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By David A. Robalino, Lead Economist — Labor and Youth Team Leader, the World Bank

A view of the Opera House in Sidney. ©David Robalino.

In late June I was in Canberra and Sydney on a trip organized by the Community of Practice on Employment and Social Safety Nets. The sponsors were the World Bank's Human Development Department of the Middle East and North Africa Region — the region with the world's highest youth unemployment rate. I joined delegations from Brazil, Lebanon, Tunisia, and Saudi Arabia for talks with government officials, which highlighted some good active labor market policies.

Back in the mid-1990s Australia drastically overhauled its employment services by moving from a public monopoly, the common model in middle- and low-income countries, to a system where all services are delivered by private providers and non-governmental agencies. Today, its main program — Jobs Services Australia (JSA), started in 2009 — is notable for paying providers based on results. Not surprisingly, the new system has outperformed the old one, even during the worst part of the recent global financial crisis. In fact, a recent OECD report says that JSA may have contributed to Australia's strong employment picture.

Payment Based on Results

The JSA supports job seekers and employers. The process begins with job seekers registering in public employment offices where they fill out a questionnaire about their socio-economic background, reasons for unemployment, and types of jobs they are looking for. Based on their responses, a computer (not a human-being) assigns them to one of four possible streams — Stream 1 is for those deemed "work ready"; the other three are for vulnerable individuals facing more severe constraints. All job seekers are then given a list of service providers in their region where they can go to receive support.

Delegations from Brazil, Lebanon, Tunisia, and
Saudi Arabia meeting with JSA representatives. ©David Robalino.

The core function of the providers is to manage each case by providing counseling, basic job-search assistance, and monitoring progress. The providers also manage a fixed budget, which is allotted to each job seeker depending on the stream (those in Stream 4 receive USD 60, while those in Stream 1 receive over USD 1,000). The budget — called the Employment Pathway Fund (EPF) — can be used to purchase other goods and services (such as technical and life skills training, therapy, clothing), or finance wage subsidies.

The fact that the EPF is managed by the provider is, I think, a key characteristic of the JSA, because it gives the flexibility to adapt the interventions to the needs of the beneficiary. Some providers, for instance, might decide that wage subsidies aren't needed and put more money instead on building job-readiness skills. In essence, there is no one program for all job seekers, which is the case with most active labor market programs across countries. What the Australians have is a general blueprint that can then be adapted to different population groups based on the constraints they face and the characteristics of the local economy.

The other key feature of the JSA is the system used to contract and pay services providers. First, they receive a fixed budget per job seeker to cover providing basic services. Second, they are paid based on results. For each job seeker that is employed for 13 weeks, they receive a payment, and then another if the job seeker remains employed after 26 weeks. The performance-based payments are quite significant. In Stream 3 average payments can total USD 2,000 per beneficiary, and in Stream 4 around USD 4,000. Plus those providers that also offer training or other services are reimbursed from the EPF.

Because the services providers have strong incentives to place workers and have the flexibility to design interventions, they can be quite innovative. One thing they do is to have dedicated "sales" staff. These are basically people who work full time in developing relationships with employers or employers association. They offer them human resource management services and help them recruit workers.

Key Features for Employment Services

This is a simplified description of the Australian system, which is actually quite complex and requires considerable levels of institutional capacity to get going. And many developing countries might not be able to cope with a similar type of program. Even so, the JSA experience points to a number of features that I think all countries should consider:
  • • Relying on providers (public or private) that are paid based on results.
  • • Using objective and simple surveys to assign job seekers to different levels of assistance without the need of a counselor.
  • • Targeting resources to the most vulnerable.
  • • Establishing a per capita budget to provide a minimum level of basic services (that depends on the degree of vulnerability) — essentially counseling, follow-up, and monitoring activities.
  • • Using a budget per capita that can be allocated to finance other activities (such as training and wage subsidies) tailored to the beneficiary.
  • • Relying on payments based on placements, which are considerably higher than the per capita budget for basic services.
It seems simple and obvious. Hopefully we will start to see some of these changes in more and more countries, particularly those who were part of our study tour.
Sean Blagsvedt is the CEO and Founder of

Jodphur, Rajasthan, India - Jan 29, 2009: Indian man sitting on motor bike talking into mobile phone. Jodhpur is blue city in north India, most buildings in old town area are painted in blue, even inside the rooms.
photo courtesy: ©2009 Tian Zhan
How can employers with low-skill job openings in the informal sector (such as for cooks, maids, security guards, and office helpers) efficiently connect with potential employees? In India, since 2007, there's been a Bangalore-based web and mobile start-up——trying to do that via the web, mobile apps, SMS, the mobile web, and voice services. We spoke with Sean Blagsvedt, the company's founder and Chief Executive Officer, who told us that Babajob now has a presence in every state in India, with about 500,000 registered job seekers and 70,000 employers using the platform. We asked how the government could help digital marketplaces? He said what's needed are less costly, standardized ways to secure accurate data on job seekers and verify their identities.
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Click here to watch the intro video.
Mary Hallward-Driemeier, Lead Economist, Office of the Chief Economist, World Bank

Whereas much attention has been paid to small and medium enterprises in recent years, many new papers are now looking more closely at larger firm growth – and the productivity, wage, and employment benefits that can result. Indeed, this was one of the many topics at the recent LACEA-LAMES conference in Peru (Nov 1-3) and the IZA-World Bank Employment and Development Conference in India (Nov. 5-6), which brought together two of the largest gatherings of research economists working on development. The JKP was active in both conferences and will blog about some of the findings presented at these events (including interviews with some of the speakers).

