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Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers (1996)

Chapter: Options for Improving Labor Markets for Megacities in the Developing World

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Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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INTRODUCTION

Development experts are concerned with fostering economic growth, alleviating poverty, protecting the environment, and improving the general standard of living of people in developing countries. Much of this work is directed toward either creating employment or raising labor earnings because at the bottom of the earnings scale, labor earnings comprise the most significant portion of total income, and hardship and poverty are often the direct results of insufficient access to adequate employment opportunities.

Megacities are frequently the centers of production for a country’s goods and services and the location of the vast majority of a country’s paid-employment opportunities. Every year, megacities attract considerable numbers of rural migrants, who, together with the rapidly growing native population, quickly expand the labor force and generate an enormous policy challenge: to create sufficient employment opportunities to absorb the large number of new workers. With public-sector wage bills being forced to contract in many countries, much of the needed increase in employment is likely to occur within the small-scale “informal sector” or within self-employment. 1 Traditionally, nonagricultural self-employment has declined with modernization, and the urban labor force has become increasingly occupied in regular protected wage employment. However, the recent change in economic conditions, coupled with rapid population growth, may be inducing profound changes in the structure and nature of employment.

This paper addresses the problem of the need to expand productive capacity in developing-country megacities in order to create a billion new jobs over the next 35 years. The remainder of the paper is organized as follows. The next section addresses the question of whether labor markets in megacities have special characteristics. The next two sections describe the labor force and the labor market, respectively, in developing-country megacities. 2 This is followed by a review of problems in developing-country megacity labor markets that may be amenable to policy intervention. Next is an examination of the role of policy in addressing these problems. A discussion of the potential role of science and technology is then presented. The paper ends with a summary and conclusions.

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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WHAT IS SPECIAL ABOUT LABOR MARKETS IN MEGACITIES?

Just as megacities have characteristics that distinguish them from other urban areas, there are several distinguishing features of megacity labor markets. First, the urban scale involved means that the tradeoff between scale economies and congestion costs is different than for smaller urban areas. Agglomeration economies create opportunities for improved productivity and for less costly information dissemination per capita, but congestion costs are also likely to be greater. The latter may weaken, especially in higher-income megacities, as access to the World Wide Web and other computer sources improves, although the extent to which telecommunications can substitute for transportation is controversial (see the discussion later in this paper).

Second, the composition of economic activity in megacities is distinctive in a number of ways, permitting easier comparisons across megacities than among different locations (e.g., urban and rural areas) within countries. The most distinctive characteristic of economic activity in most megacities is a large quaternary (i.e., high-order financial and service) sector, often global in scope. In addition, the informal sector represents a large share of employment, though typically not as large a share as in smaller cities; the manufacturing sector may be more or less important than in other cities, usually depending on the type of development strategy (e.g., import substitution or export orientation) and when it was adopted; and the government sector is substantial in the majority of cases where the megacity is the national capital.

Third, megacities are more open to global influences than are many other urban areas (although some natural resource locations, such as mining towns, are even more influenced by global considerations). The increasing globalization of recent years has made the world’s megacities much more interdependent than before, and international capital mobility and the ease of information connectivity have resulted in a set of megacities competing for internationally footloose economic activities. There will be winners and losers in this competition, and labor market efficiency can help determine the outcome.

Fourth, megacities have a mix of advantages and disadvantages that affect their competitiveness and the demand for labor:

  • A better-educated, better-trained, and more diverse labor pool, but more expensive labor costs

  • More access to sources of capital, with favorable influences on the labor market, given the complementarity of factors of production

  • A concentration of educational and training facilities, increasing the potential for human resource investments

  • Much higher urban absorption costs per capita (i.e., the capital costs of accommodating people in the megacity, including housing, infrastructure, and job creation) than in other urban areas and up to six times higher than in rural

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
×

areas (Richardson, 1987), implying that megacity concentration aggravates the investment constraints that cripple many developing countries

  • Severe traffic congestion, with its adverse implications for job accessibility and labor market performance

