Re-thinking development strategies and policies for productive employment
Despite the importance of productive employment, development discourse at both international and national levels has tended to bypass the issue. This is reflected in the conspicuous absence of employment in influential strategies like the PRSPs (poverty reduction strategy papers) and MDGs (millennium development goals) — at least in the initial thinking on them.2 After the MDGs were launched at the beginning of the present millennium, it took eight years to have a few indicators of employment included in the list. And even after that, there was very little thinking (let alone consensus) on how to attain the goals.'1 The situation changed when discussion started on the post-2015 development agenda. The global economy had just come out of the Great Recession that started in 2008, and a number of the major economies of the world were still suffering from high levels of unemployment. The international community was under pressure to take the issue of labour market recovery and employment into account in their deliberations on the post- MDG development agenda. The outcome was the inclusion of employment in one of the goals to be pursued (alongside economic growth).
However, it would be important to move from recognition of employment and its inclusion amongst the goals to identifying and putting in place appropriate strategies and policies for attaining the goal. As pointed out in Chapter 3, there has to be careful thinking even in terms of defining and articulating the goal of employment because this would have to take into account the level of development and characteristics of the economy. And when it comes to strategies for accelerating the growth of productive employment, one has to go beyond the conventional wisdom of suggesting that rigidities in labour markets constrain job creation, and hence labour markets should be made flexible.
Despite the recognition of the issue of employment, the debate surrounding the issue of jobs, especially on why economic growth often does not lead to job creation at an expected rate, has not been resolved. At one extreme, there is still a tendency to deny the existence of the problem of slow growth of jobs in relation to economic growth. For example, the World Bank’s World Development Report on jobs (World Bank, 2012) attempts to dispel the notion of jobless growth by pointing out that economic growth is always accompanied by some growth in employment (pp. 98—99). There is, however, empirical evidence to show that there have been cases of zero growth of employment when economic growth has been positive (Islam, 2010; Islam and Islam, 2015). Moreover, the term “jobless growth" need not be interpreted in a literal sense of zero employment growth; when employment growth remains low despite substantial output growth, the situation may be termed as one of jobless growth.
A more important point to note is the approach adopted to explain the slow growth of jobs. In this respect, the conventional wisdom is to argue that distortions in the labour market and its imperfect functioning act as constraints on employment creation. This view equates employment policy with labour market policies — i.e., policies for making labour markets flexible. Influential studies like the report of the Commission on Growth (2008) and the IMF’s report on job growth (IMF, 2013) are examples of this strand of work, although there are differences in details. In addition to labour market flexibility, the Growth Commission’s report does talk about the need for measures to jump-start the process of job creation through encouraging the growth of new industries. Likewise, IMF (2013) talks about “selected policy interventions” that might lift barriers to private sector job creation. However, the debate on employment still seems to fall short of recognizing that growth and labour market flexibility alone cannot solve the problem of slow employment growth.
The present chapter questions the conventional wisdom of how the challenge of full employment in developing countries can be addressed and points out that a serious re-thinking of development strategies is required to pursue the goal of productive employment for all. Three elements of conventional wisdom about job creation that need questioning are (i) economic growth always creates jobs, (ii) job creation is hindered primarily by rigidities in labour markets, and (iii) education and training is key to attaining the employment goal. It may be recalled that some of the earlier chapters of this book have already dealt with the first issue mentioned above. So, the present chapter starts by recapitulating the basic evidence and arguments relating to growth and employment. After that, it addresses the question whether job creation is hindered only by rigidities in the labour market or whether there are other more important factors. Finally, an attempt is made to provide an outline of the direction in which re-thinking of development strategies is needed in order to attain the employment goals appropriate for developing countries.
Does economic growth always lead to employment?
Empirical evidence (presented in Islam and Islam, 2015 and in Chapter 4 of the present volume) has shown that employment intensity of growth (measured by the percentage change in employment in comparison with the percentage change in output) in manufacturing industries in many developing countries has been lower than what was expected on the basis of the experience of the countries of East and South East Asia who were successful in combining high rates of economic growth with high rates of employment growth. Moreover, employment intensity of growth declined during the 1990s compared to the 1980s.
Moreover, there are countries (viz., Mauritius, Pakistan, Philippines, and South Africa during the 1990s) where employment growth in manufacturing declined despite positive output growth. In fact, the number of such cases was larger during the 1990s (Islam and Islam, 2015). This provides further support to the conclusion that output growth in the second period has been less employment-intensive than in the first period. It is also clear that positive output growth is not necessarily associated with positive employment growth. Output growth in several cases has not only been “jobless” in a literal sense, but there has also been a decline in employment when output has grown.
The decline in the employment intensity of growth in developing countries as a whole continued during the 2000s. And that decline was particularly sharp in Latin American countries (Kucera and Roncolato, 2014). And the empirical evidence presented in Chapter 4 shows that employment intensity of growth declined in South Asia as well.4