Climbing the Jobs Ladder: A Path to Reducing Poverty in Developing Nations

A new World Bank report, Does Climbing the Jobs Ladder Promote Poverty Reduction?, explores the impact of job transitions across the formal and informal sectors in 89 countries. The report finds that moving into higher-skilled informal jobs significantly reduces poverty, especially in developing nations. While formal education and urbanization play important roles, they are not sufficient to drive the creation of poverty-reducing jobs. Instead, the growth of small firms and upper-tier informal jobs emerges as a critical tool for poverty alleviation.

Informality, Education, and Poverty: The Unlikely Connections

A new World Bank report titled Does Climbing the Jobs Ladder Promote Poverty Reduction? sheds light on how job shifts across the formal and informal sectors have affected poverty levels in 89 countries over the last three decades. The research highlights that transitioning into high-skilled informal jobs, such as those held by managers and professionals, plays a crucial role in reducing extreme poverty.

While formal education is often viewed as a clear path to better jobs, this report suggests that it doesn’t automatically guarantee access to these poverty-reducing positions. The findings challenge the assumption that urbanization and formal education alone can lead to job growth in sectors that genuinely combat poverty. Instead, the report suggests that governments and industries need to focus on developing smaller firms and upper-tier informal sectors, especially in low-income and developing nations.

Upper-Tier Informal Jobs: A Powerful Tool for Poverty Reduction

In developing nations, informal work remains a key contributor to both employment and economic output. However, not all informal jobs are equal. The study classifies jobs into five categories, with lower-tier informal jobs like street vending or unskilled labor falling on the lower rungs of the employment ladder. In contrast, upper-tier informal jobs—positions requiring skills such as management, technical expertise, and entrepreneurship—are found to have a significant impact on poverty reduction.

According to the report, moving from a lower-tier informal job to an upper-tier informal position reduces poverty levels at extreme poverty lines of $1.90 and $3.20 per day. This is particularly important in low-income countries where a vast majority of the workforce still operates within informal economies.

However, as the report shows, these upper-tier informal jobs represent only a small fraction of the total workforce—about 2%—in most low- and middle-income countries. This finding emphasizes the need to create more of these skilled informal jobs to address the broader issue of poverty reduction.

The Role of Education and Firm Size in Climbing the Ladder

The report also challenges traditional thinking regarding education and its role in promoting economic mobility. While higher education is undoubtedly linked to formal wage employment, it doesn't automatically lead to the growth of upper-tier informal jobs. Workers with post-secondary education are more likely to find formal employment, but this may not be as impactful for poverty reduction at lower income levels. In fact, for individuals stuck in low-tier informal jobs, the transition to a higher-skilled informal job might offer more immediate and significant poverty reduction than a formal job.

Firm size also plays a critical role in this dynamic. The report shows that shifts in employment from micro-enterprises to slightly larger small firms (those with 6 to 20 employees) are strongly associated with an increase in upper-tier informal jobs. However, larger firms tend to be more linked with formal wage employment. This points to the importance of supporting small businesses in creating job opportunities that can lift people out of poverty.

Rural Versus Urban: The Challenges of Location

Another key finding of the study involves the disparity between rural and urban areas. In rural regions, workers are more likely to remain trapped in lower-tier informal jobs due to limited access to education and fewer job opportunities. Meanwhile, in urban areas, there is a stronger movement toward manufacturing and formal employment, although this is more pronounced in high-income countries.

Surprisingly, urbanization itself does not always correlate with a rise in skilled informal jobs. As countries develop, many assume that moving workers from rural areas to cities would naturally generate higher-skilled employment. However, this report reveals that this is not always the case, particularly in lower-income nations, where the influx of labor into cities may increase unemployment or keep workers in low-skilled informal positions.

Addressing the Complexities of Job Growth

The findings from Does Climbing the Jobs Ladder Promote Poverty Reduction? reveal the complex dynamics of job growth, education, and poverty. The report makes it clear that formal education and urbanization, while critical, are not the only pathways to reducing poverty. Instead, there must be a focus on fostering job opportunities within upper-tier informal sectors—particularly in developing and low-income nations—where even small increases in skilled informal employment can make a significant difference in lifting people out of extreme poverty.

The study concludes that creating more opportunities in upper-tier informal jobs, particularly through the development of small firms, is essential to achieving sustainable poverty reduction. Policymakers should target strategies that promote these opportunities, as they offer a realistic and impactful means to combat poverty in regions where formal job growth has been slow to materialize.