Sectoral Trends in Job Growth: Linking GDP and Employment in Emerging Markets

The study by the International Finance Corporation of the World Bank explores how GDP growth impacts employment in developing economies, revealing that job creation often lags due to rising productivity and high informality. It highlights sectoral and income-group disparities, emphasizing the need for tailored policies to promote formalization and inclusive growth.

Research by Constantin Burgi, Shoghik Hovhannisyan, and Camilo Mondragon-Velez from the International Finance Corporation of the World Bank, examines how economic growth influences employment trends across developing countries. Based on two decades of data and a robust theoretical framework, the study investigates the elasticity of employment growth relative to GDP increases. The findings reveal that employment growth generally lags behind GDP expansion, with elasticity values frequently below 1.0, highlighting the limited impact of economic growth on job creation in many sectors. This discrepancy is most pronounced in agriculture, where productivity improvements often lead to labor displacement. Manufacturing and services exhibit higher elasticities, but even these sectors face constraints linked to productivity gains and structural factors, particularly in economies with a high prevalence of informal employment.

The Impact of Informality on Employment Growth

The study delves into the relationship between informality and employment growth, emphasizing how economies with high levels of informal employment experience weaker job creation relative to GDP growth. Informality, encompassing self-employed individuals and unpaid workers, significantly hampers productivity and economic outcomes. The research demonstrates that informal employment not only reduces the potential for formal job creation but also perpetuates cycles of low wages and limited benefits. Drawing on data from the World Bank and the International Labor Organization, the authors analyze three key sectors agriculture, manufacturing, and services using diverse methodologies. Among these, a straightforward calculation of average annual elasticities emerges as the most reliable predictor of employment trends, capturing the nuances of the GDP-employment relationship in varying contexts.

Productivity Gains and Job Quality Improvements

A crucial finding of the research is the strong inverse relationship between labor productivity growth and informality. As productivity improves, informal employment declines, leading to better job quality and higher wages. This effect is particularly pronounced in manufacturing and services, where productivity-driven formalization contributes to poverty reduction and enhanced living standards. In agriculture, however, productivity gains often result in reduced employment as fewer workers are needed to maintain output levels. This sectoral divergence highlights the importance of tailored policies that address the unique dynamics of each industry. For instance, while agricultural productivity improvements may necessitate support for labor transitions, manufacturing, and services require strategies to foster skill development and formal sector expansion.

Disparities Across Income Levels and Sectors

The study also reveals significant disparities in GDP-employment elasticities across income groups and sectors. Low-income countries typically exhibit lower elasticities due to the dominance of informal employment and subsistence activities. In contrast, middle- and high-income countries show higher elasticities, especially in manufacturing and services, where economic growth translates more effectively into job creation. However, even in these contexts, rising productivity levels moderate the extent of employment growth. The research underscores that in many developing economies, job creation often results from reallocations within the labor force rather than net increases in employment, a dynamic driven by shifts from informal to formal sectors. This pattern calls for policies that prioritize formal sector growth to maximize the employment benefits of economic expansion.

Policy Implications for Inclusive Growth

The findings carry significant implications for policymakers seeking to link economic growth with meaningful job creation. The study highlights the importance of strategies that balance productivity improvements with efforts to formalize employment, particularly in sectors characterized by high informality. In agriculture, this could involve supporting smallholder farmers with technology, market access, and resources to scale operations and create formal jobs. For manufacturing and services, policies aimed at enhancing workforce skills, improving access to finance, and fostering private-sector investment can drive formal job creation and reduce reliance on informal work. Additionally, the authors call for more granular research into sector-specific trends and worker profiles to refine interventions and optimize employment outcomes.

Bridging Growth and Job Creation

By providing a nuanced understanding of the relationship between GDP growth and employment, this research challenges the assumption that economic expansion automatically results in proportional job creation. It underscores the complex interplay between productivity, informality, and labor market dynamics, offering valuable insights for crafting policies that foster inclusive and equitable growth. The study equips policymakers with tools to design targeted interventions that ensure the benefits of economic growth are broadly shared through the creation of quality jobs. As developing economies navigate the challenges of balancing growth with employment needs, this research serves as a critical resource for fostering sustainable and inclusive economic progress.