For better or for worse? Job and earnings mobility in nine middle- and low-income countries

Excerpt: Recent evidence suggests that most market economies show significant dynamism. Many firms are created and destroyed every year, and surviving firms undergo a continuous process of transformation. As a result, a substantial number of jobs are created and destroyed, and an even larger number of workers change status in the labor market, moving across jobs, from employment to unemployment and back to employment, and also entering and exiting the labor market. Large, if not even larger, rates of mobility are also observed in developing countries.

As noted by Haltiwanger and others, one of the most controversial debates on institutional design and economic policy has been sparked around the trade-offs associated with labor mobility. On the one hand, mobility may promote efficiency and growth if economic forces induce the reallocation of resources toward the most productive uses. On the other hand, high mobility may imply that workers are uncertain and have concerns about income security.

Such trade-offs between economic efficiency and job stability become particularly important in the context of middle- and low-income countries where limited safety nets do not insulate workers against economic risk. In the last fifteen years, many of these countries have seen rapid economic transformation led by structural reforms and trade integration. For example, in Latin America, trade as a percentage of GDP increased from 27 percent in 1995 to 44 percent in 2004, while in the same period in the transition economies (here defined as former socialist countries), it increased from 45 to 70 percent. While such reforms have brought productivity gains, they have also increased labor reallocation. Analyzing the welfare costs of such reforms is beyond the scope of this study. More modestly, we assess the nature of labor mobility in a sample of countries that underwent important—albeit different—structural reforms over the past decade that had significant impact on the magnitude and characteristics of labor mobility. This is an important first step to understanding the welfare effects of such reforms.

This article summarizes the findings of an ongoing study examining worker flows and, when possible, the associated earnings changes associated with such flows across different statuses in the labor market and across different types of jobs. The study focuses on three countries in Latin America and six transition economies of eastern Europe and the former Soviet Union. Although the selection of countries is driven by the existence of longitudinal data, essential for a study of worker mobility, this selection of countries has the bonus of spanning low- and middle-income economies, as well as transition and developing countries.

We address a number of questions. Central to the question of the nature of labor mobility is assessing to what extent workers transit quickly across jobs or become stuck in long periods of unemployment. Another central issue is to what extent mobility implies welfare gains or losses relative to those workers who did not change their status in the labor market. A third question, much discussed in the development literature, is to what extent workers in low- and middle-income countries experience barriers to entry into good (that is, "formal") jobs and thus become trapped in low-productivity and low-paying jobs. So far, few studies have directly examined mobility in low- and middle-income economies. Even fewer studies have examined mobility between different types of jobs. In this study we define different types of jobs on the basis of whether they are salaried or not and whether workers have access to social security benefits, which we use as a proxy for whether such jobs are in compliance with the country's laws. To the extent possible we define common, harmonized categories to allow for cross-country comparisons.

The picture that emerges from our analysis is quite complex. There is a high degree of mobility in the labor market of all countries examined. Many workers move across jobs directly, while many others move in and out of the labor market and between jobs and unemployment. For most countries we do not find evidence of workers being trapped in unemployment for a long period, partly because of limited income-support schemes for the unemployed, which force workers to find a job quickly.

• http://dx.doi.org/10.1353/btf.2007.0002