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 by1. Working more hours (for a constant level of

earnings/hour): employment generation2. Increase effort per hour worked: increase labor

productivity in order to increase hourly earnings3. 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

1991/92 1997 1998/99 2003

H at one dollar per day (GLSS, consumption) 52% 40%H at 42th percentile (CWIQ, assets) 42% 35%

• Poverty reduction comes from growth, not from re-distribution (1991-98)

decomposition of poverty

poverty growth effect redistribution effect residual

change 1991-98 -12 -14 0.1 2

Ghana: what we don’t 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

GDP growth per capita ..

-20

-15

-10

-5

0

5

10

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

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

Δ(Y/E) Δ(E/A) Δ(A/N)

1984-2000 88% -9% 21% 100%

Decompose growth

Δ(Y/E) Δ(E/A) Δ(A/N)

1984-2000 88% -9% 21% 100%

1984-1992 122% -30% 8% 100%1992-2000 38% 26% 37% 100%

Δ(A/N)

Δ(A/N)

Δ(A/N)

Δ(E/A)

Δ(E/A)

Δ(Y/E)

Δ(Y/E)

Δ(Y/E)

Δ(E/A)

-40% -20% 0% 20% 40% 60% 80% 100% 120% 140%

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

primary secondary tertiary

1984-2000 3% 10% 10%

1984-1992 2% 10% 10%

1992-2000 4% 5% 6%

Share of the sectors%

of

gdp

% o

f gd

p

% o

f gd

p % o

f gd

p

% o

f gd

p

% o

f gd

p

% o

f gd

p

% o

f gd

p

% o

f gd

p

% o

f em

ploy

men

t

% o

f em

ploy

men

t

% o

f em

ploy

men

t

% o

f em

ploy

men

t

% o

f em

ploy

men

t

% o

f em

ploy

men

t

% o

f em

ploy

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% o

f em

ploy

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t

% o

f em

ploy

men

t

0%

10%

20%

30%

40%

50%

60%

70%

primary secondary tertiary primary secondary tertiary primary secondary tertiary

1984 1992 2000

Decomposition by sectorD(Yi/Ei) D(Ei/A) D(A/N) Total

1984-2000primary sector 14% -24% - -10%

secondary sector 33% 2% - 34%tertiary sector 41% 13% - 54%

total 88% -9% 21% 100%

Decomposition by sectorD(Yi/Ei) D(Ei/A) D(A/N) Total

1984-2000primary sector 14% -24% - -10%

secondary sector 33% 2% - 34%tertiary sector 41% 13% - 54%

total 88% -9% 21% 100%

1984-1992primary sector -28% -1% - -29%

secondary sector 88% -38% - 50%tertiary sector 62% 10% - 71%

total 122% -30% 8% 100%

1992-2000primary sector 55% -44% - 11%

secondary sector -34% 52% - 18%tertiary sector 17% 18% - 35%

total 38% 26% 37% 100%

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

2001 2005 % change

Agriculture 9.8 22.1 21.2 -4.08

Manufacturing 18.91 19 19.8 3.87

Mining and utilities 12.55 3.6 3.5 -1.69

Construction 4.52 4.9 4.5 -8.69

Commerce 15.45 18.2 18.3 0.85

Transport 20.03 7.1 7.4 4.85

Government 6.86 7 6.6 -6.65

Other 18.39 18.1 18.7 3.42

Total 14.47 100 100 -

Total value added growth 2001-2005

Share of total Value Added

Nicaragua: Aggregate Employment and Productivity Profile of Growth

-25.99

51.64

74.35

-40.00 -20.00 0.00 20.00 40.00 60.00 80.00

Changes in Output perworker

Changes in Share ofWorking age population

employed

Changes in inverse ofdependency ratio

Percent contribution to total change

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

activity

-29.53

-48.54

13.00

3.14

10.38

9.46

-14.19

23.87

22.00

64.22

-12.96

-8.13

-3.46

-2.60

9.15

-10.16

-60.00 -40.00 -20.00 0.00 20.00 40.00 60.00 80.00

Agriculture

Manufatcuring

Mining and utilities

Construction

Commerce

Transport

Government

Other

Percent contribution to total growth

Contribution of Changes in Share of Working age population employedContribution of Changes in Output per worker

