1.

***Special Feature: Employment

Summary: Key findings of recent research on employment
Employment creation in developing countries is high on the agenda of most donor agencies. Yet views vary on the
primary causes of unemployment, and the kinds of development interventions that should be prioritised to create
jobs and economic opportunities. This Section summarises recent insights into the key obstacles and solutions for job
creation, and how donor agencies can support developing countries in promoting employment; more information on
each study can be found in the following Sections.
A macro-perspective on employment growth is given in a recent literature review by Basnett and Sen
(2013): Among other findings, they identify a broad evidence base suggesting that sectoral growth in
manufacturing and services has a positive impact on employment. Ayyagari et. al. (2014) provide a firm-level
perspective: Their analysis covering 104 developing countries suggests that small firms have the highest job
creation rate; however, this does not take into account the high failure rates of small firms nor that only a
minor share of small firms grows rapidly and creates more jobs; as such, the net effects are unclear.
Many studies look at the African context in particular: Earlier research suggests that, with the exceptions of
Botswana, Nigeria, and South Africa, less than 20 per cent of African labour-force entrants find wage
employment (see Page and Shimeles, 2014). Golub and Hayat (2014) conclude that pervasive unemployment
in Africa is primarily a consequence of lack of growth in labour demand, rather than a lack of supply of
skilled workers. According to Iavocone, Ramachandran and Schmidt (2013), an important reason that
African firms dont grow and deliver more jobs relates to the business environment; examples include
insecure property rights and poor supply of electricity. Resonating with Ayyagaris finding, this could
effectively put a brake on small business and employment growth. Nonetheless, such factors can only
explain 40% of the difference between firms in Africa and the rest of the world.
For several authors, the main explanation for unemployment and poverty in Africa is the lack of structural
change, i.e. the move of workers to higher productivity activities and sectors which raises output and
typically raises labour demand in the longer term, elsewhere. Nagler and Naud (2014) find that 42% of
households own rural non-farm businesses in the six African countries studied, but these rural businesses
fail to play a significant role in job creation. Instead, they are a symptom of failed policies to promote rural-
urban migration and wage employment. Page and Shimeles (2014) find that improvements in labour
productivity in agriculture contributed to the bulk of poverty reduction in seven African countries, by
increasing the incomes of the majority of households who earn their living in agriculture. The contribution of
labour shifts from agriculture to more productive sectors (manufacturing & services) to poverty reduction
Latest Research & Evidence on PSD
May 2014

This DCED Research and Evidence Update compiles
recent books, journal articles and studies that offer
credible findings on the effectiveness of private sector
development (PSD), reviews of current trends and
approaches in PSD, or research on economic
development more broadly. This evidence is also collated
in the Evidence Framework on the DCED website.

Click here to subscribe to future issues, as well as our
separate Newsletters on the latest developments in PSD.

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Contents
1. ***Special Feature: Employment
Summary: Key findings of recent research
Overview documents: Job creation in developing
countries
Sources of employment and unemployment in Africa
Employment and Structural Change in Africa

2. Agricultural Development
Export Agriculture and Household Welfare
Impact of producer associations on rural livelihoods
Sources of agricultural growth in India
was 18 percent, and the authors argue that more structural change will be necessary to create employment
and reduce poverty.
The policy recommendations offered by the authors vary, suggesting that employment creation in
developing countries, and in particular in Africa, will require a multi-pronged approach: Basnetts and Sens
review as well as Golub and Hayat suggest that education and skill training are important requirements
allowing people to take advantage of emerging opportunities. To enable firms to provide more jobs, Ayyagari
et. al. (2014) argue in favour of measures to enhance small firm productivity (e.g. management training)
while Iavocone, Ramachandran and Schmidt suggest reducing business environment constraints to firm
growth as the priority. Many authors agree that policy interventions should focus on promoting labour-
intensive sectors. For some, one focus should be increasing agricultural productivity and developing export
agriculture (e.g. Golub and Hayat). For others, a focus of employment creation efforts should be the
promotion of labour-intensive light manufacturing sectors in particular, such as through industrial clusters
and Special Economic Zones (Lin and Wang (2014); Page and Shimeles suggest that a combination of both
will be most effective for creating jobs now and in the future. Both also note the special importance of FDI;
Lin and Wang highlight the role of Chinese investments in Africa in enabling quick wins in job creation.