  • A complicated nexus (though not necessarily fully supported by evidence) from megacity living to higher incomes to lower fertility to higher female labor force participation

  • Higher land costs that may favor locational choices in other areas (e.g., distant sites within the core region or other regions)

  • Information barriers to both migration and labor market entry that may be more difficult as a result of the scale effect

Megacities contain a large share of both a country’s industrial sector and the national population, but economic activities are much more heavily concentrated than population. In Seoul, for example, there is a heavy concentration of the nation’s modern and internationally oriented economic activities: 61 percent of managerial personnel, 96 percent of the top 50 corporate headquarters, 64 percent of research scientists, all stock brokerage offices, and 66 foreign bank offices (Yeung, 1995). Istanbul accounts for only one-tenth of Turkey’s population and is not the national capital, yet it accounts for 45 percent of manufacturing, 40 percent of commercial activity, 25 percent of all vehicles, 44 percent of the country’s hotel rooms, and 50 percent of all university students (El-Shakhs and Shoshkes, 1995). Before the revolution in Iran, Tehran accounted for 83 percent of registered companies, 60 percent of wholesale employment, 55 percent of telephones, 53 percent of city bank branches, 47 percent of construction investment, 41 percent of insurance companies, and 40 percent of retail employment.

In the new global economy, function becomes more important than population size. For example, in Asia, Bangkok and Singapore are smaller but more interconnected than Beijing or Shanghai (Yeung, 1995). In these new world cities, the sectoral composition of the labor force may be quite different than in the traditional megacities (see the discussion in the next section).

On the other hand, developing-country megacities rank higher in terms of population (and employment) than production. Of the world’s top 20 cities in gross urban product, only 2 are in developing countries: Seoul (a marginal candidate for developing-country city status) ranks twelfth with $93 billion, and São Paulo ranks twentieth with $70 billion, as compared with $854 billion for Tokyo, $448 billion for New York, and $326 billion for Los Angeles. Among other developing-country megacities, Singapore accounts for 65 billion; Hong Kong for $60 billion; Bangkok and Rio each for about $40 billion; and Manila, Cairo, Jakarta, Shanghai, and Calcutta each for $10-15 billion (Prud’homme, 1995).

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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THE MEGACITY LABOR FORCE

As suggested above, megacities have different economic structures from other urban areas because of their higher degree of connectedness to the international economy, the existence of high-order (i.e., quaternary) services, and the presence of a cosmopolitan elite. This differentiation has implications for the types and composition of the labor force found in megacities.

Types of Labor

While it is common to discuss the urban labor force in terms of a “formal” and an “informal” sector, recent analysis has suggested that this split is too simplistic and fails to capture the diversity in capital-widening activities, earnings, labor quality, and entry barriers (Kannappan, 1985; Cohen and House, 1996). Some analysts draw instead a distinction between “vulnerable” (Harriss, 1989) and “protected” sectors (Mazumdar, 1983). An alternative but related classification might distinguish five categories: (1) protected labor (contracts and restrictions on entry); (2) competitive but regular labor; (3) unprotected labor (e.g., casual labor, domestic service, wage labor in petty trades); (4) self-employment and family labor; and (5) marginal activities (e.g., hawking, semilegal, or illegal activities). Only numbers (3), (4), and (5) would be included in most definitions of the informal sector.

Thus while we refer to the informal sector in the discussion that follows, we are mindful of this underlying complexity, as well as of the need to recognize the informal sector itself as a heterogeneous entity. Indeed, much of the debate surrounding the functioning of urban labor markets is concerned with how to conceptualize the diversity of income opportunities and heterogeneity of the informal sector. Some experts have emphasized the diversity and dynamism of the informal sector (e.g., House, 1987) or the problems these characteristics imply for devising and implementing effective policy prescriptions (Tokman, 1989). On the other hand, despite the heterogeneity of the sector, many studies have found similar identifying characteristics, suggesting a sector of family-based enterprises ranging in size from one-person operations to medium-sized firms. These firms usually operate in relatively competitive markets and use labor-intensive technologies. Workers in these enterprises are often young and poorly educated. Many rural-urban migrants view the informal sector as a point of entry into the urban economy and as a means of lowering their costs of searching for a formal sector job. It is in this broad, inclusive sense that we use the term here.

