A recent study released by Kevin Donovan, Will Jianyu Lu & Todd Schoellman, on Labour Market Dynamics and Development, make an interesting read, especially when findings are correlated to realities in Pakistan. The study argues that a dynamic labour market is an essential component of a well-functioning economy. It allows people to find work and then climb the job ladder by moving to better-paying jobs. These job-job transitions are an important direct contributor to life cycle wage growth. They also provide workers with an incentive to acquire skills, further boosting wage growth. At the aggregate level, a dynamic labour market speeds the reallocation of workers toward more productive jobs and sectors, which in-turn boosts GDP.
A prominent concern among policymakers is that labour markets in developing countries are failing in these objectives: they do not create the right jobs or reallocate workers to them, and this has important consequences for poverty and growth. The evidence so far is tangential. For example, we know that workers’ wages grow half as much over the life cycle in developing economies, but not whether this is necessarily a failure of the job ladder. We also have substantial evidence that there are large, persistent gaps in wages and labour productivity between sectors and regions, but again we do not know for sure whether this stems from labour market frictions. Through compiling a new set of micro data and its analysis thereafter, the research’s first contribution is to show that standard labour market flows are all higher in developing economies. The employment exit rate, job-finding rate, and job-job transition rates are all twice as high in developing countries as compared to developed economies, while the occupational switching rate is four times as high. It used harmonized measures of demographics to show that these results do not reflect composition effects: similar differences apply even for people with a fixed age, gender, and education. Its second contribution is to study the sources of these differences. Doing so is a useful step toward thinking about whether the flows constitute faster reallocation of labour up the job ladder or to more productive jobs. The compiled literature provides two reasons this might be plausible. First, recent evidence shows higher growth rates of GDP per capita for developing areas. Higher flows could be a natural consequence of higher growth rates, for example, as workers reallocate during structural transformation; and second, higher flows could even cause growth. A consistent finding of the literature that studies labour market flows among developed economies is that higher flows go hand in hand with more flexible labour market institutions, which allow the economy to respond more quickly to shocks and incentivize human capital accumulation. The other differences in the employment exit rate between the developed and developing economies come from wage work. The study shows how informal and low-earnings wage work accounts for almost the entire difference itself between the two. Put differently: labour market flows for workers with formal, above–median earnings wage-work are similar around the world. In principle, high flows into and out of marginal employment could reflect that workers in developing economies use marginal jobs as an entry point to a rapid climb up the job ladder. On the other hand, it reveals that workers in developing economies fall down or off the job ladder at extremely high frequencies.
For example, the non-employed in developing economies who move into self-employment are a staggering 24 percentage points more likely to return to nonemployment just one quarter later, as compared with people making the same transition in developed economies. Workers who move to a higher-wage job are 39 percentage points more likely to return to nonemployment or fall to a lower wage level just one quarter later. Higher labour market flows in developing economies largely represent a slippery job ladder, not faster reallocation of workers to productive jobs or growing sectors. Lastly, its third and final contribution is to use our database to guide theories of the labour market frictions that generate a slippery job ladder rather than a beneficial reallocation of labour. In essence, it outlines the differences in how job matches are selected: developing economies have more initial low-quality matches but also a more rapid exit from them and the developed economies instead tend to sway in the opposite way.
In conclusion and the findings of particular relevance to Pakistan are the following:
One, with development and GDP growth labour market flows can be checked, despite other challenges like inflation, security, a low state-support barometer, etc.
Two, Labour disgruntlement is largely attributed to poor governance by the economic managers as against blaming the private sector employers.
Third, data tells us that a slippery job ladder and labour market frictions in developing economies can be addressed by government’s direct facilitation to and an emphasis on supporting a re-modelling of self-employment as quasi-unemployment rather than including it with wage work.
And fourth, in re-modeling labour market frictions and designing policy the key is to avoid the standard approach to addressing labour market frictions that “lock” workers into jobs, occupations, locations and/or remains fixated on minimum wages; something that often tends to be counterproductive rather than being helpful. Something that perhaps is quite pertinent in context of Pakistan’s job market today, where with a rapid deindustrialization on the way the national unemployment in recent-term seems to be going up at an alarming pace!
Dr Kamal Monnoo
The writer is an entrepreneur and economic analyst. Email: kamal.monnoo@gmail.com