Employment and Development: Role, limits and opportunities of international cooperation Robert Holzmann Director, Social Protection

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Employment and DevelopmentRole, limits and
opportunities of international
cooperationRobert HolzmannDirector, Social
Protection Labor

• Expert Group Meeting on Full Employment and
  Decent Work
• New York, 02-04 October 2007

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Background and Motivation

• Major economic and social transformations in
  recent decades often led countries to move to a
  higher growth path
• but in many cases these transformations have not
  led to major improvements in labor market
  outcomes
• A growth process without strong job creation has
  limited impact on poverty reduction and exclusion
  
• as employment is key transmission mechanism
  between growth and poverty reduction
• Labor is often main or only asset of poor
• yet our understanding of this market in
  developing countries remains limited and
  employment has not featured high in the
  development thinking recently

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Addressing the Issues Road Map

1. The role and limits of international policy
   coordination for employment creation
2. A multi-sectoral agenda for good job creation
   MILES
3. An operationally relevant international research
   strategy Labor market, job creation and economic
   growth

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Role, limits and opportunities of international
policy coordination for employment creation

• Gains from policy coordination Nash
  equilibrium, and beyond
• Making international markets work, and fair
• The role of benchmarking (and firm creation)
  The Doing Business survey 2007
• Interacting between international and bi-lateral
  organizations

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Chart 1 The optimistic scenario about gains of
international macro-economic coordination
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E2 R2(E1)
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Area of potential cooperation gains
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E1 R1(E2)
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E2
Chart 2 A more realistic scenario on gains of
international macro-cooperation
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E2 R2(E1)
MC
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NE Nash Full-information non-coop
equilibrium XX Non-information non-coop
dis-equilibrium
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Obstacles to macro-economic policy coordination

• Uncertainty about
• Parameters of economic model
• The economic model
• Potential gains
• Distribution of gains
• Low estimated gains
• Past estimate of welfare gains of macroeconomic
  coordination (fiscal and monetary policy) are
  typically in the range of 1-2 percent of GDP

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Making international markets work, and fair

• The importance of free trade in goods and
  services for employment and the role of labor
  market policies to profit from
• The importance of integration into international
  capital markets for employment and the role of
  domestic policies to profit from it
• The importance of migration to help balance job
  opportunities and welfare and the role of
  domestic policies to profit from it

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Complementary policies matter
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The role of firm creation and benchmarking Doing
Business survey

• The incentives and opportunities to create firms
  (and let them go out of business) are crucial for
  (net) employment creation
• Understanding the key elements that drive firm
  creation and comparing the indicators for doing
  business create reform incentives
• Doing Business survey 2007 a key benchmarking
  exercise for levels and changes in incentives and
  opportunities

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Interacting between international and bi-lateral
organizations

• ILO Policy Coherence Initiative
• ILO (WB) Doing Better work projects
• UN-ILO-WB Youth Employment Network
• ILO-WB-UNICEF Understanding Children Work
• WB-ILO-GTZ LM TF for Africa
• Etc etc

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II. Multi- sectoral policy frame-work for good
job creation - MILES
M I L E S
Acroeconomics nvestment climate abor market
institutions ducation and skills ocial protection
Job creation
Labor supply
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Rationale for MILES approach

• Unemployment/underemployment and low pay are not
  just a labor market problem
• Focusing just on supply side measures
  (institutions, reservation wages, and matching)
  may be necessary, but seldom sufficient
  conditions for employment generation
• Within the demand side, essential factors in
  determining employment growth include analysis
  of
• firm restructuring
• firm dynamics
• firm incentives
• There are almost no one size fits all recipes
  for employment creation
• the binding constraints, and thus the priorities,
  vary from country to country
• This requires a multi-sectoral approach, with
  emphasis on costs and risks to job creation, and
  to participation in the formal sector

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M Macro-economics

• A sound macro-economic framework crucial for the
  decision by entrepreneurs to expand their
  business and to create new jobs
• Conditions are likely to include macroeconomic
  stability and fiscal space
• Indications that economic and political
  instability hurt mostly SMEs
• MILES framework focuses on how reforming macro
  policy settings by providing a more stable and
  predictable environment can contribute to
  foster investment, growth and job creation.