Sectors of Employment

The Informal Sector

Because of its size in low-income megacities, the informal sector plays a critical role in their economies. It is sometimes described as a residual sector--implying not a small segment of the labor force or a subsistence component, but rather a large, unprotected sector

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
×

with considerable economic potential and dynamism, sometimes even contributing to export performance.

The informal sector employs more than 50 percent of the labor force in most developing-country megacities. 3 In Indian cities, unregistered (i.e., informal sector) manufacturing firms employ more than do those officially registered by the government. The informal sector is generally larger in sub-Saharan Africa and Latin American than in Asia (World Bank, 1995a), influenced by two main policy considerations: pro-urban strategies that encourage faster rural-urban migration and labor market policies that dampen formal sector job growth by weakening the role of wage adjustments as market signals.

The informal sector is also very important for non-household-head workers (see Browder et al., 1995, on Bangkok, Jakarta, and Santiago). Its growth during national recessions is an important labor market adaptation strategy. It acts as a buffer for avoiding more negative effects elsewhere in the labor market, such as downward adjustments in wages and increased open unemployment. On the other hand, it may not be an avenue to formal sector jobs. In a labor survey in Bombay, 70 percent of “casual” workers had not changed jobs, whereas 57 percent of factory workers had (only 13.5 percent had started as casual workers). There is little evidence for the “graduation hypothesis” from the informal sector. Contacts (family, caste, neighborhood) are very important. “Regular work looks like an enclosure, to which a limited number hold the keys” (Holmstrom, 1984:203). On the other hand, especially in Asian countries, many capable informal sector workers “graduate” to more remunerative family enterprises (Blau, 1986; Foster and Rosenzweig, 1994; Soon, 1987).

One view about government interventions in the informal sector is that they should be minimal (“benign neglect”). An alternative view is that if governments are to develop informal sector strategies, these should be related to long-term development objectives. In Cairo, for example, “reconstructing, improvement and upgrading low-income, deteriorated urban areas have been temporary remedial procedures to face violence, terrorism, and inflamed social unrest. . . . it is important that the government recognizes and deals with the informal sector. The informal sector should not be seen as either an economic or physical liability (as it is indeed still perceived as such by the government), but rather as an asset that could be directed, upgraded, and recruited to be an efficient, impelling force in systemic development” (Yousry, 1995:25).

Manufacturing

In many developing-country megacities, the role of the modern and/or large-scale manufacturing sector is relatively small, and the informal sector employs more people. For example, manufacturing accounts for only 15 percent of employment in Delhi and for less than 15 percent in Jakarta, while in the latter case one-fifth of the employed population is own-account workers, and about one-half of the labor force is in the informal sector. In

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
×

Manila, the manufacturing sector accounts for 20 percent of employment and the personal services sector for about 35 percent. 4 Even in São Paulo, with its reputation as a megacity industrial dynamo, fewer than one-third of all jobs are in the manufacturing sector (more or less equally divided among the 500-plus firms, the 100-499 firms, and the less-than-100 firms).

Government Employment

There is a large segment of urban employment in the government sector in many developing countries (e.g., Egypt, Argentina). In 1988, 23 percent of urban employment (much higher in Cairo) was in the public sector, although the share may be falling slightly as privatization strategies are implemented. There is evidence of overmanning, and sinecures are common (PADCO, 1982). Efficiency has been impeded by low wages (especially for critical skills) and the problem of the principal agent (i.e., monitoring of work performance).

The growth of corruption is a by-product of low and declining public-sector salaries (see Kpundeh, 1994). For example, real public-sector wages fell by 36 percent in Egypt during 1981-86 and by 80 percent in Ghana during 1977-85. In a sample of African countries, the ratio of private- to public-sector salaries for engineers ranged from 1.6 to 8.6 and averaged 3.7 (World Bank, 1995c).

