Labor Markets in Developing Countries Eighty percent of the worlds labor force works in developing countries, where labor

markets are very different from those in developed countries. In many developing countries, more than half of the population of working age labors in the informal economy, where working conditions can be poor (World Bank, 2005). Behrman (1999) notes additional differences. In the developing world, agriculture and other rural labor activities are much more important than they are in the industrialized world. Nonwage labor (such as that of unpaid family workers) plays a much more important role in the economy, particularly in agriculture. Labor forces grow more rapidly, and labor force participation rates among those aged 15 64 are higher (particularly for low-income countries, in part because of lower school enrollment rates). Human capital investment is lower, with larger gender gaps, and nonlabor production inputs per worker are much smaller. In the developing world, social protection such as unemployment insurance either does not exist or has very limited coverage. Few households have the resources to weather a period of unemployment. Therefore, many who lose their jobs must look for work in the informal sector and have no option but to choose undesirable jobs (Bourguignon, 2005). The ILO (2010), in a synopsis of regional developing labor markets, noted the following: The limited increase in the unemployment rate in Sub-Saharan Africa (to 8.2 percent in 2009 from 8 percent in 2008, see below) is not indicative of the true state of the labor market the share of vulnerable and working poor should also be consulted. Furthermore, discouraged workers are an important phenomenon in Sub-Saharan Africa. The labor market in North Africa continues to face a large number of challenges, namely, a rapidly growing labor force (2.6 percent annually over the past 10 years); high unemployment rates, especially among youth; low labor force participation rates among women; slow increases in productivity, with repercussions for wages and earnings; and large shares of the vulnerable and working poor. Youth unemployment and large shares of vulnerable and working poor also characterize the labor market in the Middle East. Furthermore, there are large gaps between the sexes in labor force participation rates, with female participation rates just over one-third of male rates. The 2009 estimate of 25.4 percent of women is the lowest among all regions. Favorable economic conditions in LAC rapid economic growth, rising exports, high commodity prices, and abundant financing yielded positive spin-offs for the labor market over the past decade as seen in reduced rates of vulnerable employment and reduced unemployment rates. This has been curtailed in the wake of the global financial crisis with negative effects for the working poor, vulnerable employment, and unemployment.

East Asia boasts the highest employment-to-population ratio among all the regions almost 70 percent of the working-age population is employed. The figure has been declining, however, as young people spend longer in school and older workers retire and exit the labor market. The share of workers in salaried employment has grown significantly in East Asia in recent years, reaching 45 percent in 2008. Significant gains have been made among the working poor in the past decade, with an estimated 29 percent living with their families on less than $2 a day and 11 percent living with their families on less than $1.25 a day in 2008 versus 75 and 50 percent, respectively, a decade earlier. The negative impacts of the ongoing crisis are expected to be offset by declining commodity prices, and economic growth is expected to rebound sharply with unemployment expected to decline slightly to 4.3 percent (see below). Southeast Asia and the Pacific are heavily dependent on foreign trade and investment flows, and thus have been hit hard by the ongoing crisis. Unemployment has increased, especially among men. Youth unemployment is a big concern in this region and there is a large gender gap in labor force participation. Labor force participation among the youth has declined, which may suggest more youth staying on in education or becoming discouraged. Vulnerable employment and the working poor remain big issues in this region. South Asia suffered least from the recent crisis, due principally to the fact that its two largest countries India and Pakistan are less reliant on exports than many of the other countries in the Asian regions. Th e regions workforce has a large proportion of working poor and many in vulnerable employment. Progress has been made in extending social protection in the region but much remains to be done.

