Policies for Growth

Module 10
Labor Friendly Economic Growth

World Bank
Institute

Presentation Script

Policies for Growth

Module 10: Labor Friendly Economic Growth Presentation Script

Introduction and Objectives In this presentation, we will learn: The definition of labor friendly growth How countries can determine whether they are growth is labor friendly The importance of promoting employment while encouraging economic growth

Slide 3 Earlier in this course, we learned that there is a relationship between economic growth and poverty reduction. However, when countries are enacting policies to promote growth, they need to think about how the policies will affect different parts of the economy. In this presentation, we will discuss the importance of economic growth being labor friendly.

Slide 4 So, what exactly is labor friendly growth? Well, labor friendly growth is when growth in output is translated into growth in employment. Growth that is unfriendly to labor occurs when growth in output is not translated into growth in employment and unemployment actually increases and/or the informal sector expands. Unfortunately, in recent years, strong economic growth in the transition economies had been accompanied by large and increasing unemployment rates. Page 1 of 6

Policies for Growth

Module 10: Labor Friendly Economic Growth Presentation Script

Slide 5 An examination of employment elasticity sheds some light on the employment intensity of output. Employment elasticity measures the percentage point change in the number of employed persons in a country or region associated with a 1 percent change in economic growth, measured by gross domestic product. Essentially, a ratio of the growth in employment to the growth in output is created by placing the growth in employment in the numerator while putting the growth in output in the denominator. As the employment elasticity varies across countries and across time, the ratio changes.

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Policies for Growth

Module 10: Labor Friendly Economic Growth Presentation Script

Slide 6 Examining changes in output along with changes in the employment elasticity helps explain 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 or productivityled growth is more advantageous from a development perspective. On the other hand, positive economic growth accompanied by employment elasticity of greater than 1 indicates declining labor productivity and an increase in lower productivity jobs.

Slide 7 Globally, employment elasticities ranged between 0.3 and 0.38 percentage points during a study by Kapsos for the period from 1991 to 2003.Thus for every 1 percentage point increase in GDP, employment growth grew by one-third and productivity growth by twothirds. The study by Kapsos also revealed that employment elasticity for individual sectors links employment growth to changes in the various sectors of employment. Low employment elasticity and positive sectoral growth for a given sector suggest productivity growth. If this scenario continues and is accompanied by reduced employment in the given sectorand overall economic growth is positivethen it is probable that the favored sector of employment is changing.

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Policies for Growth

Module 10: Labor Friendly Economic Growth Presentation Script

Slide 8 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 suggest a movement out of manufacturing and into services. The Kapsos study showed the services sector as the fastest growing in the 139 countries, while also providing the most job-intensive growth. This means that for every percentage point of growth in the service sector, employment increased by 0.57 percentage points.

Slide 9 On the other hand, productivity growth contributed to growth in the agricultural and industrial sectors over the period. Structural changethat is, movement from agriculture and industry to service sectorsplayed an important role in these divergent results. Thus, new jobs were created in both agriculture and industry. With that said, agriculture remained the worlds largest employment sector with 1.2 billion workers in 2003. Agriculture is still a large employment today, reflecting how important agriculture is in developing countries.

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Policies for Growth

Module 10: Labor Friendly Economic Growth Presentation Script

Slide 10 Trends in employment elasticities can not only indicate growth in employment but they can also reveal structural shifts in an economy. For example, in Latin America and Caribbean, a 1 percent increase in GDP was associated with a decrease in agricultural employment, along with an increase in service-sector employment. This evidence indicates ongoing structural change in Latin America and the Caribbean, particularly a movement away from employment in agriculture and into the service sector.

Slide 11 While this presentation has so far talked about how increases in labor productivity and employment intensity contribute to overall growth and sectoral value-added growth, BOTH should be jointly pursued in order to realize economic development. Information would be needed on other labor-market indicators, like job quality, demographics, labor demand and so on, to fully examine the link between labor market improvements and economic development. This is important for countries to explore because economic growth reduces poverty when there is a strong link between labor-market improvements and economic development.

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Policies for Growth

Module 10: Labor Friendly Economic Growth Presentation Script

Slide 12 Even though this presentation has focused primarily on employment intensity and labor productivity, neither offer information on the quality of jobs created. Yet the type of job created in the context of a developing economy is important, especially when so much of the labor market is in the informal sector.

Slide 13 In this presentation we learned: The definition of labor friendly growth How countries can determine whether they are growth is labor friendly The importance of promoting employment while encouraging economic growth Various definitions of technology and its connection to economic growth

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