Urban Services

The housing, transportation, and water and sanitation sectors are also important for job creation. Examples are informal sector construction workers, transportation operatives (120,000 bicycle rickshaw drivers in Dhaka and “phut-phut wallas”--drivers of three-wheel scooters--in Delhi), home-based auto repair shops, and community participation in public works projects. Thus efficiency in these three sectors can have a major impact in terms of higher labor productivity, as well as improved quality of life.

The High-Order Financial and Service or “Quaternary” Sector

As noted above, most megacities have a high-order service sector specializing in banking, finance, information processing, and professional services. This sector may be small in size, but it is important as a source of employment for highly trained professionals and as a direct link with the global economic system. As international markets are liberalized, this sector can play a major role in the efficient functioning of international trade and finance.

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
×

Women and Children

Women and children are employed in many sectors, but their potential vulnerability in the work force and in society justifies specific attention.

Female Labor

As might be expected, women are paid less than men in developing-country megacities, although in many cases female employment has grown more rapidly, especially in the informal sector. In a survey of urban West Bengal, India (mainly Calcutta), one-fifth of male workers but two-fifths of women were in the two (out of six) lowest-income (expenditure) classes. Male workers earned about double what female workers earned. About one-fifth of adult females were in the labor force (Bardhan, 1989). In addition, the female labor force participation rate was lower in locations where the manufacturing sector was more important, where male job opportunities were better, and where skilled jobs were more plentiful (women, mostly unskilled, were more likely to work in the informal sector). The taboo against women working outside the home was weaker for nonmanual jobs requiring education and for lower castes. The female labor force participation rate was lower for large households (where women were looking after children and old women), better-off households (income effect), households with more adult male workers, and wage-employed households (women having more job opportunities in self-employed households). In Bombay, the adult female labor force participation was 35 percent among casual-labor households, but less than 10 percent among factory-worker households. Of course, women (and children) were extensively employed in family-based economic activities, such as tailoring and laundering.

The gender gap in share of informal sector employment in favor of women varies between 5 percent (Korea, Thailand) and 28 percent (Bolivia, Egypt) (World Bank, 1995a). In Jakarta and Santiago, household heads earn two to three times the combined income of other household members (Browder et al., 1995). In São Paulo, the income disparity between male and female workers is also 2:1, although female employment has grown spectacularly, probably because of the need to augment household income in an era of crisis (Arriagada, 1990). In Mexico City between 1960 and 1986, the female labor force participation rate increased from 28 to 35 percent, while the male labor force participation rate declined from 81 to 70 percent. A major factor was the relative growth of the tertiary sector. In Latin America, the economic recessions of the 1980s had a positive impact on women’s participation in the labor force. In the longer run, rapid economic development was frequently associated with the growth of female employment, more education for girls, and lower fertility.

Studies of cities below the megacity size class confirm the above gender wage gaps. Telles’ (1993) study of Brazil’s nine metropolitan areas found a formal-sector female/male wage ratio of 0.73, which widened to 0.47-0.54 in the informal sector; Cohen and House

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
×

(1993) found a wage gap of 0.77 in formal-sector work in Khartoum, while Ashraf and Ashraf (1993) estimated a gap of 0.60 in Rawalpindi. There is also debate about explanatory factors behind the wage gap, emphasizing either education and skill differentials (Cohen and House) or discrimination (Ashraf and Ashraf). Reduction of the gender wage gap, implying rising female wages, is a key determinant of increasing female labor force participation because it widens the options available to women and increases the opportunity cost of staying at home. Other facilitating conditions include the development of community child care centers.

Child Labor

Children work to provide insurance against family poverty and fluctuating incomes. UNICEF has calculated that in 1991, 80 million children aged 10-14 were working, although many of them worked on farms (World Bank, 1995a). In Brazil, for example, about 18 percent of children aged 10-14 work, despite legal restrictions. On the other hand, in megacities child labor may be less of a social problem than street urchins and abandoned children.