Sectoral contribution to growth

Total contribution of the sector

Agriculture -7.53

Manufacturing 15.68

Mining and utilities 0.03

Construction -4.99

Commerce 6.93

Transport 6.86

Government -5.04Other services 13.71Inverse of dependency ratio 74.35Total 100

Total % change in output per capita 2001-2005 7.14

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

Poor Non Poor TotalAgriculture 55.66 17.25 32.82Mining and Utilities 0.76 1.13 0.98Manufacturing 11.04 16.89 14.51Construction 3.83 4.98 4.51Commerce 11.85 28.56 21.79Transport 1.9 4.93 3.7Financial Services 1.03 4.44 3.05Gvt. Services 1.4 4.34 3.15Community Services 12.54 17.49 15.48Total 100 100 100

Incidence of poverty by sector

Head Count poverty 2001

Agriculture 60.67Mining and Utilities 16.82Manufacturing 29.61Construction 37.12Commerce 19.98Transport 16.80Financial Services 17.36Gvt Services 10.82Community Services 24.46Not employed 39.24Total 36.69

Sectoral decomposition of changes in poverty by household head

Intra-sectoral effect

Inter-sector shifts

Interaction effect

Total

Agriculture 62.50 152.82 4.20 219.53Mining and Utilities 33.90 -4.14 -3.49 26.27Manufacturing 13.20 161.94 7.13 182.27Construction -0.46 17.63 -0.03 17.13Commerce 2.76 72.21 0.49 75.47Transport -23.97 -22.63 4.39 -42.21Financial Services -20.50 1.84 -0.48 -19.15Gvt Services 10.13 -12.71 -2.24 -4.82Community Services 9.60 13.40 0.33 23.33Not employed 16.62 -390.93 -3.50 -377.80Total 103.78 -10.58 6.80 100.00Total change in poverty among employed (% points)= 0.637

* employment in primary activity in past week. Only working age population considered

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

Non agriculture

Agriculture

Wage and salaried workers (non-agric.) Median annual labor income*** (C$) 21,733.07 10,953.47

Median hourly earnings rate** (C$) 8.71 4.29

Low earnings rate 18.66 37.14

Individual self-employed workers Median annual labor income*** (C$) 14,710.35 6,491.63

Median hourly earnings rate*** (C$) 10.38 3.88

Low earnings rate 28.97 55.05

Employers (non-agric.) Median annual labor income*** (C$) 31,143.96 14,294.02

Median hourly earnings rate*** (C$) 16.33 5.87

Low earnings rate 6.23 38.07

Household enterprise workers Median annual labor income*** (C$) 15,027.46 9,940.54 Median hourly earnings rate*** (C$) 10.12 4.19

Employment status by poverty level

2001 2005 2001 2005 2001 2005Employed 24.4 25.4 36.2 37.3 60.6 62.8Unemployed 0.6 0.6 1.8 1.6 2.3 2.2Inactive 15.9 15.9 21.2 19.1 37.1 35Total 40.8 42 59.2 58 100 100

Poor Non Poor Total

Income structure

2001 2005 2001 2005% income from waged employment 48.9 45.0 48.9 45.4% income from self-employment 32.6 32.7 28.6 28.2% income from public transfers 1.2 5.5 2.1 2.6% income from family remittances 2.8 3.9 3.7 6.7% income from other non-labor sources 14.4 12.8 16.7 17.2Total 100.0 100.0 100.0 100.0

Poor Non-poor

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

Quintile

Annual growth rate of per capita household

income Y/NLevel of per capita household

income $C 2001 Y/N

1 14.22 2,608.902 5.36 3,844.403 8.71 4,862.364 6.98 7,015.595 -1.00 14,897.57

2005 poverty line C$ 2001 5,241.17

Decomposition of changes in labor income

Quintile E/L L/A A/Nearnings waged

Agriculture

Share of workers in

waged Agriculture

earnings waged

worker in Non-

agriculture

Share of workers in

waged Non- agriculture

earnings self-employed in Agriculture

Share of workers in

self-employment

in Agriculture

earnings self-employed in

Non-Agriculture

Share of workers in

self-employment

in Non- Agriculture

Total

1 0.53 11.14 37.94 -0.9 5.15 3.45 2.7 44.64 -14 10.29 -0.96 1002 4.5 63.99 73.17 -17.1 -2.44 19.13 -32.69 -5.14 3.38 -20.86 14.07 1003 -3.74 16.4 65.96 -1.55 -1.17 33.21 3.02 -14.72 -7.47 3.28 6.76 1004 5.46 42.49 36.83 1.29 2.76 -3.69 -8.71 -3.39 -4.9 30.82 1.05 1005 4 -342.18 -55.39 -3.3 -9.8 289.27 77.7 55.61 -20.84 136.31 -31.38 100

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