Overview documents: Job creation in developing countries

What do empirical studies say about economic growth and job creation in developing countries?, by
Yurendra Basnett and Ritwika Sen, EPS PEAKS, September 2013.
This paper reviews the empirical literature to present evidence on the employment impact of economic growth.
The review finds an extensive body of evidence suggesting that growth in manufacturing and services have
positive impacts on employment. These are labour-intensive sectors which are able to absorb surplus labour
quickly; this is particularly true for manufacturing, since the skills typically required are quite minimal. The
impact of growth in agriculture on reducing unemployment is found to be limited, though it is noted that
several studies find growth in agriculture tends to reduce underemployment.
From a long-run perspective, so long as growth takes place and thereby increases the demand for jobs, it
does not seem to matter which sectors grow if individuals are able to move between jobs and have the
appropriate skills to work in the thriving sectors. In this context, the review emphasises the importance of
complementary policies to ensure that economic growth has a positive impact on employment. The impact
of trade liberalisation, for instance, is found to be limited in a study on the employment impact of
Madagascar export growth because the large majority of the poor do not have the necessary skills to benefit
from new employment opportunities (Nicita 2006). Investment in building the productive capacity of the
work force for the future thus emerges as a key policy recommendation. >> Full paper

Who creates jobs in developing countries?, by Meghana Ayyagari, Asli Demirguc-Kunt, Vojislav
Maksimovic, Small Business Economics, February 2014.
This study utilises a cross-country data set of 104 developing countries to examine the contribution of small
enterprises to total employment, job creation, and growth in the formal sector.
The small and medium enterprise (<100 employees) sector as a whole contributes 48% to aggregate
employment on mean. Moreover, small firms are found to have the highest job creation rate even after
controlling for age. This suggests that many small firms grow into medium size firms, and that they are thus
very important for generating employment. As such, the authors emphasise the importance of encouraging
entrepreneurship and reducing constraints to starting up new businesses.
However, these results are biased towards the small firms which survive, and failure rates are typically
high. The authors also emphasise that there is a substantial amount of heterogeneity in the growth rates of
SMEs. Typically, a small number of transformational entrepreneurs grow rapidly and become bigger. Thus,
one priority for research and policy should be to identify and promote these high-growth SMEs.
Another caveat is that the contribution of SMEs to productivity growth is not as high as that of large firms.
The authors thus recommend a policy focus on the likely obstacles to productivity faced by SMEs ranging
from lack of access to finance and the need for business training and literacy programs to addressing
business environment constraints such as corruption and excessive regulation. >> Article Abstract. More
resources on SMEs and employment can be found on the DCEDs Small Enterprises Knowledge Page.




Sources of employment and unemployment in Africa

Stunted growth: Why dont African firms create more jobs, by Leonardo Iacovone, Vijaya Ramachandran
and Martin Schmidt, December 2013.
Using data from 41,000 firms across 119 countries, this paper finds that African firms at any age tend to have 20-24
percent fewer employees than firms in other regions of the world.
The authors find considerable empirical evidence for Africa, Asia, and Latin America that business climate
constraints such as lack of access to credit, insecure property rights and poor supply of electricity can
discourage or prevent firms from investing, and thus slow their growth, in particular because the cost of
dealing with government increases with size.
However, the business environment and certain firm characteristics (e.g. exporter status and foreign
ownership), can only explain 40% of the size difference between firms in Africa and the rest of the world;
60% remains unexplained.
The authors thus conclude that there are likely to be particular constraints in Africa which prevent firms
from growing and limit demand for labour. Firstly, the relatively high price level in many countries in Africa
makes firms less internationally competitive. The cost of formal labour, which is in some African countries
strictly controlled by minimum wages and unions, could also prevent formal firms from taking on new hires.
On a micro level, it is also hypothesised that issues related to trust between managers and workers, if firms
transition away from the typical pattern of hiring family-only employees, may play a role in limiting firm size.
>> Full paper. To view a recent article in The Economist (March 2014) on this study, click here.

