Growth, Structural Change and Employment

The consultation held in Tokyo, 15-16 May 2012, aimed to stimulate discussions amongst multi-stakeholder experts on issues relating to growth, structural change, productive capacities, and employment, as they relate to both the MDGs and any framework that may come after 2015.

Conference paper | 25 June 2012

Concept note for the Global Consultation: Building the Post-15 Development Agenda

1. Purpose of the consultation

The consultation aims to stimulate discussions amongst multi-stakeholder experts on issues relating to growth, structural change, productive capacities, and employment, as they relate to both the MDGs and any framework that may come after 2015.

2. The global jobs challenge

According to the ILO, global unemployment is estimated to have increased from 170 million in 2007 to 197 million in 2011. During this period, labour force participation also declined by 29 million. Projections are that unemployment will increase to 200 million in 2012 and 206 million in 2016. ILO figures also show that there are now 75 million unemployed young people in the world, up from 71 million in 2007. About 29 million people globally are also ‘discouraged workers’, meaning that they have stopped looking for work. Of these, 6.4 million are young people.

It is widely recognized that, especially in developing countries, the employment-to-population ratio can be a better indicator of inadequate access to a job than the unemployment rate. According to this measure, the ILO states that 40 percent of the global labour force is unemployed, inactive or discouraged. Employment-to-population rates are significantly lower for women, ranging between 20 and 30 per cent in countries in South Asia, Middle East and North Africa. There are an estimated 1.5 billion own-account and contributing family workers (vulnerable employment).

Long-term unemployment is also worrying. For instance, 29% of the unemployed in the United States have been looking for jobs for over one year. Although the share of the working poor globally declined from 34.9% to 29.5% between 2007 and 2011, about 910 million workers still live in households with incomes below the US$2 a day poverty line.

The global challenge is how to create productive and decent jobs for the working poor and the 200 million out of work and for the 40 million people entering the labour force every year plus those ‘discouraged workers’. In addition, the world is experiencing demographic shifts. Even if fertility rates decline in the future, since we have a large and growing youth population especially in the least developed countries, an increasing number will enter the labour market in the future. At the same time, due to increased longevity and advances in health, many older adults in developed countries will keep working beyond the conventional retirement age.

The question is: can the world economy create such volume of jobs? Can we ensure the new jobs are productive and decent?

The MDG agenda helped focus development policy making towards achieving poverty reduction; it galvanized resources for this objective and helped form a global coalition for advocacy. Many least-developed and Sub-Saharan African economies made significant progress towards achieving the MDG targets. Donors have also responded to the MDGs by progressively allocating more aid to countries with the highest MDG achievement needs. However, despite having employment-related targets for achieving poverty reduction and gender equality, the MDG framework overlooked the fact that growth can be jobless. The framework, with its principal focus on social sectors, also overlooked the structural changes and the consequent decline in productive sectors that would worsen the employment crisis. The Post-2015 thinking would start from recognizing decent employment as the key component for achieving human development. Employment in turn is generated where growth and structural changes do not weaken productive capacity and mechanisms are in place to ensure workers are productive, safe and adequately remunerated, thereby encouraging inclusion, equity and steady growth in aggregate demand.

3. Growth and structural changes

In the period before the global economic and financial crisis, particularly from the early 2000s, many economies achieved high growth rates. However, the response of employment to growth (what economists call the employment elasticity of growth) has been low. The employment-to-population ratio stagnated around 60% when the world economy was growing steadily. While it may mask regional and country level successes, at the global level, there is little evidence to suggest employment is responsive to growth.

One reason why growth fails to generate significant employment can be explained by the structural changes that the global economy is undergoing. The structural change required is not that only change the composition of jobs along the formal-informal sectors but that absorbs the large increases in the labour force/working age population.

First, we are experiencing rapid technological advances. Labour saving techniques and mechanization are increasingly becoming substitutes for human labour. A study of sixteen European countries show that “The employment structure in Western European countries has been polarizing over the period 1993-2006 with rising employment shares for high-paid professionals and managers as well as low-paid personal services workers and falling employment shares of manufacturing and routine office workers”.

Second, globalization has also meant that employment has shifted to ‘low cost’ regions and countries. Outsourcing and trade-in-tasks are two examples, which effectively exported jobs out of relatively ‘high cost’ developed and developing economies. The upshot of globalization in developed nations is sectoral shifts towards high skill ‘knowledge sectors’. These sectors do not absorb low to medium skill labour. Education and skill developments have not kept up with the fast paced structural changes towards ‘knowledge sectors’. A study by UNCTAD shows that some African and Latin American economies have been deindustrializing. This means that labour-intensive and high productivity sectors, such as manufacturing have been out-competed by ‘low-cost’ producers.

Third, the upshot of deindustrialization, coupled with rapid urbanization, is the informalization of employment in low-productivity sectors. As the upcoming World Development Report 2013 by the World Bank argues, unlike the predictions of tradition models, the labour force in many developing economies is not moving from traditional activities such as agriculture into manufacturing. Increasingly, workers are moving into traditional service sectors, which have low productivity features as well as informality and casual nature of jobs. New entrants to the labour market especially in rural and informal urban settings cannot afford the luxury of not working; they are registered as employed if they work at least one hour a week, in any casual, off-contract informal kind of activities. Low productivity and poor earnings, in turn, impede growth of consumption and investments that could be a catalyst for job creation.

Fourth, economies are facing adjustments to ensure environmental sustainability in their production and consumption patterns (in the fight against ‘climate change’). While this is not yet happening in large scale, a shift to low carbon-emission production and consumption requires a new set of technologies and human skills. Adjustment to a ‘green economy’ inevitably implies loss of labour as economies shift to new production processes and consumption patterns. As we venture into sustainable economic models, workers that are skilled in the new technologies as well as retrained workers are needed. Social protection and safety nets are also required to lessen the inevitable impact of these adjustments.