Today's blog highlights five working papers – all still works in progress - that look at questions of firm size and job creation. The papers argue from different perspectives that ignoring distortions that can keep firms from becoming large is costly. If the aim is to raise productivity and expand overall employment, the contribution of larger firms is critical.

IN080S07 World Bank
Worker in factory, 2008. India. Photo: © Ray Witlin / World Bank

Bigger firms may offer bigger economic benefits

We know that removing frictions to larger firm growth, particularly of productive ones, can significantly boost overall productivity and employment. After all, in most middle- and high-income countries, the majority of formal employment is in large firms. In addition, larger firms, on average, pay higher wages than smaller firms. This might be because larger firms may hire more skilled workers, use more sophisticated technology that raises productivity, or allow employees to gain more skills by working with a more diverse set of colleagues.

How big is the employer size wage effect? Using matched employer-employee data for Brazil, Alessandro Casalecchi and Naercio Menezes-Filho examined the issue in Brazil. Unlike earlier studies they have an 8-year panel, enabling them to follow workers across multiple jobs. Not surprisingly, controlling for the three types of fixed effects (characteristics of the firms, workers, and the matching between them) soaks up most of the variation – but not all. Whereas in the raw data firms with 1,000 employees paid 65 percent more than firms with 5 or less employees, controlling for the fixed effects reduces the unexplained wage premium to 19 percent. If larger firms provide more and higher paying jobs, enabling firms to grow is all the more important.

So which firms should we focus on? A paper by Hugo Hopehayn argues that the distortions that are likely to be disproportionately costly in terms of productivity and employment are those that keep more productive firms from growing. Rather than focus on distortions that simply move the entire size distribution down, he argues, focus on ones that skew the distribution such that firms with the greatest productivity potential are held back and are smaller than firms with lower productivity potential.

Born large or born to grow

The question of whether distortions affect the distribution of firms can also be looked at in terms of the growth dynamics of firms – and how they may vary for small and large firms. In my own work, I look at how large firms become large over time, whether they can start small and grow or do they need to begin as large firms. With more than 50 percent of all manufacturing workers in Chile employed in firms with 150 employees and more than 70 percent in Morocco, the dynamics of these large firms is a critical source of overall job creation. In both countries, the data show that for 10-year-old firms, 85 percent of them started as "large" – whether this is defined as more than 500 employees or even a lower cut-off of 150 or more employees. There is certainly more fluidity in size transitions lower down in the size distribution, but at the upper end, there does not appear to be nearly as much movement. That large firms can be born large could be understood as a lack of distortions, with firms able to access the needed capital and set up near their optimal scale. However, that relatively few firms expand significantly enough to join the group of large firms provides some concern about the reallocation process and the ability of more productive firms to grow. On-going work is examining how these processes of entry and firm growth by size vary with the degree of competition and between pre- and post- reform periods.

Enabling "high end entrepreneurs"

From the side of the entrepreneur, what helps predict who will be a "high end entrepreneur" - that is, those with greater potential to start a larger and more productive enterprise? Markus Poschke provides a theoretical model for choosing whether to be a worker or an entrepreneur (taking into account occupational choice, differences in workers' abilities, and an ex ante unknown productivity of start-up firms). He examines how institutions (particularly labor regulations, restrictions on entry, and taxes) not only affect the likely upside return to being an entrepreneur but also the relative costs of failure and thus the willingness to start a firm. His work helps explain why there can be relatively unproductive self-employed entrepreneurs earning less than wage workers, as well the trade-offs facing highly skilled potential entrepreneurs that affect the likelihood of larger enterprises being started. Proposed additional work includes calibrating the model to test how well it can predict the size distribution of firms in different countries.

Julian Messina, Caglar Ozden, and Miguel Salcedo are also interested in understanding the potential for "high end entrepreneurs" empirically. They seek to tease out the differences between entrepreneurial characteristics and the business environment by comparing the size and productivity distributions of new firms in various Latin American countries with the firms begun by immigrants from these countries in the United States. The selection of who the migrants are is an issue the authors are working to address; patterns in age and education do vary both within and across countries of origin. What is striking is a repeated pattern of productivity where there are two peaks in the distribution: most firms are relatively low productivity, but there is a second, albeit smaller set of higher productivity firms that are established in most of the countries. Shedding light on how to expand the scope for these higher productivity enterprises could help policy makers in Latin America who are keen to (re)vitalize entrepreneurship in their own countries.
By Gladys Lopez-Acevedo, Senior Economist, Poverty Reduction and Equity Department, the World Bank.

