Part I: Special Chapter: Toward Higher Quality Employment in Asia
Table of Contents
- Introduction and Background
- What is Higher Quality Employment?
- Why is the Quality of Employment Important?
- Patterns and Trends in the Quality of Employment
- Selected Interventions to Promote Higher Quality Employment
- Appendix: Cross Country Regression Models of Poverty Changes and Formalization of Employment
Of all the regions in the world, developing Asia has experienced the most momentous change over the last five decades. The region has enjoyed tremendous economic growth, with real gross domestic product (GDP) per capita (in 2005 purchasing power parity terms) growing by an average of 6.4% per year between 1990 and 2008, substantially faster than in countries of the Organisation for Economic Co-operation and Development (OECD), at 1.8%; Latin America and the Caribbean, at 1.9%; and developing Europe, at 1.1%. Asia’s growth has been led by the People’s Republic of China (PRC), with 9.1% average annual growth in real per capita income; India, with 4.9%; and the Republic of Korea, with 4.6%. Per capita incomes of the PRC, India, and the Republic of Korea have grown by 5.2, 2.2, and 2.2 times, respectively, during this period.
The strong economic growth has been accompanied by growth in employment and, in turn, poverty reduction. Employment in developing Asia grew by an average annual rate of 1.5%, significantly faster than the OECD at 0.9%, and developing Europe at 0.1%, although not as rapidly as in Latin America and the Caribbean, at 2.5%. Living standards have improved for billions of people. Wan and Sebastian (forthcoming) estimated that the number of people in developing Asia living on less than $1.25 per day in purchasing power parity terms fell from 903 million to 754 million just between 2005 and 2008.
Behind this rosy picture of economic growth, job creation, and poverty reduction, is the reality that these achievements have been largely unequal and the quality of job creation in Asia has been inadequate. Many low-income economies have had only mild poverty reduction and job creation. Even in emerging economies that have experienced substantial job creation, it has largely been driven by massive structural transformation (the PRC is a good example) from the low-productivity traditional sector to low-cost manufacturing created by high export-led growth. In these economies, the Lewis model of development applies, where “unlimited supplies of labor” from the traditional sector are attracted to the modern sector (Lewis 1954). Due to the low opportunity cost of this surplus labor, the modern sector is able to obtain large profits, and thus make further investments. While structural transformation from the traditional to the manufacturing sector increases society’s welfare, in general the transformation has failed to significantly improve the quality of jobs in the modern sector. Globalization has added to the challenge, as the pressure to remain competitive has created even greater incentives to keep the cost of labor low and employment relations informal. Moreover, in some emerging economies, the Lewis model may soon no longer hold as the supply of labor from the traditional sector dwindles. The modern sector in these countries will need to move to higher value-added production to ensure that the quality of employment continues to rise.
Many low-income economies in Asia have barely begun their transition from the traditional to the modern sector. Examples include Cambodia, where 78% of the employed still work in agriculture, Nepal (67%), and Viet Nam (58%). In these economies, high population growth exacerbates the low earnings received in the traditional sector. As such, overall quality of employment remains low.
It is difficult to measure the quality of employment in a manner that takes into account all possible tradeoffs between its different dimensions, or accurately quantifies differences in subjective evaluations. For the purposes of this chapter, the quality of employment is primarily measured by the status of employment and/or the ratio of employment in the informal sector. While informal employment offers a cushion to workers during economic crises, the benefits of informal employment may not be sufficient to achieve an acceptable standard of living because informal employment rarely comes with adequate wages, good working conditions, and social protection (e.g., Pratap and Quintin 2006). While there are clearly exceptions, informal employment can be taken as a rough proxy for lower quality employment.
This study finds that Asia lags far behind other regions (e.g., Europe and North America) in generating quality jobs, even though Asia has been catching up in recent years. While the region’s employment growth rate has exceeded its population growth, growth in employment has not kept pace with growth in the labor force and the unemployment rate has been rising. However, although the share of workers in informal employment has decreased in developing Asia, it continues to have one of the largest shares of informal employment in the employed population. Developing Asia’s informal employment share at 67% is over twice that of Latin America and the Caribbean and almost 9 times that of the OECD. Uncertain incomes, poor environmental conditions, and mismatches between jobs and skills availability in informal sectors also create inefficiencies in the workplace that reduce social welfare and lower productivity. Thus, generating more and higher quality employment is a continuing challenge for Asia and the Pacific.
