From Raj Nallari and Breda Griffith's lecture notes.
The Labor Market and the Investment Climate
The interaction between the investment climate and the labor market determine labor market outcomes. The flip-side to a well-functioning labor market is of course a well functioning investment climate that provides opportunities for employment, lower levels of informality, better working conditions and the potential for rising wages. This necessitates reforms in the investment climate that often involve short-term costs for workers: higher unemployment may follow, at least initially, when domestic firms experience a reduction in trade barriers, state support or increased competition from foreign-owned firms. It is widely accepted that outcomes in the short run can be costly to workers and in particular in a developing economy context where the vulnerable groups—the poor, children and women—disproportionately bear the brunt of structural reforms of the investment climate. But equally, it is also by now widely accepted that reforms to the investment climate, including to trade, and product and labor markets, are essential to set countries on a sustainable healthy long-run growth path.
Labor Market in Developing Countries
Behrman (1999) outlines the following characteristics of the labor market in developing countries where most of the world’s poor live:
- By country income group, 80% of the world’s labor force works in the developing countries;
- Agriculture and other rural labor activities are much more important;
- Non-wage labor are much more important (largely unpaid family workers, Particularly in agriculture at lower incomes);
- Labor forces growing more rapidly;
- Labor force participation rates among 15-64 year olds are higher, particularly for low-income countries, in part because of much lower schooling enrollment rates among those who are in the youngest cohort in this age range;
- Human capital investment is lower with larger gender gaps;
- Non–labor production inputs per worker are much smaller.
