Much of what economists understand about labour market dynamics—the process by which workers can improve their lives by switching jobs—is based on data and research from high-income countries. However, a recent breakthrough study conducted by Kevin Donovan, Will Jianyu Lu, and Todd Schoellman presents new evidence from low- and middle-income countries, outlining somewhat surprising findings about labour market flows. The study, which utilises harmonised microdata analysis from rotating panel labour force surveys covering 80 million people across 49 countries, reveals that labour market flows, such as the job-finding or employment exit rates, are significantly higher in developing or low-income economies. These higher flows largely reflect a precarious job ladder: workers frequently transition to and from marginal employment without necessarily advancing to or sustaining better-paying jobs. Subsistence self-employment and differing patterns of selection for wage workers each play a role in these findings and offer useful avenues for future theories on labour market frictions, helping governments form more informed labour policies.
A dynamic labour market is an essential component of a well-functioning economy. A good labour policy is one that enables people to find work and, more importantly, to climb the job ladder by moving to better-paying jobs, which directly contributes to lifestyle improvement through tangible job transitions. Additionally, a robust labour policy that supports this trajectory provides workers with incentives to acquire skills, further boosting their wage growth.
What does this imply for Pakistan? In simple terms, it is evident that Pakistan’s labour policy has thus far failed to promote organic skill development and enhance an individual’s bargaining power through acquiring niche skills while remaining within the system. A revision or upgrade of the policy is therefore necessary. When formulating a revised labour policy, the government must ensure that it not only accelerates the relocation and/or reallocation of workers towards more productive jobs and sectors but also provides every worker with the legislated freedom to polish their knowledge and skills while remaining on the job—something that directly correlates with boosting the national GDP. The concern for these researchers is that labour markets in developing or low-income countries, including Pakistan, are failing in these objectives. A distorted or unimaginative labour policy fails to create the right jobs or reallocate workers to them, with serious consequences for poverty and growth. The evidence from Pakistan and similar economies is alarming. For example, workers’ wages grow only half as much over the life cycle in developing economies, and upward mobility on the job ladder is even lower. The study also highlights significant evidence of large, persistent gaps in wages and labour productivity between sectors and regions, among both developed and low-income economies, which need to be bridged for sustainable development.
The study provides two main reasons for this rising inequality between regions and economies: First, the lower a country is on the ladder of developing nations, the higher the GDP growth rate it requires to close the gap and give workers better upward mobility momentum. For many such countries, this may not be practically happening within their economies. Second, the growth itself should correlate to increased labour flows in the market directed towards a higher life cycle wage level, which might not be happening in poorer countries trapped in a vicious income cycle, thereby stagnating workers’ incomes and compromising incentives, productivity, innovation, and growth.
To conclude, the study holds the following relevance for the formulation of Pakistan’s labour policy moving forward: First, the policy should be designed to facilitate upward labour market flows within the economy. Such an environment will also mitigate the fallout from migrations resulting in severe brain drain. Second, real freedom for workers will come when they have both the facilitation and opportunity to navigate between marginal employment, self-employment, informal work, and supplementary-earnings wage work—something that can only happen by promoting SMEs and start-ups as a priority. Third, the government needs to provide guidance through real data to help both employed and unemployed workers prudently assess their work options. It is time for the provincial governments to rise to these tasks and challenges, and this endeavour requires no permission from the IMF—an excuse typically used by policymakers these days!
Dr Kamal Monnoo
The writer is an entrepreneur and economic analyst. Email: kamal.monnoo@gmail.com