Fifth, the above structural shifts were sustained thus far through a globalization process that is largely based on export-led strategies and unrelenting global demand. In the case of many developed nations, this demand was chiefly supported by sovereign and household debt accumulation. The model worked well until the recent economic and financial crises exposed the fragility of this unbalanced model. Growth becomes ever more important to resuscitate global demand. In addition, the decline in global demand will have to be compensated by ever greater demand from emerging economies.

Sixth, one such demand is for commodities, which increased the income of resource-rich economies and propelled their growth rates significantly, but had limited impact on employment. Some estimates show that the extractive sector only absorbs 2-4% of the work force, despite contributing over two-thirds of GDP. In oil, gas and mineral producing economies, income is derived from capital-intensive production processes. This has meant limited expansion in non-resource related productive capacity with potential for job creation.

4. Exclusion, inequity and deterioration in human development

The conclusion we reach from the above discussion is that: 1) growth is not a sufficient condition for employment generation, despite it being a necessary condition (since it enlarges the resources for making people’s choices larger); and 2) the structural changes the world economy is undergoing, and likely to undergo, do not seem to be conducive to employment creation. These two factors explain the employment crisis and the subsequent inequity, exclusion and unsustainable human development.

First, close to 55 million people were added to the number of working poor between 2008 and 2011, indicating the negative impact of the economic and financial crisis. A study by the ILO shows that in the past 15 years, the distance between the highest and lowest paid deciles of workers increased in nearly two-thirds of the thirty countries studied. The widening pay gap is both a result of falling wages at the bottom and momentous increases for the top earners. The decline in the wage share of national income in developed countries, especially the US and the UK, is shown to be the cause of rising inequality.

Second, beyond inequity in income distribution, the labour market, mainly in the developing economies, is closely related to exclusion. Studies show that low pay and unemployment are aggravated by workers characteristics, which are not always of their choice. These attributes, such as gender, race, age as well as level of education, bargaining power and residence status (migrants, for instance) determine wage levels and access to work opportunities.

Third, even when the excluded find jobs, the likelihood that they will be in vulnerable and casual employment is high, where women and the youth make up the majority. There are an estimated 1.5 billion vulnerable workers globally, including the self-employed and unpaid family workers. The economic and financial crisis added another 34 million people to this number. Sub-Saharan Africa and South Asia host a large number of vulnerable workers, about 77% of the total work force. Not only do developing countries have a large proportion of workers in vulnerable employment, but the recent growth in their employment figures are also related to jobs created in the informal sector (which are largely classified as vulnerable). About 70% of the growth in employment in Sub-Saharan Africa; 50% in South-East Asia and the Pacific, 25% in Latin America and the Caribbean are in the informal sector.

Fourth, as UNDP’s International Assessment of the MDGs pointed out, inequity and exclusion have direct impacts on human development. Earning poverty wages and loss of income from unemployment lead to poor nutritional intake, as households either purchase less food or opt for low quality dietary sources. The impact is also greater on women and children. Besides the mental trauma caused by loss of income and employment, households also reduce their spending on healthcare and cut back the number of visits to health centers. Children remain unattended as parents increase working hours. In many reported cases, children also drop out of school either to supplement household income or simply because parents are unable to afford school fees, uniforms and learning materials. Household assets such as land and cattle are also sold to compensate for loss of income and employment. Depletion of assets has been found to be a good predictor of long-term poverty and vulnerability to future shocks.

Fifth, job insecurity threatens human security in general. Unemployment, under-employment as well as the combined effects of inequity, exclusion and worsening human development represent a threat to human security. As indicated above, workers are increasingly facing insecure working conditions. What are called the precariat are growing in number. These are a class of workers in precarious employment – with no social security; no career identity and prospect; no safety and security at work; and trapped in casual and temporary jobs. Inequity and exclusion constitute a serious threat to social cohesion and might result in political instability and violence. The absence of equity and inclusion weakens societal values, trust in political leadership and institutions. A study of 69 countries finds that joblessness translates into reversal in democratic progress and increased desire for uprising.

5. Prospects for employment generation and the Post-2015 Agenda

Recognizing employment as the greatest means for achieving the MDGs or similar development goals, the Post-2015 agenda needs new thinking for reversing the jobs crisis. Such thinking has already begun at various forums. This consultation is an attempt to shed lights on the prospects for employment creation in recognition of the patterns in growth and structure of the global economy. The questions to be addressed at the consultation include:

1. Why did the MDG agenda underplay growth, employment, the productive sector and structural changes? If so, what do we learn moving forward to a new agenda?

2. What kind of ‘new industrial policy’ is needed that recognizes the structural shifts unfolding and provides incentives for building productive capacity in employment-intensive sectors?

3. What are the policy options for incentivizing agricultural productivity and small-scale enterprises that are notably employment generating sectors?

4. What are the new education and skill sets required for the ‘knowledge economy’? How to raise skills for all those working in the informal economy?

5. How do we manage the labour market transition to ‘de-carbonized’ economies of the future?

6. How will the emerging economies be a new source of the sustained global demand necessary to reverse the employment crisis?

7. How will the resource-rich economies tap into increased flows of revenues and direct them towards developing employment-intensive and productive sectors?

8. In what way the goals of inclusion, equity and inequalities, as described above, can be achieved by global and domestic policy responses?

9. What is needed to ensure that gender is considered as a key determinant of growth and employment policies address this fact?