600M Jobs Needed

Six hundred million! The number is so large, it’s almost incomprehensible. Yet that’s how many new jobs the world needs by 2020, according to a 2013 World Bank World Development Report.

Joblessness is a global crisis. Most of the world’s 200 million unemployed are women and young people living in developing countries. Without jobs, they cannot care for themselves or their families. The result: poverty, and social and economic unrest.

The associated increase in income allows consumption of basic goods and services above poverty thresholds: as average household income rises by two percent per year, poverty rates are reduced between 1.2 and seven percent, depending on country’s circumstances. Jobs are the principal way out of poverty for people in developing countries.

A recent survey had 60,000 poor people citing jobs as their best pathway out of poverty through self-employment, i.e., running their own businesses, and/or income from wages or salaries.

Suffice to say that the solution to the current employment crisis can only come from the private sector, as it provides some 90 percent of the jobs in the world. But the question of what kind of firms would create the most jobs becomes expedient with the surging global population.

According to a recent International Finance Corporation (IFC) Jobs Study, the largest share of employment in developing countries belongs to small and medium enterprises (SMEs). Furthermore, if micro enterprises are included, then in fact, the largest share belongs to micro and small enterprises.

This fact is likely driven by institutional and financial constraints that result in a high degree of informality of the economy and prevent the smallest firms from formalizing and growing into larger, formal firms.

Jobs in SMEs account for more than half of all formal employment worldwide. This is especially true in developing countries, where SMEs represent on average, about 66 percent of permanent and full-time employments. For example, Argentina, Bolivia, El Salvador, and Mexico have fewer than 10 workers, and about 90 percent of manufacturing establishments employ five to 49 workers in China, India, Indonesia, Korea, the Philippines, and Taiwan.

While SMEs account for 45 percent of formal employment, employment in the informal sector (the informal sector consists especially of micro, small and medium enterprises) in developing countries accounts for about half or even more of the total labour force.

The variation in job contributions by small, medium, and large firms becomes apparent when analysed by national income levels, analysts say.

In high-income countries, large firms have the highest share of employment, followed by medium-size firms, with small firms having the lowest share of employment. However, the opposite is true for low-income countries. It might not even be small and medium but in fact, micro and medium enterprises that have the highest share of employment in the developing countries, even for middle-income developing countries, according to the World Development Report (WDR) 2013 on jobs.

This ‘‘stunted’’ growth of SMEs in the developing countries is likely to reduce productivity, as well as slow down growth and poverty reduction.

Experts say small firms drive employment growth in developing countries, but they are also much more likely to enter and go out of business. This might be indicative of the fact that, due to various constraints, small firms are unable to grow into larger ones. Removing such constraints will disproportionately benefit MSMEs and allow them to grow into larger firms.

Source: Economic Tribune/Ghana