THE MEGACITY LABOR MARKET

Labor Supply

It has been estimated that the economically active population in developing countries (largely in urban areas) will increase by about 1.2 billion between the mid-1980s and the year 2020 (International Labour Organization, 1986). The total developing-country urban labor force should expand from 598 million in 1990 to 1,521 million in 2020, although much of this growth will take place in smaller urban places. The distribution of the labor force varies considerably among different segments of the population: in the developing countries, 94 percent of males aged 20-59 are economically active, 53 percent of women aged 20-49, and at least 15 percent of children aged 10-14.

Growth in population and employment in the majority of megacities is slowing down (Beijing and Shanghai are striking exceptions; see United Nations, 1995), and this trend will continue. Moreover, in some cases the slowdown is dramatic. For example, the Rio de Janeiro Metropolitan Area grew in the 1980s at one-third the rate of the 1970s, while the share of the State (and Rio accounts for more than four-fifths of the State’s economic activity) in Brazil’s gross domestic product (GDP) fell from 13 percent in 1980 to 9 percent in 1994 (Tolosa, 1995). However, a few large cities (Dhaka and Lagos, for instance) will continue to grow rapidly (in the 4 percent per annum range), even after decelerating (United Nations, 1995). Undoubtedly, these changes will have important implications for the age structure of the labor market in developing-country megacities.

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
×

The slowdown in megacity growth will relieve labor supply pressure, but only to a modest degree. However, Williamson (1995:101-102) argues that labor supply is not a problem; on the contrary, he suggests that there has not been enough immigration into developing-country cities. Everybody (new migrants, skilled workers, capitalists) gains from additional migration except city-born unskilled workers. The problem, in Williamson’s view, is “underinvestment in cities, not overmigration.” This is an interesting opinion, but a little extreme. A more accurate statement might treat migration as a valve that regulates labor market supply in megacities, sometimes increasing and sometimes declining in response to changes in wages and in labor demand.

The Egyptian example gives an idea of the scale of the problem. In Egypt, job creation as a whole is slow, largely reflecting the low rate of private investment (7-8 percent of GDP), given that the working-age population growth rate has been and is expected to be more or less constant at 2.5 percent from 1960 through the year 2010. The urban labor force is growing somewhat more rapidly, at 3.3 percent per annum, because of migration and the rise in the labor force participation rate (Yousry, 1995).

Labor Demand

Because the demand for labor is derived from the demand for goods produced by labor, its strength in megacities depends on their ability to compete in the production and sale of tradable goods with other urban areas in the national economy and with other export-oriented cities in the international economy. Factors that impede the competitiveness of megacities, such as core city congestion and constraints on transportation and communications, will have adverse effects on the demand for labor. However, the negative impacts on the labor market are mitigated by the existence of adjustment mechanisms, such as variations in the interurban and rural-urban migration rate and the dynamism and flexibility of the informal sector. The extent of this mitigation varies from megacity to megacity. As a generalization, these cities can be divided into economically dynamic (e.g., Bangkok, Jakarta) or stagnant (e.g., Calcutta, Rio de Janeiro), with widely divergent demand for labor conditions. The labor absorption problem can be very severe in the latter cases (even in conditions of low immigration), resulting in poverty and the risk of serious social unrest.

Labor Market Equilibrium

There is an apparent inconsistency between high unemployment in megacities and rural-urban labor market equilibrium. However, complex forces are at work, such as the role of age-selective migration in stimulating future megacity rates of natural increase and in promoting increases in the domestic savings rate, the cost of public overhead capital and inelastic land supplies in choking off real wage and welfare gains, and competition between city-building investment and industrial capital accumulation (crowding out). The appearance

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
×

of disequilibrium can be deceptive because of equalizing differences and adjustments across various sectors, as well as problems involved in estimating unemployment and the size of the informal sector.

