Human Development Report, The Role of Economic Growth, Oxford, Oxford University Press

World Bank 1995, World Development Report 1995, Workers in an Integrating World, Oxford, Oxford University Press

World Bank 1997, World Development Report 1997, The State in a Changing World, Oxford, Oxford University Press

* General studies on employment, income growth and development include:

Birdsall, N. and Sabot.S 1994, Virtouous Circles, Old and New Perspectives on the Policy Issue, Paper presented at the International Monetary Fund conference on Income Distribution and Sustainable Growth, Washington D.C., 1-2 June

Chenery, H. and Srinivasan, T.N. 1988, Handbook of Development Economics, Amsterdam, North Holland Press

Kuznets, S. 1966, Modern Economic Growth. Rate, Structure and Speed, New Haven, Yale University Press

Lewis, W.A. 1955, The Theory of Economic Growth, London, Allen and Unwin

Turnham, D. 1993, Employment and Development, A New Review of Evidence, Paris, OECD

World Bank 1996, Global Economic Prospects and the Developing Countries, Washington D.C., World Bank

* The general role of the informal sector in the creation of urban employment and its impact on economic development are discussed in:

ILO 1992, Statistics of Employment in the Informal Sector, Geneva, International Labour Office

ILO 1996, The Future of Urban Employment, Turin Centre Symposium December 1995, Geneva, International Labour Office

Portes, A. et.al. 1989, The Informal Economy, Studies in Advanced and Less-developed Countries, Baltimore/London, John Hopkins University Press

Sethuraman, S.V. 1976, The Urban Informal Sector, Concept, Measurement and Policy, International Labour Review, Vol.114, No.1, Geneva, International Labour Office

* Statistics and analyses of the urban informal sector in different regions can be found in:

ILO 1996, The Urban Informal Sector in Asia, Policies and Strategies, Geneva, International Labour Office

Rodgers, A. (ed.) 1989, Urban Poverty and the Labour Market, Access to Jobs and Incomes in Asian and Latin American Cities, Geneva, International Labour Office

Tokman, V. (ed.) 1992, Beyond Regulation, The Informal Sector in Latin America, Boulder/London, Lynne Rienner

* For a discussion of the impact of education and skill-training on employment and economic development see:

Murphy, K.N. and Welch, F. 1993, Occupational Change and the Demand for Skill 1994-1990, The American Economic Review, Anaheim/California, May

Psacharopolous, G. 1994, Returns to Investment in Education, A Global Update, World Development 22 (9)

Sahn, D.E. and Alderman, H. 1988, The Effects of Human Capital on Wages, and the Determinants of Labour Supply in a Developing Country, Journal of Development Economics 29(2)

Sen, A.K., Development as Capability Expansion, Journal of Development Planning, No. 19