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February 23, 2022

Labor markets in low-income countries: Challenges and opportunities

Opinion image

The world’s working-age population is expected to grow by more than one billion by 2050. About 70% of this growth will be in sub-Saharan Africa. This rapid growth of the working-age population will need to be met by equally rapid job creation to avoid rising unemployment and succeed in the fight against global poverty. How labor markets function will play a critical role in determining whether low-income countries can meet this challenge of job creation.

A new book on labor markets in low-income countries looks at the role of labor markets in driving economic growth and poverty reduction in the coming decades. The book builds on research findings from a ten-year research program “Growth, Gender, and Labor Markets in Low-Income Countries” (G²LM|LIC), a joint project of IZA and the UK Foreign, Commonwealth, and Development Office (FCDO). The book reviews the results of over 40 studies of low-income country labor markets supported by the program.

The volume provides a number of lessons about labor market programs and policies which can make a difference. Some of these illustrate the difficulties that many well-intentioned programs face when they are implemented. Vocational training programs, for example, a widely-used labor market intervention, have a disappointing record when subjected to rigorous evaluation. However, the evidence shows that training programs which apply techniques from behavioral psychology tend to have stronger positive impacts, not only on labor market outcomes of entrepreneurs, but also on long-term innovation and capital investment.

Many labor market interventions try to reduce information barriers and help firms and workers find each other. The evidence discussed shows that, while these programs can improve the kinds of jobs that job-seekers get, they may not succeed in increasing overall employment. Another barrier to worker–firm matching is limited geographic mobility. This is a particular challenge for women, given patriarchal social norms in many developing countries. The findings of multiple research projects indicate that women would be more active in the labor market if they had access to safe and reliable transportation.

Since most workers in low-income countries continue to live in rural areas and work in agriculture, the book addresses several issues related to imperfections and distortions in rural labor markets and discusses policies which can improve the functioning of these markets. One important challenge facing farm households is maintaining consumption levels during the lean season preceding the harvest. This leads to food insecurity and potentially inefficient use of labor as households seek wage income from working off-farm rather than investing in their own crop production. Evidence shows that offering subsidized loans in the lean season increases on-farm labor and agricultural output, and drives up wages in rural labor markets. 

While governments extensively use Public Works Programs as a tool to reduce poverty and improve food security, evidence from research projects in Malawi and India indicates that these programs do not always succeed. Adjustments to their implementation, such as help in opening bank accounts, providing basic financial literacy, and direct deposit of wages into accounts, can increase their effectiveness.

© David Lam and Ahmed Elsayed

David Lam is Professor of Economics and Research Professor in the Population Studies Center, University of Michigan, and a Research Fellow of IZA
Ahmed Elsayed is Senior Research Associate, IZA

Please note: We recognize that IZA World of Labor articles may prompt discussion and possibly controversy. Opinion pieces, such as the one above, capture ideas and debates concisely, and anchor them with real-world examples. Opinions stated here do not necessarily reflect those of the IZA.