Megacity employment growth is affected by the extent of social development in rural areas and by the level of resources for industrial capital accumulation. Other factors, such as foreign capital inflows, global terms of trade, and the supply of mineral and energy resources, have played a role (Williamson, 1995). Technological progress can be important as well: “If urban sectors tend, as they do, to have relatively high rates of total factor productivity growth and if the demand for urban output is relatively price elastic, as it is at least for tradables, then final demand shifts toward the dynamic sectors, the derived demand for urban employment is augmented, urban job creation is accelerated, migration responds, and cities expand. The higher the price elasticities of demand for urban output, the greater the migration and city growth given some rate of unbalanced technological progress. The more open the economy to foreign trade, the more likely it is that these conditions will be satisfied” (Williamson, 1995:91). This explanation applies to much of developing-country city growth since the 1950s (Kelley and Williamson, 1984).

A somewhat different view is that urban economic growth is self-defeating because “increased in-migration might well undermine any gains from policies to reduce urban poverty directly” (Rodgers, 1989:2-3). However, even if this were true, aggregate welfare would still be improved because urban wages would remain higher than rural wages, and the urban/total labor force share would have increased. The formal sector urban-rural wage ratio ranges from 1.10 (Costa Rica) to 8 + (India, Ivory Coast) and is typically in the 1.50-2.00 range (World Bank, 1995a). But such data tell us nothing about what is happening in the urban informal sector, which is often characterized by rapid growth and substantial wage levels (certainly overlapping the wage distribution in the formal sector). Because of data limitations, the assertion that growth-induced migration significantly reduces welfare gains is untested.

Another option is to argue for stronger rural development interventions to increase the supply of domestically produced food and to ease the pressure on megacities from rural inmigration. However, strategies to increase rural incomes often involve labor-saving technology, thereby increasing the rural labor surplus. This may be one factor that explains the upswing in the growth rates of Beijing, Shanghai, and other large cities in China in the last decade.

Megacity Spatial (Geographical) Structure and Labor Markets

To what extent has the decentralization of large metropolitan areas in the developed countries been replicated in developing-country megacities, and how has the spatial reorganization that has occurred affected the operation of labor markets? The severity of core-city transport congestion in many megacities (e.g., Bangkok) suggests that job

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
×

decentralization could dramatically improve labor market efficiency and productivity. In Jakarta and the Hong Kong-Zhujiang Delta region in the 1980s, population growth was much more rapid in the periphery (Tangeram and Bekasi in the first case, Shenzhen and Zhuhai in the second) than in other areas, largely because of the decentralization of manufacturing (Yeung, 1995). In São Paulo during 1977-1987, tertiary employment grew 77-90 percent in peripheral locations (e.g., Ipiranga, Penha, Ibirapuera, São Miguel, Campo Limpo) as compared with 54 percent in the municipality as a whole (United Nations, 1993). Mexico City’s manufacturing sector is declining, and both population and employment growth are more dynamic outside the Federal District in the municipalities of the State of Mexico (Rowland and Gordon, 1994). In addition, Mexico City will benefit much less than the northern border cities from the effects of the North American Free Trade Agreement (Richardson and Rowland, 1994). A related issue that merits more research is whether the spatial ambit of agglomeration economies is extending in developing-country cities as it is in developed countries (a major influence on this pattern is the telecommunications revolution, which has reduced the need for face-to-face contacts).

Research Needs and Information Constraints

There is a need for more information “on the operation of urban labour market mechanisms, the labour recruitment and job rationing process, the nature of labour market segmentation, the network of ’connections’ and migration linkages, the working of intermediaries and contract systems, the formation and structure of trade unions, access to credit and marketing systems for the self-employed, the pattern of remittances and links with relatives in villages” (Bardhan, 1989:215). The fact is that we know relatively little about how labor markets work or about employment and wage levels, especially at the megacity level. The source of information on these issues is usually survey data, but surveys are sparse, and their results are not always in the public domain. Moreover, the private-sector component of labor market operations (e.g., recruitment agents, contract systems, information networks) is rarely integrated into existing databases.