Improving the quality of employment is important to sustain Asia’s growth and stability. The quality of jobs is important for reducing poverty and income inequality. When economic growth creates more and better (higher paying) jobs, there is an immediate effect on poverty reduction. When there is jobless growth, poverty reduction usually stalls. The quality of jobs is also important in noneconomic frontiers, such as social cohesion and political stability. Due to greater social awareness and the rapid spread of information technology (and social networking), people are less satisfied with just having more income. Instead, they are now more concerned about relative income and social standing. People are also demanding more transparency and responsiveness from their governments. Thus, without inclusive growth it will be difficult to maintain stable economic growth in Asia.
The growth of higher quality employment in Asia also has an important role to play in “rebalancing” the global economy. The demand for consumer goods in the developed world (e.g., Europe, Japan, and the United States), which has been a key driver of the global economy, will likely remain sluggish as households in these countries are engaged in a long and painful process of deleveraging—i.e., increased saving in an effort to reduce their high levels of debt and to rebuild lost wealth. The emerging middle class consumers of Asia, especially in the PRC and India, can become the next leading global consumers, and assume the role that the American and European middle classes have traditionally played in the world order. By 2030, developing Asia may comprise 43% of worldwide consumption (ADB 2010). Rebalancing Asia from an export-led to a more diversified growth will depend on the growth of domestic spending, which in turn will depend on the growth of good (i.e., stable and well-paid) jobs (Kharas and Gertz 2010). Having a more diversified growth will also serve to reduce Asia’s vulnerabilities to external shocks.
Asia is a region of tremendous cultural, historical, and economic diversity. It contains low income, agrarian economies with high rates of population and labor force growth. It also contains some of the most modern cities and economies in the world. This breadth of experiences and characteristics requires that any policy prescription to improve the quality of employment must be carefully tailored to the particular economy where it is to be applied. At the same time, some general principles can be derived to help this enormous and diverse region move toward higher quality employment. Productivity growth and speeding the structural transformation are potentially keys to achieving higher quality employment, as developing Asia has a much higher share of workers that remain employed in the lowproductivity agricultural sector (43.5%) than other regions.
For countries with low population growth and that have successfully transformed their economies from the traditional to the modern sector, an important challenge is how to relocate employment away from low-wage manufacturing jobs toward more high-paying jobs. The relocation will necessitate greater industrial diversification and promotion of industries with higher value added. In other words, such economies need to go beyond the Lewis model and find ways to further increase labor productivity. These economies also need to enhance the quality and safety of employment in general, which is one way to avoid the middle income trap and allow the emerging economies to achieve high-income status.
For countries that still have a large traditional sector and high rates of population growth, the challenge is to create enough productive jobs to absorb new entrants into the labor force and promote transition from the traditional to the modern sector (which itself may improve the quality of employment). However, considering the significant amount of time needed to achieve this transition, such countries also need to enhance the quality of current employment and protect minimum workers’ rights in the traditional sector.
In general, this chapter argues that active public intervention may be needed to create higher quality employment on a sustained basis, through opening the economy to trade and competition, promoting rural–urban migration for labor, developing skills and human capital through education and training, investing in innovation, strengthening the business climate with infrastructure services and moderate regulation, and providing social protection. By trying to develop higher quality employment and ultimately improving productivity, Asia can continue to achieve progress toward more sustainable, stable, and inclusive economic growth.
As trying to capture the quality of employment is not straightforward, the next section discusses various aspects of employment quality. The third section details the importance of the quality of employment to social and economic outcomes. The fourth section examines patterns and trends in employment and the quality of employment in Asia to clarify the current state of development and identify which countries may face particular constraints or need further interventions to help the quality of employment. The last section explores a range of policy interventions aimed at raising the quality of employment in different developing Asian economies, and then concludes.