Labor Supply and Unemployment

Labor supply depends on populationits age composition, gender composition, skill level, global distribution, and migration patterns. Table 13.9 examines labor-supply trends by region for 1990 and 2006 and forecasts for 2016. Developing economies account for 64 percent of the global working-age population (World Bank, 2008); these economies labor forces are expected to expand very rapidly. Across the regions, the labor force in Sub-Saharan Africa, South Asia, and the MENA increased by at least 2 percent per year. Population growth is the principal factor driving labor force growth, and while the rate of population increase has slowed in most developing countries, the working-age population continues to grow, at least for the time being. (Changes in population growth affect the labor force only after a lag of some years.) Table 13.9 Labor supply trends by region, 1990 2016
Working age (15 64) population (millions) Average annual labor force growth Average annual population growth Share of women in labor force (%)

(%) 2006 East Asia and Pacific Eastern Europe and Central Asia Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa High-income World Source: World Bank, 2008. 1,317.8 317.3 356.5 195.7 928.1 419.0 691.6 4,223.6 19902006 1.4 -0.1 2.6 3.4 2.0 2.7 0.9 01.6 19902006 1.1 0.1 1.5 2.0 1.8 2.6 0.7 1.4 200616 0.8 0.0 1.1 1.7 1.4 2.3 0.4 1.1 2.1 1990 44.1 45.7 33.9 22.9 29.7 43.0 41.4 39.7 2006 43.5 44.7 40.8 28.0 29.3 42.2 43.4 39.9

We know little about rates of unemployment and underemployment in the developing world, compared with the wealth of data collected by labor economists in the industrialized economies. The data that do exist are often unreliable and not susceptible to cross-country comparison. They are notoriously incomplete in Africa and South Asia, where large rural and informal sectors exist. In Latin America, the term unemployment often refers to urban unemployment only. Unemployment increased in all the developing countries during the 1990s (Betcherman, 2002). The scenario during 2000 to 2007 was much different, reflecting the favorable growth rates experienced by the regions, as outlined in table 13.7. The unemployment rates in 2007 represented a marked decrease from those in 1999 (table 13.10), across all regions except South Asia and to a lesser extent Southeast Asia and the Pacific. Table 13.10 Unemployment rates by region, 19992009

Source: International Labour Office, 2010: 46. Notes: *2009 are preliminary estimates; CI = confidence interval.

Following the onset of the global financial crisis, in 2008 a number of the developing regions had the same unemployment rate as in 2007 or only a marginally smaller rate (the Middle East, South Asia, Southeast Asia and the Pacific). The preliminary estimates for 2009 indicated an increase in unemployment in all regions; some regions Sub-Saharan Africa, the Middle East, LAC were expected to return to 1999 rates (table 13.10). Those regions reliant on international trade were hard hit and the progress made over 2000 07 was reversed in many regions, with adverse implications for the working poor and those in vulnerable employment. Meanwhile, the issue of youth unemployment continues to be a major worry for many regions. Table 13.11 examines the share of youth unemployment in recent years and its estimated response to the onset of the global financial crisis.

Table 13.11

Unemployment rate for youth, world and regions (%)

Source: International Labour Office, 2010: 47. Notes: *2009 are preliminary estimates; CI = confidence interval.

Similar to the total unemployment rate (table 13.10), the largest increases in youth unemployment between 2008 and 2009 occurred in the developed economies and the EU (an increase of 4.6 percentage points between 2008 and 2009), in Central and Southeastern Europe (non-EU) and CIS (a 4.5 percentage point increase), and in LAC (a 2.2 percentage point increase). Youth unemployment is a major concern in the MENA regions, with one in five of the regions youth classified as unemployed.

Wages
Conclusions on wages and worker compensation in developing countries are also difficult to make owing to poor and incomplete data. Often the only data collected are for manufacturing. In countries with large rural and informal sectors, such data fail to give an accurate picture of worker compensation. It is difficult to compare trends over time and across countries because of data inconsistencies and differences in productivity, the bargaining power of workers, and social security (Betcherman, 2002). Nevertheless, the International Labour Office and World Bank do the best they can to collect data on workers compensation, as measured by payroll costs, not just wages. Keeping these caveats in mind, let us consider some of the disparities that appear across countries. For example, an average worker in manufacturing in Kenya earned less than $100 a year in the early 1990s, whereas an average worker in Brazil earned more than $14,000 per year. In terms of earnings growth, East Asian countries experienced increases in real wages between 25 and 31 percent in the early 1990s, while real wages declined in South Asia and Sub-Saharan Africa, with mixed trends in the Latin American region. 1 Within regions, the best measure of wage inequality is income inequality (because, in most countries, wages are the primary source of income). Data on various inequality measures, and in particular the Gini coefficient as quoted in Betcherman (2002) show that inequality varies dramatically across countries, with developing countries exhibiting much higher and increasing levels than developed countries. The United Nations Development Programme (UNDP, 2009) tabulates the Gini coefficient for 148 countries for the period 1992 2007 (figure 13.1). We selected a number of countries to show the range of values. Denmark had the lowest Gini coefficient of 24.7 and Namibia had the highest, 74.3. The greatest proportion of the 148 countries had values between 30 and 39. Many countries in Africa scored in the 40s and 50s, as did some Latin American economies.

