Why jobs matter and how to create them

Creating jobs is widely seen as one of the most effective ways to reduce poverty. But while the link between jobs, growth and development is clear, the path to getting there is far less straightforward. What role can governments and donors play in shaping labour markets?

Creating jobs has long been at the heart of efforts to reduce poverty and build stronger economies.

Simply put, the reasoning behind these efforts is: Poverty reduction and job creation are in many ways inextricably connected. To get people out of poverty, they need a job. And for jobs to be plentiful, a country needs economic growth. 

But how do we get there? Will the market create these dynamics on its own, or does it need a push from governments and donors? And if so, when and how? 

David McKenzie, Lead Economist in the World Bank’s Development Research Group, recently participated at the Jobs Network closing workshop in Bergen. In discussing poverty alleviation, job creation and the need for active measures taken by governments and donors, he points to the basics of market dynamics:

-We know that economic growth is the most important factor. When the economy grows, jobs flourish. So the question is: How do we facilitate the conditions that create economic growth?

Creating connections, generating activity
When we see market imperfections, such as markets that are not clearing, or a potential labour force that does not have the skills that the markets need, governments and donors can play a crucial role by putting into place the conditions for economic growth: for example, good institutions, access to finance, and education.

Should we do more on top of that? Before implementing measures, we should start by asking the right questions, argues McKenzie. 

-What is the main challenge: is it low productivity, a lack of customers, a mismatch between available skills and what the market needs? Or do people simply not live where the jobs are?

China went to an extreme that has also contributed to the country’s success in alleviating poverty. 800 million people were lifted out of extreme poverty in four decades, thanks to targeted policies. 

-China achieved massive economic growth, in part by moving people from the countryside to cities where the factories were located, says McKenzie. 

But extreme measures also have a flipside. Which opportunities do governments and donors have to stimulate economic growth and job creation that are less invasive?

A different example can be found in Ethiopia. Since 2010, the Ethiopian government has invested one billion USD annually in industrial parks, aiming to create more jobs in the country’s industrial sector, but the experiences have been mixed. Many, especially women, have gotten a job that has contributed to increase the household’s income, but the effects have been short-term. The industrial parks are also faced with a massive turnover: 10 % quit during their first day of work. 

McKenzie argues that the experiences from Ethiopia’s industrial parks show that a holistic approach to job creation is needed.

-People do not simply want a job, they also want flexibility, and decent working conditions, he says. 

Yet, for the millions of people in low-income countries that are self-employed, the reality is far away from industrial parks and large-scale employers. For many small firms, the challenge is simply that the number of customers is scarce: In rural settings in countries where people struggle to make ends meet, the customer base is simply not there.

In such cases, but also as a generally overarching move for boosting the economy, creating good physical connections linking rural to urban areas is crucial. Good transport infrastructure, like roads and railways, supports economic growth which in turn reduces poverty. 

-Expanding and strengthening the transport infrastructure generates economic activity, says McKenzie.

The value of training
The vast majority of firms and jobs are in self-employment. In Africa alone, according to statistics McKenzie presented during the Jobs Network workshop, there are 244 million firms, out of which 232 million are one person firms. In all likelihood, many of them will fail. Will business training help more small-scale entrepreneurs survive? Numerous studies on the effects of business skills training show limited results, at least when it comes to the overarching goal of business growth.

-The basic ‘improve your business skills’ training has proved inefficient when it comes to job creation. It is beneficial for raising the business owner’s profits but does not lead to more jobs, says McKenzie. 

Yet, skills matter. One side of the story is the general level of education, and governments who want economic growth must invest in the educational sector. A strong pool of human capital makes it more interesting for large international firms to invest. But in order to ’close the deal’, there also needs to be a match between the competencies on offer and what large international firms need.

Governments can contribute by implementing policies that facilitate training of workers in specific areas that are important for targeted industries. 

Coordination is key, according to McKenzie. Costa Rica’s success in getting the Intel Corporation to establish in the country in the late 90’s is a good example. In this instance, the Costa Rican government worked closely with the company to develop and see through programmes that gave workers the skills the Intel Corporation needed. The government also implemented tax policies and invested in infrastructure to make investment even more attractive.

McKenzie also refers to experiences from Colombia’s auto industry that shows a clear value of management training: Better management practices have strong potential to drive business success.

-So it’s not that training doesn’t work, it’s that not all training works in the same way. 

The challenge for policymakers is to invest in the right kind of training, targeted at the right needs, and aligned with the realities of the market.