The health of an economy is often gauged by examining the flow of labor, and particularly the movement into work from unemployment. Given the complexity of the labor market, analyzing such flows is far from straightforward, however.
Research from Yale aims to help by providing a dataset of labor information from nearly 50 countries. The dataset, which incorporates over 80 million individuals has enabled a number of interesting findings to emerge.
Labor patterns
One of the key findings of the study is that people in poorer countries seem to move into and out of employment the most, while also being more likely to change jobs.
However, the nature of these labor flows requires further examination and offers several potential interpretations. One perspective suggests that the observed flows may indicate workers transitioning to more productive jobs in rapidly growing developing countries, potentially driven by the introduction of new technologies or the pull of employment opportunities from unemployment.
Alternatively, a less optimistic hypothesis posits that the structure of these developing countries poses challenges in terms of upward mobility, resulting in limited contributions of these flows to overall growth.
The authors find greater support for the latter explanation. In economically disadvantaged nations, individuals are not consistently transitioning to higher-paying positions. Instead, the significant labor flows primarily involve movement into and out of marginal jobs, encompassing informal wage work, self-employment, and low-earning formal employment.
Precarious work
At the core of this issue lies a precarious lower rung of the job ladder. Individuals who transition from non-employment to a job in developing countries are notably more likely to return to non-employment. Similarly, those fortunate enough to shift from low-paying to higher-paying positions often experience subsequent wage declines or even job loss.
These findings imply that the substantial labor flows observed in poorer countries predominantly involve the least well-off individuals, engaged in a cycle of shuffling between various states and similar job conditions, rather than progressing towards better positions over time.
The concentration of labor flows among those who struggle to secure consistently productive jobs prompts the question: why do they face difficulties in finding better employment opportunities? Understanding the answer to this question is crucial for devising policy solutions that address the underlying causes rather than merely treating the symptoms of an inefficient labor market.
Developing markets
The researchers observe that developing countries tend to exhibit a higher prevalence of initial low-quality matches between firms and workers, but also experience more rapid separations from such matches.
This pattern aligns with a growing body of microeconomic experiments conducted in developing countries labor markets, which highlight information asymmetries between firms and workers. In wealthier nations, both parties have access to a range of tools for assessing the likelihood of a successful match prior to hiring.
Firms can review résumés, while workers can gather information to assess if a company aligns with their preferences, all before making employment decisions. However, such easily accessible information is less prevalent in poorer countries. Consequently, workers in developing countries become what can be termed “experience goods,” meaning that the quality of the match between workers and firms is only realized after the worker is hired.
In other words, firms and workers must “experience” the match before determining its suitability. This dynamic leads to a higher incidence of low-quality matches, serving as a mechanism to filter out unfavorable matches and identify more favorable ones.
The significance of this research lies in its extensive scope, as it analyzes a wide range of countries, yielding highly unexpected and empirically robust results. While the authors acknowledge the challenges of deriving direct policy implications from cross-country data, they express optimism that this study will stimulate further research, ultimately yielding more targeted and context-specific solutions to address these issues in labor markets.