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I Investment climate, institutions and
infrastructure

• Firms will expand and create formal sector jobs
  when costs of doing business are low and
  predictable
• Even when market costs appear to be low, the
  shadow costs for doing business such as the
  lack of access to finance or to markets or
  corruption can be very high.
• A poor investment climate often has
  disproportionately negative effects on SMEs
• MILES framework use of existing tools Doing
  Business and Investment Climate Surveys
• To diagnose the status of the business
  environment and how this affect those
  firms/sectors with the greatest potential to
  create more jobs
• To develop the policy instruments to create a
  more employment-friendly climate for businesses

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L Labor market regulations and institutions

• Sound regulations are crucial for both the
  employer and the worker to engage in a productive
  and longer-term working relationship
• Regulations need to strike a balance between
  protecting jobs and enhancing working conditions
  with the need for firms to adapt to the evolution
  of demand
• Labor market regulations and institutions also
  play an important role for working conditions and
  in the wage setting process, by mandating minimum
  wages and by setting rules for wage negotiations
  among the social partner
• Recent and innovative empirical work in
  developing countries indicates that these
  regulations and institutions have a significant
  bearing on job creation and wage growth through
  their impact on sector choice and firm size
• MILES framework assesses the status of labor
  market regulation, the impact on labor market
  outcomes, and thus the effects of reforming such
  regulations on job creation and workers
  protection on the job

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E Education and skills

• Good/decent jobs, i.e., higher productivity jobs,
  are invariably based on good formal education and
  require appropriate skills for all age groups
• Many employers consider skill shortages as a main
  constraint to the operation of their business and
  growth potential
• MILES framework reviews education attainment and
  enrollment rate, information on skill shortages
  and returns to education, and the policies of
  school to work transition and life-long learning

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S Social protection

• Social risk management programs, if well designed
  and implemented, can potentially enhance
  efficiency and the proper allocation of
  resources
• Social insurance schemes can stimulate the
  emergence of more risky, but more productive,
  jobs and industries
• Uninsured transient shocks which reduce
  individual consumption below a threshold needed
  to retain productivity can give rise to dynamic
  poverty traps and lead to chronic poverty.
• Uninsured risk also reduces efficiency through
  costly production and portfolio choices, such as
  the use of outdated but less risky production
  technologies
• Uninsured risk can adversely affect human capital
  accumulation, for example, when children are
  forced to drop out of school in the wake of an
  income shock
• But badly designed and expensive social risk
  management programs can be a critical obstacle
  for formal and informal job creation
• MILES framework reviewes the options for social
  risk management programs given the administrative
  and resource constraints and assess the benefits
  and costs of different options

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Operationalization of MILES approach 3 key
elements

1. The use of existing diagnostics tools to assess
   constraints to growth and job creation
2. The identification of policy priorities and
   required reforms
3. The promotion of a policy dialogue with policy
   makers and different stakeholders to identify a
   feasible strategy to foster more and better jobs.

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The use of existing diagnostics tools to assess
constraints

• Growth diagnostics
• New approach to economic reform, focusing on
  binding constraints and limited political capital
  
• 12 pilot countries (Armenia, the Baltic
  countries, Bangladesh, Bolivia, Brazil, Cambodia,
  Egypt, India, Madagascar, Morocco, Tanzania and
  Thailand)
• Doing Business (annually, latest 2008)
• Detailed set of indicators of the regulatory and
  institutional setting is available for over 140
  countries
• Help identify constraints for growth and job
  creation (Chapter 7 in WDR 2005)
• Investment Climate Assessments (regularly)
• Survey of 30-40 thousand firms around the world
  to assess constrains on the performances of
  different types of firms and, in particular,
  obstacles to job creation

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Implementation in client countries while
promoting dialogue with all stakeholders

• Review of the policy and institutional frameworks
  in countries, to identify the most binding
  constraints in key policy areas with have the
  most direct effect on employment
• Full list of requested reforms is unknowable or
  impractical
• Across-the board reforms have proven difficult
• Establish minimum policy consistency across
  sectors
• E.g. labor market plus benefit reform
  (flexicurity)
• Implementation of reforms to overcome the binding
  constraints and to create critical policy
  consistency
• Requires bringing key stakeholders and close
  cooperation across different ministries (MoF,
  MoL, MoE, etc), institutions, and social partners