Employment, Unemployment and underemployment in Africa, by Stephen Golub and Faraz Hayat, UNU-
WIDER working paper, January 2014.
This paper analyses the predominance of informal employment in Africa and concludes that lack of demand for
labour appears to be the main reason for pervasive underemployment. An insufficiently skilled workforce is only
partially the cause, with 30% of income variation explained by education levels.
In order to boost labour demand, the authors argue that integration into the global market and exports of
labour-intensive products are vital. Whilst light manufacturing presents some opportunities, the authors
emphasise that the potential for growth in the agricultural sector should not be underestimated. This is due
to the fact that traditional cash crops are already the source of livelihood for millions of Africans, and have
many of the features of manufacturing exports: high labour-intensity; potential for quality improvements
through technological transfer; and lucrative but quality-sensitive markets in developed countries. Improving
the business environment is argued to be critical to boosting investment and growth in either sector.
Low-income Sub-Saharan African countries compare unfavourably to other developing regions in terms of
the quality of infrastructure and public services including frequency of power outages; time taken to obtain a
fixed-line telephone connection; time taken to clear an imported container through customs; and percentage
of roads that are paved. Such weaknesses are particularly damaging for export-oriented industries, where
quality control and timeliness of delivery are paramount. >> Full paper

Employment and structural change in Africa

Aid, Employment and Poverty Reduction in Africa, by John Page and Abebe Shimeles, UNU WIDER Working
Paper, February 2014.
This paper offers evidence that unemployment and poverty in Africa are symptoms of a lack of structural change,
i.e. the movement of workers from lower to higher productivity employment.
Earlier research suggests that, with the exceptions of Botswana, Nigeria, and South Africa, less than 20 per
cent of African labour-force entrants find wage employment and about 80 percent of workers are classified
as working poor. Growth in the four fastest growing African economies has not been employment
intensive, relying mainly on extractives industries. In contrast to Asia, economic growth has also not lead to
rapid poverty reduction. In fact, Africa is the developing region with lowest income elasticity of poverty to
growth.
Based on a simple econometric model, the authors show a link between industrial employment and poverty
reduction: On average across all developing countries, a 1 percent increase in the former is linked to a 0.8
percent reduction in the share of population that is poor; for Africa alone, there is no significant association.
Based on household surveys in seven African countries, the authors then assess the contributions of intra-
sector productivity increases, and labour shifts to more productive sectors (industry and services), to poverty
reduction. Overall, improvements in labour productivity in agriculture contributed to the bulk of poverty
reduction, while that of labour shifts was 18 percent. In Malawi, Nigeria and Egypt these intra and inter-
sectoral changes worked together to reduce poverty. In Rwanda, poverty reduction was due to a shift of
employment to more productive sectors. In Tanzania, Uganda and South Africa, employment shifts from
higher to lower productivity sectors (out of industry and services into agriculture) have reduced the poverty
impact of growth.
The authors conclude that there are three priority areas for donor agencies in promoting employment
creation and poverty reduction: Increasing agricultural productivity, e.g. through enhanced support to
agricultural R&D, rural infrastructure and market access; investments in industrial clusters; and building firm
capabilities, e.g. through management training and FDI promotion agencies. >> Full paper

Non-farm Entrepreneurship in Rural Africa: Patterns and Determinants, by Paula Nagler and Wim Naud,
IZA Discussion Paper, February 2014.
This study analyses non-farm entrepreneurship in rural areas, based on World Bank surveys of 24,551 households in
six African countries between 2005 and 2012. 42 percent of these households own non-farm businesses, but the
role of these businesses in job and income creation is limited.
91 to 100 percent of rural non-farm enterprises are small and informal, operated from within, or close to
households. Over 80 percent of enterprise owners do not employ any non-household worker.
Only between 42 and 62 percent of rural non-farm enterprises operate throughout the year, reflecting
seasonality in farming and indicating a primary role of non-farm income as a mechanism to manage risk.
Urban households, in contrast, are more likely to operate enterprises throughout the year.
The factors determining rural non-farm entrepreneurship vary strongly among the countries surveyed and
are hence difficult to generalise. For example, shocks such as food shortages make operating a non-farm
enterprise more likely in Malawi and Niger. Distance to a road or to the next population centre play a
negative role in Nigeria, Malawi and Uganda (i.e. there are fewer rural non-farm businesses). Educational
attainment has a positive effect on rural entrepreneurship, but a negative one on urban entrepreneurship,
indicating that educated individuals in urban areas can find wage employment more easily. Gender is a
determinant of non-farm entrepreneurship in Nigeria, where women-headed households are 12% more
likely to start a non-farm enterprise.
The authors conclude that rural non-farm entrepreneurship is a sign of failed policies to foster effective structural
change through rural-urban migration and wage employment. >>Full paper

