Increased productivity/ revenues lead to increased employment

This page summarises evidence on the relationship between growth in productivity/ revenues and employment.

When firms increase revenues, they can afford to hire more staff and may wish to do so in order to expand their businesses. On the other hand, in the short-run, productivity increases may reduce employment (e.g. because new technologies reduce labour requirements).

Employment increases after new businesses start up or formalise

One evaluation tracked the results business registration reform programme on firm creation and through to employment, finding positive impacts in the industries targeted.

  • Bruhn (2011) finds that the Mexican Rapid Business Opening System programme led to a 5% increase in the creation of new firms, exclusively because former wage earners opened businesses. For those unemployed or out of the labour force the likelihood of finding work as wage earners increased after the programme was introduced, and overall employment in the industries targeted by the programme increased by 2.8%.

There is also a cross-country study which indicates that small young firms have particularly high revenue growth and job creation rates; this would suggest that encouraging start-ups with high-growth potential is beneficial for job creation.

  • Ayyagari, Demirguc-Kunt and Maksimovic (2014) study the role of small and medium enterprises in job creation in 104 developing countries. While large mature firms have the largest employment shares, small young firms grow the fastest and have higher job creation rates.As such, the authors emphasise the importance of encouraging entrepreneurship and reducing constraints to starting up new businesses.

A common bias in studies measuring the employment impact of start-ups is that they only measure the employment impacts of those firms that survive in the short term. In practice, failure rates are often high, leaving owners and employees without work. One study suggests though that employment growth in surviving firms may offset the loss from other firms that exit the market:

  • Bartelsman, Haltiwanger and Stefano (2004), find that new firms which survive for several years may generate more than enough employment to provide jobs for employees and owners of failed businesses. In Mexico, for example, about 27% of new firms survived seven years after entering the market; these surviving firms employed more than 105% of the number of workers originally employed by all new entrants in their cohort.

Employment increases following value chain development interventions

Ingram, Verina and Elsje Oosterkamp (2014) review 53 studies about the impact value chain development interventions on job quantity and job quality. Overall, the authors find that evidence on the creation of long term jobs at large scale is scarce: Most studies (96%) report that jobs were created, but only a few (18%) presented quantitative details about the number of jobs created. A clear causal relationship or attribution between the intervention and the number of jobs created was generally lacking in the publications reviewed. The majority provided very general, rounded figures of jobs created.

Only a few publications indicated medium to large-scale job creation, notably in productive industries such as light manufacturing and agro-processing:

    • Dinh et al.(2012) report on the positive impact of government support to light manufacturing industries on job creation in Ethiopia and Vietnam. In Ethiopia’s cut-flower industry, a single pioneering firm and subsequent support opened the door to an industry employing 50,000 workers.This was aided by facilitating access to land for strategic investors. Interventions in the garment chain in Ethiopia led to 1 million productive jobs. Government support included the setting up of a green channel for apparel at customs, the provision of free and immediate access to foreign exchange, reducing the cost of letters of credit, and setting up an industrial zone close to main port and airports. Another example from Vietnam indicates that 600,000 productive jobs were created in the leather products sector, where labour costs were relatively low, and the quality of raw materials was already high.
    • Webber and Labaste (2010) report on interventions in the dairy chain in Pakistan that resulted in around 7,000 jobs. The interventions focused on encouraging entrepreneurs to invest in collection and cooling centres. The authors also describe the case of the agribusiness Blue Skies Holding Ltd in Ghana which produces EuroGAP certified fruit for export. It began its operations in 1998 with 38 workers and has ncreased its workforce to 1000, over 60% is permanent staff. Growth is attributed to the company paying its farmers promptly with a higher price than other buyers, to incentivise farmers to invest in their production. Blue Skies has also assumed technical and financial responsibility for certifying its suppliers (through training and education on EuroGAP standards) and support to improve local road facilities.
    • Seville et al. (2011) reports that the Better Trading Company (BTC), an enterprise that connets international retailers with producers in low and middle income countries and provides market information as well as business advice and training, has helped small businesses grow and create over 429 new jobs.

Evidence also suggests a positive impact of many value chain interventions on job quality, as well as limited or negative employment effects of some interventions.

  • 11% of studies reviewed in Ingram et al. (2014) mention that the desired impact of job creation was not achieved and in a few cases, interventions such as upgrading, outsourcing and value adding led to a decrease in work. The main factors seen as contributing to these negative impacts were productivity improvements and automation.
  • Just over 50% of the publications report that job quality was enhanced due to value chain interventions, in particular training as well as certification standards.  Certification standards enhanced job quality over a longer term. Publications on certfication provide concrete examples of how job quality has been enhanced.Theseinterventions generally have been introduced and up-scaled to impact larger numbers of people over a period of several years. Certification was most successful when famers and fishers were linked to chains already and organised into groups to increase their bargaining position andgain economies of scale.