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Posted by Ignacio  on  Fri, 29/06/2007

Like every Friday, from Raj Nallari and Breda Griffith's lecture notes.

 

Labor Friendly Economic Growth

 

What does it mean to make growth more labor friendly?  First, there are cases by which growth in output is not translated into growth in employment and unemployment actually increases and/or the informal sector expands.  For example, Pierrre and Scarpetta (2004) note that while many countries in East and South Asia managed to successfully combine strong economic growth with increasing employment, for many other developing regions, especially Sub-Saharan Africa, increases in the working age population outstripped job opportunities in the formal sector with a resultant increase in employment in the informal sector.  Furthermore, strong economic growth in the transition economies in recent years has been accompanied by large and increasing unemployment rates. The unemployment rate in Poland, Slovak Republic and Former Yugoslavia has been close to 20 percent with declining labor force participation rates.  Similar tales abide in Latin America where the unemployment rate doubled to more than 10% in Argentina, Brazil and Chile during the 1990s combined with an expansion of the informal sector “the working poor” and rising wage and income inequality (Pierre and Scarpetta, ibid.)  

 

Employment and Productivity Intensiveness of Economic Growth 

 

An examination of employment elasticity sheds some light on what has taken place with regard to the employment intensity of output/growth. The employment elasticity measures the percentage point change in the number of employed persons in a country or region associated with a 1-percentage point change in economic output, measured by GDP.  Employment elasticities, essentially a ratio of the growth in employment (numerator) and growth in output (denominator) vary across countries and across time reflecting changes in the relationship between employment and output.  Research at the ILO showed that growth in labor supply, the size of a country’s service sector, instability, uncertainty and taxes on labor earnings were relevant in explaining a country’s employment intensity of growth (Kapsos, 2005).    

 

Examining changes in output with changes in the employment elasticity sheds light on whether growth is occurring with gains in employment and labor productivity, or whether it is balanced between the two. Opinion varies on whether employment-led growth or productivity-led growth is more advantageous from a development perspective.  On the other hand, positive economic growth accompanied by an employment elasticity of greater than 1 indicates declining labor productivity and an increase in lower productivity jobs. Globally employment elasticities ranged between 0.3 and 0.38 percentage points during the study period (from Trends in the Employment Intensity of Economic Growth). Thus for every 1 percentage point increase in GDP, employment growth grew by one third and productivity growth by two thirds.

 

The employment elasticity for individual sectors, where value added in the respective economic sector—agriculture, manufacturing, services—replaces GDP (in the denominator) links employment growth to changes in the sectoral composition of employment.  A low employment elasticity and positive sectoral growth for a given sector suggests productivity growth.  If this scenario continues and is accompanied by reduced employment in the given sector and overall economic growth is positive, then we would expect that structural change is occurring. At early stages of development structural change is indicative of a movement away from agriculture to manufacturing and at later stages of development, low employment elasticities and positive sectoral growth suggests a movement out of manufacturing and into services.  Based on data from 139 countries, the exhibit below shows employment elasticities by sector and value added growth rates in each sector during the period 1991 to 2003. 

 

Employment Elasticities by Sector

Employment Elasticities
 

 

The services sector was the fastest growing sector (3%) for the 139 countries as well as the sector that provided the most job-intensive growth (e.g. for every one percentage point of growth in service sector value added, employment increased by 0.57 percentage points).  On the other hand, productivity growth contributed more to the growth in the agricultural and industrial sectors over the period. No doubt structural change, i.e. movement from agriculture and industry to service sectors, played an important role in these divergent results, but nevertheless new jobs were created in both agriculture and industry  and agriculture remains the world’s largest employment sector (1.2 billion workers in 2003) reflecting its importance in developing economies. 




Posted by Ignacio  on  Tue, 26/06/2007

The latest issue of the World Bank Institute's Development Outreach magazine is out, with the title Youth and Development: Investing in the Next Generation




Posted by Ignacio  on  Fri, 22/06/2007

This Friday we begin the study of the relationship between the labor market, economic growth, and poverty reduction. As usual, from Raj Nallari and Breda Griffith's lecture notes.

 

The labor market represents one of the main conduits through which economic growth can help to reduce poverty.  Economic growth arises from increases in employment and/or productivity (how employment-intensive economic growth is and what part of growth is due to labor productivity will be discussed).  And, from the flip side, an economy’s failure to translate economic growth into employment opportunities can stunt its efforts to reduce poverty. Labor is the main asset of poor people and jobs represent the main pathway out of poverty for the poor. Furthermore, labor is an important factor of production for firms.