The role of social structures and ascriptive networks, including ethnic ties, in constraining access to information about labor market conditions, skills, and credit is very important (Kannappan, 1988). Kinship networks reduce the risks for potential migrants and help overcome the limitations of employment exchanges and government sources of employment. At the same time, however, they restrict access to jobs and pose a challenge to equity-oriented policy interventions. On the other hand, as economies develop, the relative importance of informal networks declines, while that of more formal market networks increases. It would be wrong to draw inferences about the potential superiority of either type of network; both may be quite efficient at different phases in economic development. However, the natural transition from informal networks to market systems may be distorted by legal prohibitions. In many African countries, for example, governments retain a monopoly over employment agencies.

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
×

LABOR MARKET PROBLEMS

Labor markets in developing country megacities are vulnerable to several problems that may be amenable to policy intervention. These include unemployment, poverty and income inequality, job mobility constraints, a lack of protection, and big firm bias.

Unemployment

Unemployment in megacities is the product of many factors, such as rapid population growth, disequilibrium in the migration process, changes in megacity competitiveness, constraints on efficient job search, and skill deficiencies. In general, open unemployment rates in developing countries are misleadingly low because such a high proportion of the labor market is unstructured. However, low-productivity employment or “underemployment” is a serious problem (World Bank, 1995a). For example, Krooth and Moallem (1995) report that one-fifth of Egypt’s urban labor force is unemployed, with another fifth working part-time. Unemployment may increase with city size. To illustrate, the labor force participation rate was much lower (53.6 vs. 63.8 percent in 1986) and unemployment higher (19.3 vs. 6.7 percent) in Metro Manila than in the Philippines as a whole (Alonzo, 1989); Mexico City offers a similar example.

Poverty and Income Inequality

It is difficult to generalize about whether poverty is more severe and the distribution of income more unequal in megacities than elsewhere. The reason for this is a dearth of information on the distributional pattern of wages and on the size and distribution of nonwage income, and the fact that wage and nonwage incomes are often pooled and difficult to separate. Alegria (1994) presents evidence on the distribution of earnings by the labor force showing that Mexico City has a pattern similar to that of Monterrey, but more unequal than that of Guadalajara and (especially) Tijuana. In Brazil, only 2.7 percent of urban families were found to be in the poorest category in São Paulo, compared with 10.4 percent in Brazil as a whole and 26.6 percent in the urban Northeast (Jatoba, 1989). São Paulo also had a much lower Gini coefficient--0.48 compared with 0.58 in the northeast. However, São Paulo may be in a special position (for example, relative to Rio de Janeiro) because real wages increased strongly, by 55 percent, over the 1984-94 decade. In Egypt, the super-rich are heavily concentrated in Cairo, with the top 5 percent receiving 50 percent of the income (Yousry, 1995). Poor public investment allocation decisions between urban and rural areas can have an important influence on spatial inequality (Becker et al., 1992).

Of course, it is difficult to expect improvements in the distribution of income in the present economic climate when real wages are stagnating. As a generalization, real wages have increased only modestly, if at all, over the past two decades in all regions with the notable exception of East Asia, where real wages (in the manufacturing sector at least) have increased more than two-and-a-half times (World Bank, 1995c).

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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Multiple job holding is an important strategy for alleviating poverty, but its prevalence varies from country to country. It is especially common in countries with short public sector hours (e.g., 7 a.m.-2 p.m. in Jakarta). On the other hand, in Bangkok, Jakarta, and Santiago (at least with respect to peripherally located households, the samples analyzed), multiple-earner households were found to be much more common than multiple-job-holding household heads (Browder et al., 1995). Also, household earnings often combine incomes generated in different sectors of the urban economy.

Job Mobility Constraints

Various labor policies and practices result in severe constraints on job mobility. These policies and practices include job security, severance pay requirements, minimum wage policies, and housing allowances and other fringe benefits.

The Lack of Protection

The existence of a very large unprotected sector, combined with a heavily protected (in terms of labor regulations) but small formal industrial and government sector, would appear to contradict the job mobility problem as stated above. But the basic problem is the lack of equity across the labor market. The excessively protected formal sector and its associated costs may provide a strong disincentive for employers in the unprotected sector to offer even the most minimal levels of protection to their workers.