The data refer to the periods before the financial crises in Asia and Latin America.

Figure 13.1

Income inequality (Gini coefficient) in select countries, 19922007

Source: UNDP, 2009.

Skills
The link between education (and other forms of human capital investment) and sustainable longrun economic growth is strong, as we saw in chapter 11. Pierre and Scarpetta (2004) note that a simple decomposition of the sources of economic growth over the past decades suggests that the combined effect of greater utilization of labor and enhancement in human capital have generally made a significant contribution to improvements in output per capita. No wonder, since a skilled workforce attracts new firms while enabling existing firms to become more efficient and productive. Surveys2 conducted regularly by the World Bank reveal that many firms in developing countries rate inadequate worker skill and education as a major obstacle to their operations. Although educational attainment has improved in all developing regions particularly in East Asia and Pacific and MENA it remains low in many developing countries. In Sub-Saharan Africa and South Asia, more than 40 percent of those aged 25 and over in 2000 had not completed any formal education. And while there have been significant improvements in the

The World Bank maintains an index of the ease of doing business in 183 economies and select cities at the subnational and regional level and publishes these reports. See http://www.doingbusiness.org for further details.

proportion of adults who have completed secondary and higher education in all regions, their share in the working-age population remains very low in many countries (figure 13.2). Figure 13.2 Educational attainment by region

Source: World Bank, 2005. Note: Population aged 25 and over with secondary or higher education attainment as a share of total population aged 25 and over.

The link between education and growth can break down under extreme circumstances, in developing and developed countries alike. Many African countries have seen poor growth performance even with rapid increases in education. For investments in education to reap positive returns, the investment climate must be favorable, the quality of education must be high, firms must have incentives to hire more skilled workers, and graduates must have opportunities to use their newly acquired skills in productive settings, rather than bloated bureaucracies and overstaffed state enterprises (World Bank, 2005). The World Bank (2007) notes the following:

Educational quality measured by what people know has powerful effects on individual earnings, on the distribution of income, and on economic growth The educational quality in developing countries is much worse than educational quantity (school enrollment and attainment) a picture already quite bleak Just providing more resources to schools is unlikely to be successful improving the quality of education will take major changes in institutions (World Bank, 2007: 2)

Investments in education also yield higher returns when combined with or preceded by investments in health and nutrition. Behrman (1999) shows that initial 1965 investments in health and nutrition represented by life expectancies at birth relative to those predicted by per capita income in a cross-section for that year had more predictive power for economic growth over the coming quarter-century than did initial investments in schooling. It is reasonable to expect that with better health and nutrition, the expected returns on schooling would be far greater. The links between skill and health generate a cycle in which good education and health enable growth, which in turn promotes further investment in them (World Bank, 2005).

Women and Children in the Labor Force

Between 1999 and 2008, the proportion of women in the labor force increased in all regions except East Asia and Southeast Asia and the Pacific (see table 13.12). Globally, the proportion of women in the labor force decreased by 0.1 percentage points during the same period. There is a great deal of variation across the regions. The relatively low share in the MENA 24.9 and 27.5 percent respectively in 2008 compared with the other regions has been linked to the nonenforcement of legislation protecting womens employment rights, and family laws that translate into women being less employable than men. On the other hand, women are more likely than men to be employed in the informal sector, with the result that their overall weight in the labor force is greater than official statistics would suggest.

