24 September 2019

How should DFIs and impact investors manage the challenges of job creation?

In recent years, development finance institutions (DFIs) have expanded their traditional mission of job creation to include impact in areas such as education, health, gender and the environment. Whilst these are all important objectives for DFIs, it is vital that job creation does not become overlooked. The creation of decent jobs is imperative to reducing poverty and improving quality of life in developing countries. And, because the market will not create enough decent jobs when left to its own devices, purposeful interventions are needed.

At the same time, investing in job creation in Africa and South Asia presents a unique set of challenges. The full impact of investment on labour markets is hard to predict and measure, and creating jobs can conflict with the goal of raising productivity. We wrote this Insight study, How job creation fits into the broader development challenge, to explore how impact investors and DFIs should approach these problems, drawing on theory and evidence from economics. We have also written a shorter article, How should DFIs and impact investors manage the challenges of job creation?,  which summarises the main challenges and what we’ve learned about job creation in emerging markets.

The key lessons
  • In advanced economies, the goal of job creation is to reduce unemployment. In Africa and South Asia, where hardly anyone is unemployed, the goal of job creation is different. It is to replace informal, unstable jobs that pay poorly with formal, stable jobs that pay well. To that end, impact investors and DFIs should focus on creating more decent jobs in the formal sector and/or raising the quality of jobs in the informal sector.
  • There can be a tension between creating jobs and productivity. Poverty reduction requires higher real wages which requires more productive economies. But when we make investments that raise productivity, we often reduce the need for labour. Economies grow by more productive firms adding jobs and less productive firms shedding them.
  • Gross job creation – that is, the number of new jobs created before accounting for the number of old jobs destroyed – helps drive progress in two ways: it increases the total number of decent jobs in the formal sector and it replaces bad jobs with better ones. This makes it a useful results indicator for DFIs to report. By contrast, net job creation – that is, increasing the overall level of employment – is a less useful indicator in developing economies that are close to full employment.
  • When a firm invests and expands, it adds demand for workers to the labour market. This extends beyond the firm itself as creating jobs in one firm can spur domino effects that result in other workers switching jobs. This in turn can increase productivity and improve worker conditions – for example if workers in the chain move from precarious self-employment to formal employment. But these domino effects are hard to predict and cannot be taken for granted.

 

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