At the end of 2004, the Multifibre Arrangement (MFA) was finally phased out, and with it, 30 years of quota restrictions by industrial countries on textile and apparel imports from developing countries. As expected, this phase-out led to a substantial reallocation of production and employment worldwide. In 2008, 70 percent of global apparel exports came from developing countries, making the sector a critical engine of growth. It often provides entry into formal employment for the unskilled, the poor, and women, owing to the relatively low technology and the labor-intensive nature of the work.

In the post-MFA world, what exactly has happened to the apparel value chain—all the activities that cover a good’s production from conception to end-use. It’s a topic that few studies have examined (Gereffi and Frederick 2010; Frederick and Gereffi 2011; Staritz 2011). For that reason, the World Bank recently undertook a study (see “The Promise and Peril of Post-MFA Apparel Production”) to explore the effects of the MFA removal on employment, wages, inter-industry changes, working conditions, and related government policies. Case studies were conducted in nine countries: Bangladesh, Cambodia, Honduras, India, Mexico, Morocco, Pakistan, Sri Lanka, and Vietnam.

The results show that post-MFA, some countries gained while others lost. But contrary to expectations, it wasn’t just China that benefitted. What mattered was how countries prepared for the phase-out and if they continued innovating and upgrading in the value chain – such as shifting to higher-value goods or “modernizing” production techniques.

Key Lessons

First, export gains in the apparel industry were not simply owing to industry relocation from higher-wage countries to lower-wage ones – domestic policies mattered too. Global buyers try to maximize profits by minimizing costs, so it makes sense that production shifts in a labor-intensive industry might have been driven primarily by wage differences across countries. However, the study shows that only about a third of the variation in cross-country changes in apparel exports was driven by wage differences. The rest came from domestic policies targeting the apparel sector, ownership type, and functional upgrading of the industry.

Second, changes in exports usually, but not always, matched changes in wages and employment. This finding shows that using exports as a metric of “success” for helping the poor isn’t sufficient. While rising exports correlated with rising wages and apparel jobs in the large Asian countries, rising exports coincided with fewer apparel jobs in Sri Lanka. In Mexico and Honduras, both exports and apparel jobs fell, but Mexico – unlike Honduras – was able to absorb these workers into other industries. If the country is moving into a more advanced manufacturing, moving out of apparel may be a sign of economic development.

Third, the changes in the “apparel premium” were predictable: rising (in most cases) in the winners and falling in the losers. This matters because the apparel premium over other industries is the critical component of wages that helps lift workers from poverty (De Hoyos et al., 2008, and Robertson et al, 2009). So not only are job opportunities generally lost when exports contract and gained when exports expand, but one of the key features that made these “good” jobs—the wage premiums—is also lost (or gained), representing a double impact for workers in developing countries.

Fourth, the countries with larger increases in apparel exports – such as India, Bangladesh, Vietnam, and Pakistan – promoted apparel sector upgrading, while those that didn’t ended up with smaller increases or even falling exports (like Honduras). Although this may imply that upgrading facilitates competitiveness, upgrading doesn’t always boost jobs or wages. In fact, the opposite might be true (as in Sri Lanka, where upgrading coincided with more exports but fewer jobs, particularly for women). Moreover, some countries (such as Cambodia and Bangladesh) expanded employment while staying at lower levels of the value chain. Because upgrading often requires workers with more advanced skills, less labor demand affects mostly low-skilled poor; hence the need for targeted workforce development.

Fifth, better labor conditions and worker treatment made a difference. In an industry driven by buyers sensitive to importing countries’ reputation, a concern for labor conditions and worker treatment may be more than a labor rights issue. Better working conditions may also give a competitive advantage, as occurred in Cambodia.

A major policy concern is that the opportunities for pro-poor apparel production may be short-lived and are highly sensitive to changes in the global economic environment. Thus, for economies that are gaining, it is important to know who is benefitting and what conditions are necessary for the poor to benefit from the policy change. If the poor aren’t benefitting, policy makers need to ask why and to determine what, if anything, might be done to help the poor capture some of the gains.
Cai Fang is the Director of the Institute of Population and Labor Economics, Chinese Academy of Social Sciences. He was interviewed by the JKP on March 13, 2012
For China, one of the fastest growing economies in the world, a huge challenge is balancing growth between the booming coastal areas and the inland areas. We spoke about this and China's labor market with Cai Fang, Professor and Director of the Institute of Population Economics at the Chinese Academy of Social Sciences - and one of China's most influential economists. He described how efforts to balance growth are affecting China's huge migrant worker population, which typically lacks the formal employment contracts enjoyed by urban workers. He also stressed the need to find jobs for 6 million new university graduates each year.


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John Haltiwanger is a Professor of Economics at University of Maryland. Professor Haltiwanger was interviewed by the JKP on March 13, 2012.
There is a great deal of variation in how efficiently different firms make the same products.  This pattern is found in all countries.  Professor Haltiwanger addresses what this dispersion in productivity implies -- for opportunities to create jobs and to improve productivity.


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