Perhaps the most fundamental finding from Jobs Diagnostics is that it isn’t adding more of the existing stock of jobs that raises a country’s per capita income. Rather, it is improving the productivity of a country’s jobs that matters more.
When we split the sources of per capita income growth into productivity and demographic factors, we find that for the 95 countries for which data from 1991-2001 is available, it is growth in labor productivity that is most closely associated with per capita income growth as shown in chart 1. Demographic factors such as growth in the working age as a share of the population or growth in the labor force participation and employment rates matter much less. Labor productivity growth explains 79 percent of the change in per capita incomes on average during the period, with growth in the working age share of the population contributing 17 percent, growth in labor force participation 4 percent, and growth in the employment rate nothing at all on average.
Part of the reason, as we showed in the study “Pathways to Better Jobs,” is that employment rates are often high in poorer countries, since people work – often in low productivity jobs – because they cannot afford not to. In these countries, labor force participation first falls with economic prosperity, and then rises again when an improved quality of work eventually entices people back into the workforce. We will return to this topic in a future blog.
However, sustained productivity growth is likely to require structural change, and without structural change, Low Income Countries (LICs) are unlikely to reduce poverty in the long run. The two countries’ experiences in chart 2 bear this out quite starkly. Vietnam dramatically reduced poverty with a transformation in the jobs available to workers in the economy from the early 1990s. Zambia didn’t. In 1991, Vietnam’s per capita GDP was just 44 percent of Zambia’s. Poverty headcount ratios at $1.90 a day (2011 PPP) were similar for the two countries, at 54.1 percent of the population in Zambia in 1991 and 52.9 percent in Vietnam in 1992.
Chart 2: Vietnam Generated Millions of Waged Jobs in Manufacturing, Zambia had a Copper Price Boom
Between 1991 and 2004, Vietnam’s per capita income grew at 6 percent annually on average and Zambia’s by only 0.45 percent. Average labor productivity grew by 5 percent annually in Vietnam, and by just 0.04 percent in Zambia. By 2004, Vietnam’s poverty rate had fallen to 26.5 percent, whilst Zambia’s rose to 56.7 percent, underscoring the importance of growth in labor productivity and per capita income to poverty reduction.
However, in the decade after, Zambia also enjoyed healthy economic growth and a change in the share of GDP in favor of industry and especially services, without moving the needle on poverty reduction. From 2004-2015, Zambia’s per capita income growth was 3.9 percent compared to 5.2 percent in Vietnam. Labor productivity growth in Zambia was a creditable 3.35 percent on average compared to 4.36 in Vietnam, and interestingly the level of average labor productivity in Zambia remained higher than in Vietnam.
And yet, despite this acceleration in productivity growth from 2004-2015, Zambia’s poverty rate increased again to 57.5 percent in 2015, whilst Vietnam’s dropped dramatically to an estimated 2 percent. The main differences were that Vietnam rapidly increased employment in waged jobs in manufacturing, whereas Zambia did not. By 2015, Vietnam had 20.6 million waged jobs (41 percent of total employment, and more than in family farming). In contrast, Zambia had only 17 percent of employed workers in waged jobs, and 67 percent in agriculture. We take up the link between waged jobs and poverty in two future blogs in this series.
The Jobs and Economic Transformation (JET) agenda is as much about creating better jobs as it is about GDP growth. As we shall see through this blog series, a big part of the story of success in jobs is what happens to jobs with structural change, which types of jobs are created, who benefits, and how many workers are included in economic transformation.