Table 13.12

Labor force participation rates; females, world and regions (%)

Source: International Labour Office, 2010: 50. Note: *2009 are preliminary estimates.

Child labor is primarily a rural and agricultural phenomenon, with children working either on family land or as hired farm laborers, and is found disproportionately in poor countries (figure 13.3). Girls work in the household or are hired out as domestic help. While they are working, children are not in school, which limits their own potential and that of their social group. Even where free schooling is available, parents may prefer that their children help out on the farm or in the household. Where fees must be paid for education, many parents worry that their investments will not be repaid, particularly if employment prospects are bleak. Mothers are more likely than fathers to make sacrifices and invest in children. Therefore, transfer programs that help women (such as Mexicos Progresa program) are also likely to benefit children. Bans on child labor, trade sanctions, and boycotts have proven to be ineffective, even where they are enforced, as children wind up working in illegal or unregulated activities. Figure 13.3 Child labor participation and GDP per capita

Source: World Bank, 2006.

Conclusion The labor market represents one of the main conduits through which economic growth can help reduce poverty in developing countries. While labor-friendly economic growth can be useful especially where demand for jobs is high and rising an accompanying cost may be slow growth in labor productivity. The labor force is growing rapidly in many developing countries, accompanied in many cases by an ongoing shift from agricultural employment. This would appear to call either for some form of labor-intensive growth or for a marked increase in growth

itself, if an increase in unemployment or a shift to the informal sector is to be avoided. Other notable developing-country concerns highlighted in this chapter are wage inequalities across countries and marked differences in labor-market access for men and women.

References and Reading List

Behrman, J. R. 1999. Labor Markets in Developing Countries. In Handbook of Labor Economics , ed. O. Ashenfelter and D. Card. Amsterdam: Elsevier Science Publishers. Besley, T., and R. Burgess. 2002. Can Labor Regulation Hinder Economic Performance? Evidence from India . Unpublished paper, London School of Economics. Betcherman, G. 2002. An Overview of Labor Markets World - Wide: Key Trends and Major Policy Issues. Discussion Paper 0205, Social Protection Unit, World Bank, Washington, DC. Bourguignon, F. 2005. Development Strategies for More and Better Jobs. Presentation at the conference Help Wanted: More and Better Jobs in a Globalized Economy, Carnegie Endowment for International Peace, Washington, DC, April. Gutierrez, C., C. Orecchia, P. Pierell, and P. Serneels. 2007. Does Empl oyment Generation Really Matter for Poverty Reduction? Poverty Reduction Group, World Bank, Washington, DC. International Labour Office. 2010. Global Employment Trends . Geneva: International Labour Office. Kapsos, S. 2005. The Employment Intensity of Growth: Trends and Macroeconomic Determinants. Employment Strategy Paper 12, International Labour Organization, Geneva, Switzerland. Pierre, G., and S. Scarpetta. 2004. How Labor Market Policies Can Combine Workers Protection with Job Creation: A Partial Review of Some Key Issues and Policy Options. Background Paper for World Development Report (WDR) 2005: A Better Investment Climate for Everyone , World Bank, Washington, DC. . 2004. Employment Regulations Through the Eyes of Employers: Do They Matter and How Do Firms Respond to Them? Background note for WDR, 2005: A Better Investment Climate for Everyone , World Bank, Washington, DC. Ravallion, M., and G. Datt. 1999. When Is Growth Pro -Poor? Policy Research Working Paper 2263, World Bank, Washington, DC. UNDP. 2009. Human Development Report . United Nations: New York. World Bank. 2004. Unlocking the Employment Potential in the Middle East and North Africa: Toward a New Social Contract. MENA Development Report, World Bank, Washington, DC. . 2005. World Development Report: A Better Investment Climate for Everyone . Washington, DC: World Bank. . 2006. World Development Report. Equity and Development . Washington, DC: World Bank. . 2007. Education Quality and Economic Growth . Washington DC: World Bank. . 2008. World Development Indicators . Washington, DC: World Bank.