Do global value chains create jobs?

Lower-income countries that have been successful in attracting GVC investment often experience a significant increase in formal manufacturing jobs. In Bangladesh, for example, the emergence of the GVC-oriented export apparel sector led to the employment of more than three million people over the last two decades. On a smaller scale, Lesotho’s integration into the global apparel sector in the late 1990s transformed the structure of the economy, generating more than 50,000 manufacturing jobs—employing up to 10% of the workforce—in what was previously an almost fully agrarian economy. But the impact goes beyond the formal sector, as the growth of large, GVC-linked formal companies also increases the opportunities for subcontracting and other spillovers to smaller and informal firms. This is very common in sectors such as clothing and footwear.

But it is also important to recognize that a large increase in jobs in developing countries that results from GVC investment does not necessarily imply an increase in “labor intensity” (i.e. a larger expenditure of labor relative to capital). In fact, it is usually just the opposite. For any given volume of output, GVC participation will actually result in fewer jobs. This is because participation in GVCs requires companies to invest in improved technologies and to meet productivity requirements and strict quality standards, and because growth in output allows firms to gain productivity from scale economies.

But developing countries are not a monolith, and the scale and nature of jobs impacts from GVCs will depend crucially on comparative advantage for hosting labor-intensive stages of production. A recent analysis of South Africa’s integration into the global automotive value chain during the 2000s highlights the complexity of the GVC job-creation story. While GVC integration coincided with a sharp decline in labor intensity of automotive exports (from $37 of labor per $100 of exports in 2001 to below $30 in 2011), significant nominal growth in jobs occurred as a result of the automotive sector’s extensive backward links to the domestic economy. While each direct job in the automotive sector was linked with one indirect job in 2001 (such as in a steel plant or an accounting firm, for example), by 2013 it was linked with three indirect jobs. Moreover, most of these jobs gains came through backward links to the domestic services sector rather than manufacturing (Figure 1).

Wages

At an aggregate level, the fact that GVC-oriented investment is concentrated on low-wage economies is supported by evidence showing that wage differences across locations are a substantial predictor of employment generated by new entry of multinational firms, and that changes in cross-country relative wages have large employment effects [4]. On the other hand, there exists a considerable amount of evidence showing that multinational firms pay higher wages than similar firms (i.e. in the same sector) located in the host economy [5]. This wage premium paid by foreign firms may reflect a number of factors, such as higher productivity, the fact that these firms employ the most skilled workers, a strategy to mitigate worker turnover, or simply a lack of sufficient knowledge of local labor markets. Whatever the reason, it suggests a positive aggregate story: GVC-oriented multinational firms improve their productivity by concentrating labor-intensive activities in low-wage countries, but in doing so they raise wage levels in those countries.

Of course, from a development perspective at the national level, the question is what happens over time. Development requires wage growth to move workers out of poverty and into higher income levels. But if those same factors that allowed globally “footloose” firms (i.e. firms that are not tied to any particular location or country) to locate in the host economy also allow them to just as easily shift out to a lower-cost location, countries may be locked into a “race to the bottom” on costs, which will most likely result in suppression of wages. The answer is improving productivity, as well as moving to higher value-added segments of GVCs that can support higher wages. What matters are unit labor costs, not wages per se.

A key part of the wage growth story is human-capital development. Empirical evidence shows that multinational investors tend to spend more than domestic firms on the training of workers, although this is far from consistent across sectors, countries, and FDI source countries [6]. This investment in training matters because, as shown in one of few studies that has been able to match data on firms with that on workers in those specific firms, the “foreign wage premium” only emerges over time and is explained only by workers that receive on-the-job training [7].

Inclusion

For many developing countries, attracting GVC-oriented investment contributes to more “inclusive” job creation (i.e. it allows access to jobs for youth, women, and lower-skilled workers), as demand is largely for lower-skilled, labor-intensive activities. In fact, in the sectors most intensely traded in GVCs—apparel, footwear, and electronics—employment is highly concentrated among lower-skilled, young female workers. And employment of these workers often draws workers from lagging, rural areas. However, developing countries that are more competitive in technology and skills-intensive activities may face, like more advanced economies, sharpening disparities, as demand for labor is biased toward higher-skilled workers. Indeed, this same challenge is experienced by low-income countries as they seek to upgrade to higher value-added positions within value chains. For example, as a firm and a sector shift to more skills, and capital-intensive activities, it is common to see a significant shift from female to male employment—described as a “defeminization” of the labor force [8]. This is for a variety of reasons including skills, but also cultural factors, where jobs involving machinery may be viewed as being more suitable for men than women.

