Labor Flows are Negatively Correlated with GDP: A Departure from Previous Literature
Donovan and coauthors’ first key result is that all labor flows are negatively correlated with GDP per capita. In other words, they show that people in the poorest countries move into employment, out of employment, and change jobs the most.
But what do these flows represent? There are several possible interpretations. One is that, because many developing countries are growing quickly, the observed flows could indicate that workers are moving to more productive jobs or that new technologies are pulling people into the labor market from unemployment. A more negative hypothesis is that the structure of developing countries makes it difficult to climb the job ladder into these more productive jobs, so these flows aren’t greatly contributing to growth.
This research is exactly what we’ve been waiting for” – Dorothea Schmidt-Klau, Senior Economist at the International Labour Organization's Employment Policy Department
The authors find more evidence in support of the latter explanation. In poorer countries, people aren’t consistently switching to higher paying jobs. Instead, these high flows are entirely accounted for by movement into and out of marginal jobs: informal wage work, self-employment, and low-earning formal jobs. At the heart of this issue is a “slippery” bottom of the job ladder. Non-employed people who start a job are substantially more likely to move back into non-employment in developing countries. Those who are lucky enough to move from a low to high paying job are likewise more likely to see their wages decline again or lose their job entirely. These results imply that the high labor flows observed in poorer countries are concentrated among the least well off within those countries, shuffling between various states and similar jobs rather than moving to better positions over time.
The importance of matching firms and workers
If labor flows in developing countries are concentrated among people who cannot consistently move to jobs where they are more productive, why can’t they find better jobs? Understanding the answer to this question is essential to designing policy solutions that address underlying causes rather than the symptoms of an inefficient labor market.
What they observe is that developing countries have more initial low-quality matches between firms and workers, but also more rapid exit from them. Such a pattern is consistent with a growing body of microeconomic experiments in the labor markets of developing countries which focus on information asymmetries between firms and workers. In rich countries, workers and firms have a variety of tools to uncover whether a match is likely to be successful before hiring. Firms can look at workers’ resumes and workers can learn information about whether the company meets their preferences, all before hiring. This information tends not to be as easily accessible in poorer countries. Instead, workers in developing countries become “experience goods,” meaning that workers and firms learn how well they suit each other only after the worker gets hired. That is, the firm and worker have to “experience” the match before realizing whether they are a good fit. This forces them to create more low quality matches to weed out the bad ones from the good.