China-Africa co-operation in structural transformation: Ideas, opportunities, and finances, by Justin Yifu
Lin and Yan Wang, UNU-WIDER Working Paper, February 2014.
This paper examines China and Africa co-operation from the angle of structural transformation as a major driver of
growth and job creation.
The authors argue that China, being further ahead in the structural transformation process, can provide
relevant ideas and knowledge which will help Africas transformation. These ideas can be quickly transferred
through firms wishing to take advantage of lower wages in Africa by relocating labour-intensive light-
manufacturing firms creating jobs at the same time.
In particular, it is argued that cluster-based industrial zones have the potential to quickly create jobs in
labour-intensive light-manufacturing sectors in which African countries have comparative advantages.
The authors illustrate this with the example of Huajian Shoe Factory, which identified Ethiopias high
productivity and low wages in the shoe-making sector; 8 months after operations began in Ethiopia, the firm
had produced 2,500 jobs and more than doubled Ethiopias shoe exports. >> Full paper
For a more general stock-take of structural change and employment in Ethiopia, with a statistical break-
down of changing sectoral contributions to GDP and employment, view Pedro Martins/ World Bank (2014).

2. Agricultural Development

Export Agriculture and Household Welfare

Export horticulture and household welfare: Evidence from Zambia, by Gelson Tembo and Maureen Zulu,
Journal of Development and Agricultural Economics Vol 6 (2), February 2014.
This study uses data from 41 farm worker households and 64 comparison households within the same
neighbourhood in Zambia to determine the impact of large-scale export vegetable production sites on the welfare of
employees. Welfare is measured in terms of consumption expenditure.
Descriptive statistics indicate that those who participate in estate horticulture firms as workers are better off
than control group households, with almost twice as much consumption spending.
The study uses three different models to estimate the causal effect of estate horticultural farm employment
on income; matching techniques were used to ensure comparability of treatment and control households.
The authors find that employment in estate horticulture farms raises per capita household consumption by
49 to 53%.
The authors note that the finding of positive income effects of participation large-scale agricultural
production is consistent with recent similar studies such as in Senegal and Kenya. >> Full study

Impact of producer associations on rural livelihoods

Can Producer Associations Improve Rural Livelihoods? Evidence from Farmer Centres in India, by Taj M.
Desai and Shareen Joshi, Journal of Development Studies, Volume 50, Issue 1, 2014.
Rural producer associations are often considered a community-driven solution to the problems of smallholder
agriculture. This article evaluates the impact of organising female producer associations in Gujarat state, India.
The initiative provided training, information, access to inputs, risk mitigation, and market linkages. 42 villages
were selected randomly, and 1,475 female farmers evenly split between participants and non-participants.
To address problems of individual selection, propensity matching techniques were used.
Over 18 months, no statistically significant effect on income was found for the treatment group as a whole.
However, the authors find significant effects among poorer, tenant farmers poorer women experienced
on average 40% increases in income.
Impacts were also found on awareness and utilisation of financial services: participants were on average 45
per cent more likely to be aware of their loan options and 1014 per cent more likely to have taken loans.
>>Article Abstract

Sources of Agricultural Growth in India
Changing sources of growth in Indian agriculture, by Pratap S. Birthal et. al., IFPRI Discussion Paper,
February 2014.
This paper analyzes changes in the patterns and sources of growth in the crop sector over the last three decades,
which accounts for close to two-thirds of the total value of agricultural production in the country.
Between 2000 and 2010, technology, such as the use of better fertilisers and better quality seeds to combat
food security issues, was the most important source of agricultural growth. Agricultural diversification
toward high value crops (HVCs), such as groundnuts, oil seeds and spices, emerged as the next most
important source of agricultural growth. This trend towards diversification has intensified in the last four
years, and is found to be pro-poor.
In general, the incidence of poverty is higher among farm households toward the bottom of the land
distribution: 29 percent among marginal farmers (<1 ha) and 19 percent among small farmers (1-2 ha), as
compared to 10 percent among large farm households (>4 ha). However, on average, the incidence of
poverty is less among the growers of HVCs (20 percent) as compared to the non-growers (25 percent). The
incidence of poverty is less among growers of all sizes than among non-growers.
Moreover, there are potential multiplier effects of diversification-led agricultural growth as postharvest
processing activities such as transportation, packing and sorting are all labour intensive. >>Full paper


This Research Update has been compiled by Eleanor Bell and Melina Heinrich of the DCED Secretariat. Research papers for inclusion in
future issues can be sent to the Secretariat. Please note that the DCED is an inter-agency body, not a funding organisation.