Employment And Inclusive Development: Contesting Conventional Wisdom

Iyanatul Islam

In a recently published book, my co-author Rizwanul Islam and I suggest that the notion of inclusive development should have the following attributes: (1) rapid, stable and sustainable per capita GDP growth; (2) sustained decline in income poverty; (3) sustained improvement in human development indicators, such as health, nutrition and education; (4) growth of productive employment that matches or exceeds labour force growth; (5) reduction in inequality; (6) social protection for all.

We highlight a series of propositions or proclamations that might be construed as conventional wisdom. Critically engaging with such conventional wisdom is necessary for deepening our understanding of policy actions that might enable a typically low or middle income country to make significant progress towards the laudable goal of inclusive development through the route of employment creation.

What are the propositions that constitute what we call conventional wisdom? Here is our interpretation. 

Growth is good for the poor and good for jobs

Growth is necessary for poverty to decline and for jobs to be created, but it is not sufficient. Both global evidence and country-specific experience suggest that various patterns in the growth-poverty-employment nexus are possible. In particular, one should be wary of ‘jobless growth’, an undesirable outcome in which the rate of per capita GDP growth is satisfactory, but jobs barely grow. This is not uncommon and requires actions on multiple fronts cutting across macroeconomic, sectoral and labour market policies.

Macroeconomic stability is fundamental to growth and employment creation

Macroeconomic stability is a necessary condition for growth and employment, but it is not sufficient. Hyperinflation and out-of-control budget deficits can lead to growth collapses. Restoring macroeconomic stability by itself will avert a crisis, but it is unlikely to kick-start self-sustaining growth and structural change that lies at the core of job creation. This does not mean that the conventional emphasis on macroeconomic instability is misplaced. Governments in developing countries should act as guardians of stability, but they should also act as agents of development. This means protecting citizens from the vagaries of economic volatility, engaging in a sustainable resource mobilization strategy to finance core development needs, promoting a competitive and inclusive financial system, ensuring that exchange rates do not become badly misaligned and engaging in prudent management of the capital account.

The biggest impediment to structural transformation in developing countries is premature de-industrialization

The notion of ‘premature de-industrialization’ can be attributed to the fact that the manufacturing sector in developing countries is unable to absorb a growing labour force entailing concomitant expansion of low productivity activities in the non-manufacturing sector.

We review the relevant evidence on premature deindustrialization and conclude that one should not adopt the view that manufacturing-led industrialization is the only route to economic prosperity. In large parts of the developing world of today, non-manufacturing activities are the primary sources of livelihood and will remain so in the long-term. Furthermore, the agricultural sector will continue to be a major source of livelihood for decades in low and lower middle income economies. At the same time, the non-renewable natural resources sector plays a crucial role in many cases, especially in Sub-Saharan Africa. These structural realities need to be addressed in a way that goes beyond the pessimism of premature deindustrialization.

A rights-based approach to employment raises unrealizable expectations among job seekers

In a developing country market economy where approximately 90 per cent of the jobs are created by the private sector, can the government really enforce the right to work for all? It is important to distinguish between the government as a direct provider of jobs and the government as an enabler of policies that support productive employment creation. Certainly, the public sector is a significant employer; it can also be an employer of last resort through public employment programmes, but these should be seen only as particular elements of an overall strategy for promoting jobs. Such an overall strategy provides the basis for a government to build a rights-based approach to work through ratification of international covenants and national legislation.  We suggest how one can use ILO conventions and instruments to operationalize the notion of the right to work. It is also important to make a distinction between right to work and rights at work. There is considerable consensus on the latter, with the vast majority of ILO member states having ratified the eight fundamental conventions pertaining to freedom of association, forced labour, discrimination and child labour. Hence, a rights-based approach to employment, entailing both right to work and rights at work is not as impractical as it seems.

Human capital is at the centre of growth and development and the major focus should be on primary education

A country with a good base of elementary education may be able to achieve economic growth up to a certain level and yet face constraints arising from the shortage of skilled workers at a higher level of development. If that is the case, countries would need to keep upgrading the level of their human capital as they achieve higher levels of economic development. There is also a need to avoid a ‘supply-side bias’. Simply increasing the pool of workers through the education and training system in an undifferentiated way is unlikely to respond to the changing requirements of the labour market. The net outcome is likely to be unemployed and underemployed educated workers representing a waste of human resources. Hence, human capital can play its due role in the development process provided a framework is in place that entails an appropriate utilization of the skills and talents embodied in the work-force and tailors policy interventions to anticipated changes in patterns of labour demand.

Young men and women find it difficult to get good jobs because they lack the requisite skills

Despite the reasonable view that poor youth employment outcomes are the product of demand and supply side factors that work in tandem, strategies and policies adopted at the national level are often found to be biased towards supply side interventions. When governments find it difficult to cope with fluctuations in aggregate demand either because they are committed to an economic austerity programme (as in the European Union today) or because such fluctuations stem from external sources, there is a tendency to look for an expedient explanation. This is conveniently provided by the notion that young people lack the requisite skills to meet the imperatives of a changing labour market. This usually paves the way for calls to revamp the education and training system, special initiatives such as youth entrepreneurship training, apprecenticeship schemes and other activation measures to keep young people focused on the need to nurture marketeable skills. They are certainly laudable interventions and governments can readily demonstrate that they are making an effort to look after the needs of young people. Yet, these initiatives are a partial solution to the problem of mass youth unemployment that often emerges in the wake of a major global recession. A strategy of inclusive growth demands that governments across the world recognize that poor youth employment outcomes are best handled by policy interventions that operate on both the demand and supply side of the economy.

Labour market regulations are the primary constraints on employment creation

An objective reading of the evidence does not enable one to make the claim that labour regulations – such as those pertaining to employment protection and minimum wages – represent the primary constraint on employment creation. Indeed, the evidence suggests that, across all regions of the world, firms identify multiple constraints on business operations, labour market regulations being one of them, but by no means the most important one. The quality of governance, access to finance, use of a reliable transport network, and reliable supply of electricity are usually more important constraints from a business perspective than labour regulations. Hence, if labour regulations are either substantially attenuated or removed, one cannot expect a major expansion of the private sector unless other remaining and more significant constraints are also tackled.

Developing countries should be wary of a comprehensive social protection system as it is likely to distort incentives, affect long-term growth and put a strain on public finances

The evidence does not support such concerns. Income transfers under a comprehensive social protection floor system are best seen as investment in human development rather than as unproductive current expenditure. Hence, they are compatible with a growth promoting strategy. The negative impact on incentives to work is not significant, while, on average, social protection systems can be financed on a sustainable basis. In any case, developing countries have demonstrated that they are capable of institutional innovations in the field of social protection as the popularity of conditional cash transfers and the relative success of employment guarantee schemes testify. The aim is to translate the principle of social protection within the particular environment of developing countries rather than seeking to replicate a Western-style social welfare state.