 

The functioning of countries’ labor markets is affected by a wide array of factors, including not only labor market conditions (labor regulations, tax wedges, and so on), but also natural endowments, cultural factors, and long-run economic performance.  Furthermore, external factors such as globalization and technological change play an increasing part in determining labor market outcomes within countries.  

 

Given its importance, strengthening and improving labor market conditions should bring about tangible improvements in poverty. In the short run, this will require measures that make the labor market more flexible, while closing the gap between labor supply and demand in the long run requires slower yielding policies, including improvements in human capital and training.   

 

During the next few Fridays we will analyze “labor friendliness” of economic growth, a recurring theme of the developing economy literature. We shall see that labor friendly economic growth, while sometimes useful, is a double edged sword, representing also low labor productivity growth. We will also analyze the links between the investment climate and labor market performance. We will conclude by examining labor supply trends of particular interest to developing countries, including in terms of labor force growth rates (high in developing countries), unemployment (generally accompanied by informal sector employment and underemployment in developing country cases), wages (highly unequal in certain regions), and gender issues (also highly unequal in many countries). 




Posted by Ignacio  on  Tue, 19/06/2007



Posted by Ignacio  on  Fri, 15/06/2007

After a few weeks break, we continue with our Fridays Academy series where we left it. As usual, from Raj Nallari and Breda Griffith's lecture notes.

 

The PRSP and Funding for Health

From the late 1990s, the multilaterals, working through the Enhanced HIPC Initiative and the PRSP, have recognized the importance of social spending for health and education in the macroeconomic framework by strengthening the link between debt relief, poverty and social policies. Funds freed up because of debt relief can now be increasingly targeted for government spending on public services that directly benefit the poor.  

According to Gupta et al. (2001), countries that have reached their completion point should benefit from a reduction in debt service payments of 1.9 percentage points of GDP on average a year.  For some countries, the savings from debt relief would be even more substantial—9 percent of GDP in Guyana over the coming years, Exhibit below.

 

Total revenue, Total Spending and Spending on Health in HIPCs that have reached the Decision Point

 

Total revenue, Total Spending
 
 
                    Source: Gupta et al., 2001
 
 

 

 

The savings freed up by debt relief can then be allocated towards social spending.  Measures to increase the poor’s access to health care and education form part of the country’s poverty reduction strategy (PRS) that is delineated in their PRSP. The increased focus on poverty reduction programs in the PRSP is likely to change the composition of total public spending and increase the budget allocation for health and education.

 

 

 

Annual percentage change in health spending and social indicators, 1985-99

 

Annual percentage change in health spending             Source: Gupta et al., 2001 
 
 

 

The PRSPs of the 23 countries at the decision point in 2001 contain measures for increased spending on primary and preventive health care and primary education and the countries have increased significantly public health care spending in per capita terms. Yet health care spending in the HIPCs lagged behind that of other non-HIPC countries that were eligible for debt relief under the IMF’s PRGF in 1999, Exhibit above. About 9 percent of total government outlays went toward health care in the HIPCs in 1999, ranging from US$3 a person in Madagascar to US$35 a person in Bolivia and Guyana.  Ample scope remains to increase productively the proportion of public spending going to health care.  

 

 

However, targeting public health care alone, although on the surface compelling, may not be the most expedient way of spending funds made available under debt relief to improve social outcomes.  Targeting other high priority areas such as water and sanitation and nutrition will also improve the health of the poor.  Furthermore, available evidence suggests that increased outlays on health care do not always translate into better health care indicators.  Moreover, a focus on health care indicators alone as a measure of government policy can be misleading.  Health care indicators need to be treated with caution. Limited data and changes in the methodologies used over time also affect changes in these indicators as well as factors other than government expenditures—household income, general economic conditions, improvements in health technology and the activities of nongovernmental organizations and other private sector providers (Gupta, 1998). 

 

In addition, benefit incidence studies suggest that the poor gain very little from increased health outlays.  A more comprehensive strategy for improving health care spending would focus on removing the inefficiencies that exist with regard to spending, and reallocating funds to programs such as prenatal care and vaccinations against preventable diseases that are more beneficial to the poor (Gupta et al., 2001).  This has been the approach adopted in the PRSPs of the 23 countries at decision point—a commitment to increased public outlays on health care covering a wide range of poverty reduction programs.  Funds for the health sector alone are expected to increase by 0.4 percentage points of GDP between 1999 and 2001, less than the total amount of HIPC debt relief.

 
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