Another aspect of inclusiveness is the nature of the firms that participate in GVCs. The strict standards and quality certification requirements that are common in most GVCs imposes a cost of compliance that is often more difficult for smaller firms to bear. Thus, SMEs often find themselves locked out of GVC participation. This is true in agricultural sectors, where, for example, commercial farms and large plantations are better positioned to comply with supermarket standards than small and medium producers.

Working conditions

Finally, any assessment of the employment effects of GVCs must take into account the working conditions involved in the carrying out of jobs. This tends to be an area where anecdotal evidence on sweatshop conditions, worker safety, and lack of benefits, among other things, suggests that GVC integration has negative consequences for developing countries. In many GVCs, however, global lead firms (including retailers and major brands) are now routinely operating with standards for health, safety, environment, and treatment of workers that exceed what is demanded by host governments and by the International Labour Organization (ILO). Recent research from the Better Work program, which is a partnership between the ILO and the International Finance Corporation, that is designed to improve labor standards and competitiveness in global supply chains, provides audits and technical assistance to help factories comply with improved standards and working conditions. Evaluation results indicate that improving working conditions is a win—win proposition, in that firms which have better working conditions and pay higher wages are also more productive [9]. This suggests that workers may respond to better conditions and better pay by working harder, or more efficiently. It may also be the case that in re-designing working and management practices to ensure better working conditions, firms find more efficient ways to operate. Alternatively, it could be the case that the firms who decide to pay higher wages and establish better working conditions are already the most productive ones or, at least, that they have more far-sighted management and so as a result are more predisposed towards higher productivity.

However, such findings may suffer from the common problem of selection bias. Indeed, the gains to GVC participation in terms of wages and working conditions in all likelihood depend on the position of the firm (and the country) in the value chain [10].

Nature of the sector and of lead firms

One of the most important contributions of the GVC literature is the role of value-chain governance in determining outcomes in GVCs [12]. Multinational lead firms that make offshoring and investment decisions also shape the way in which those investments play out in local economies and labor markets. The possibility to grow employment through local supply-chain densification depends, to a large extent, on the multinational’s global production strategy. If production is highly internalized—for example, because a large share of value-added is considered a core competency—the multinational is likely to have little interest in local sourcing beyond non-tradable services and standardized inputs like packaging [6]. Moreover, the sector matters. Localization of supply chains is more common in sectors with higher rents and higher levels of sunk investment. And the broader productivity spillovers from GVCs appear to be stronger with lead firm investments through joint ventures than by fully foreign-owned firms.

Absorptive capacity

Most critically, absorbing the potential benefits from GVC participation depends on supply-side capabilities. Firms and individual workers must have the skills and capabilities to absorb new knowledge and adapt to new technologies and processes in order to convert this into productivity gains. One determinant of spillovers within GVCs is the technology gap that exists between local producers and multinational lead firms, which is expected to mediate the absorption of knowledge and technology from GVCs. However, the empirical evidence conflicts. Some studies find that a large technology gap is beneficial for local firms, since their catching-up potential increases, while others find that local firms are less able to absorb spillovers if the technology gap between the multinational and local producers is too big.

The relationship between absorptive capacity and labor markets is a recursive one. Absorbing knowledge and technology from GVC participation is a source of labor upgrading and productivity gains. But a domestic firm’s ability to absorb foreign technology might also be positively related to its share of skilled labor. So in countries with low skills bases to begin with, the gains from GVC participation may, in fact, be difficult to exploit.

Moreover, limited labor mobility in many developing countries is a significant barrier to reaping the gains from GVCs, as the transfer of technology and knowledge gains from GVCs to the domestic economy requires a transmission channel. Along with supply chain linkages, the labor market is one of the most important of these channels. But if newly skilled workers are not moving between foreign-owned and domestic firms, the gains from GVCs become restricted to within the foreign-owned enclave. This is precisely what appears to happen in many low-income countries, where skilled workers often end up working exclusively within a small group of foreign-owned firms. These foreign investors outcompete domestic firms for access to a limited pool of skilled workers, as they are able to offer higher wages and benefits, as well as more attractive career prospects. As a result, skilled workers tend to circulate across multinationals rather than between multinationals and domestic firms.

Labor market institutional environment

The domestic institutional environment also plays a critical role in mediating the impacts of GVCs on jobs. More rigid labor markets lower the likelihood of multinational investment. And labor market rigidity, particularly with respect to wages, is also found to be a barrier to the acquisition of skilled labor and, from this, of a firm’s potential to absorb productivity spillovers from GVC participation. On the other hand, as more rigid labor markets tend to result in less turnover of workers, this may induce firms to invest more in training and skills development.