This Friday we begin the study of the relationship between the labor market, economic growth, and poverty reduction. As usual, from Raj Nallari and Breda Griffith's lecture notes.

The labor market represents one of the main conduits through which economic growth can help to reduce poverty.  Economic growth arises from increases in employment and/or productivity (how employment-intensive economic growth is and what part of growth is due to labor productivity will be discussed).  And, from the flip side, an economy’s failure to translate economic growth into employment opportunities can stunt its efforts to reduce poverty. Labor is the main asset of poor people and jobs represent the main pathway out of poverty for the poor. Furthermore, labor is an important factor of production for firms.

The functioning of countries’ labor markets is affected by a wide array of factors, including not only labor market conditions (labor regulations, tax wedges, and so on), but also natural endowments, cultural factors, and long-run economic performance.  Furthermore, external factors such as globalization and technological change play an increasing part in determining labor market outcomes within countries.  

Given its importance, strengthening and improving labor market conditions should bring about tangible improvements in poverty. In the short run, this will require measures that make the labor market more flexible, while closing the gap between labor supply and demand in the long run requires slower yielding policies, including improvements in human capital and training.   

During the next few Fridays we will analyze “labor friendliness” of economic growth, a recurring theme of the developing economy literature. We shall see that labor friendly economic growth, while sometimes useful, is a double edged sword, representing also low labor productivity growth. We will also analyze the links between the investment climate and labor market performance. We will conclude by examining labor supply trends of particular interest to developing countries, including in terms of labor force growth rates (high in developing countries), unemployment (generally accompanied by informal sector employment and underemployment in developing country cases), wages (highly unequal in certain regions), and gender issues (also highly unequal in many countries).