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Implementation

• Drawing on flagship publication on job creation
  for ECA and LAC region
• Capturing lessons from MILERS pilots in a number
  of countries, including Armenia, the Baltic
  countries, Bangladesh, Bolivia, Brazil, Cambodia,
  Egypt, India, Madagascar, Morocco, Serbia,
  Tanzania, Thailand, Tunisia, and Turkey.
• Reviewing alternative identification of
  priorities (triangalization approach)
• Implementation of research strategy to fill
  existing and emerging knowledge gaps

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III. An operationally relevant research strategy
on Labor Market, Job Creation and Economic
Growth

• Stock taking conference on labor market issues in
  Nov. 2004 at World Bank
• Job creation under-focused dimension of
  development agenda
• Importance of LM institutions differs
  substantially across countries
• LM discussion is lacking a shared conceptual
  framework
• LM Research strategy that identifies research
  priorities for developing countries, with main
  consultation with interna-tional organizations,
  academic community and bi-laterals
• Implementation strategy, with leveraging on
  international research community and creation of
  new program in IZA/WB on Employment and
  Development

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Proposed List of Research Priorities

1. Improve diagnosis of the labor market and
   identification of vulnerability
2. Understand the linkages between investment
   climate, labor demand, and poverty
3. Identify the benefits/costs of structural
   reforms and globalization for workers
4. Understand the different aspects of formality and
   informality
5. Identify appropriate labor market regulations and
   institutions
6. Identify best practices in skills development and
   skills upgrading
7. Assess the role of international migration in
   smoothing labor market and demographic imbalances
   across countries and promote knowledge flows

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1. Improve diagnosis of the labor market and
identification of vulnerability

• Diagnostic tools to assess labor market
  conditions in countries at different stages of
  development
• Allowing for the comparison of labor market
  outcomes across countries
• Improving identification of vulnerability and
  social exclusion in the labor market

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2. Understand the linkages between investment
climate, labor demand, and poverty

• Existing bottlenecks in the investment climate
  affect the three main channels through which
  growth can affect poverty reduction
• the sustainable growth path
• the employment content of growth (i.e. the
  elasticity of employment to output growth)
• poverty-reduction effect of employment growth
  (the poverty elasticity to employment).
• Further required work
• Assessing labor demand in countries at different
  levels of development and with different
  investment climates
• Understanding the role of labor in the link
  between growth and poverty, especially in
  low-income countries

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3. Understand the Different Aspects of Formality
and Informality

• Investigating the dynamics and links of the
  formal and informal labor markets
• Identifying the effects of labor regulations and
  social protection programs on formality/informalit
  y
• Re-thinking social protection for informal
  workers

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4. The benefits/costs of structural reforms and
globalization for workers

• Identifying the main channels by which different
  types of reforms affect labor market outcomes
• The medium-term job growth prospects of
  structural reforms
• The optimal sequencing of reforms for job
  creation
• Best mechanisms of income support and
  re-deployment for reform-affected firms and
  workers.

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5. Identifying appropriate labor market
regulations and institutions

• Identifying the impacts of labor regulations on
  labor market and other economic and social
  outcomes
• Understanding the political economy of labor
  market reforms
• Identifying alternative protection mechanisms
  with lower economic costs
• Better understanding of labor standards and the
  role of social dialogue

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6. Identify best practices in skills development
and skills upgrading

• Identifying the role of labor force skills in
  determining economic outcomes in a context of
  globalization
• Identifying optimal government interventions for
  formal and on-the job training programs
• Identifying good practices for school to work
  transition

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7. International migration

• Understanding demographic disequilibria and skill
  gaps
• Assessing and improving the labor market impact
  in receiving countries
• Assessing and improving the labor market impact
  in sending countries
• Improving the portability of social benefits for
  migrant workers
• Improving employment services for prospective
  migrants in sending countries

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Implementation of Strategy

• Multi-donor trust fund that supports
• Scaling-up Research
• Support cutting-edge research by the global
  academic and research community on key policy
  issues related to good job creation (together
  with IZA to strengthen link with research
  community)
• Capacity Building
• Build capacity of developing country
  policy-makers and researchers on labor market
  data analysis, evaluation techniques, and good
  practice in labor market policy
• Actions on the ground
• Catalyze country-level activities to analyze
  specific labor market conditions and pilot
  promising approaches
• Dissemination strategies, including
• WB-IZA Employment and Development conferences
  (next in Morocco, Rabat, May-June 2008)