Big Firm Bias

Industrial policy in developing countries is biased in favor of large firms (both public and private). These firms are often protected from overseas competition, and they frequently, and successfully, engage in rent-seeking activities (i.e., winning subsidies and concessions from government). Their activities and preferential treatment have damaging effects on employment growth because small firms are often more dynamic and much more labor-intensive--an important characteristic in capital-constrained developing economies.

THE ROLE OF POLICY

The social sciences offer a number of robust insights into how to improve the efficiency of labor markets. For example, mandates and labor regulations will be ineffective unless they take account of rational decision making by both individuals and households. Twenty or more years of economic research and close documentation of the recent economic history of both developing countries and the former centrally planned economies has taught

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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us that in general, incentive mechanisms are much more efficient as instruments to guide behavior in desired directions. This section reviews some of the key lessons learned with regard to effective (and ineffective) policy interventions in the labor market.

Goals of Policy

The key government policy goal in the labor market is to raise urban labor productivity and utilization by such means as improving the efficiency of the labor market (e.g., with respect to job mobility and the search process); promoting productivity in both the urban formal and informal sectors; building up human capital; restricting interventions in the labor market to those serving an overriding public purpose in order not to erode the competitive position of developing-country megacities; and reducing unemployment.

The Role for Government

Governments are most effective in improving urban labor markets when they assume a modest (though important) role, depending on the extent of market failure and the importance assigned to distributional issues (World Bank, 1995a). Principles for intervention include the following:

  • Let markets work, but intervene where appropriate in key areas (e.g., provision of infrastructure, environmental externalities 5 ).

  • Make interventions subject to market discipline.

  • Intervene openly (e.g., simple rules, not discretionary action).

  • Invest and encourage investment in human development (education, health care, nutrition, family planning) where markets are likely to fail (because of externalities) and/or where favorable distributional effects can be expected.

  • Create a favorable climate for entrepreneurs (e.g., eliminating restrictions, providing infrastructure support, creating a competitive regulatory framework, and reducing price distortions).

  • Facilitate integration with the global economy (lower tariffs and fewer nontariff restrictions on trade and capital flows).

  • Promote macroeconomic stability (reduce fiscal deficits, control inflation, reform the financial sector).

  • Provide incentives to encourage firms to reinvest profits.

  • In the labor market, increase access to information (although this may be inadequate if job access is controlled through informal networks.

  • Reduce the complexities of labor legislation that discourage (especially) small entrepreneurs from establishing formal labor contracts.

  • Revise labor policy mandates that are easily evaded, are enforceable only very selectively, and clash with household and worker incentives.

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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In many developing countries, the state is a major actor influencing wage determination: fixing public-sector pay, repressing or promoting worker organization, and prescribing minimum wages. Some of these interventions may be inefficient in the sense of adversely affecting productivity. In addition, there are several other (in some cases possibly convincing) rationales for action: uneven market power, discrimination against women and minority groups, obstacles to information (e.g., about health and safety hazards), and insufficient insurance against risks (e.g., unemployment, sickness, and old age). Furthermore, some actions conducive to employment growth can be implemented locally. These include measures to improve the quality of the labor force, to provide and maintain sound infrastructure (particularly transportation investments), to hold local tax rates at a moderate level, and to promote environmental quality. “Cities with efficient labor markets, and with appropriate conditions for growth and innovation, will adjust more easily than others. What is done in each urban area--by urban policies--to promote the efficiency of labor markets and the business creation potential will facilitate adjustment and flexibility of the entire economy” (Prud’homme, 1995:735-6). The argument is that labor-augmenting policies may improve macroeconomic performance just as efficient macroeconomic policies can improve labor market performance. Thus, it is insufficient to take the obvious macroeconomic steps (e.g., trade liberalization, fiscal discipline, and deregulation of financial markets). These measures will not create jobs rapidly enough and may not garner long-term political support for market-oriented strategies. Complementary strategies are needed: faster provision of infrastructure in poor settlements and in metropolitan-wide transportation and telecommunications, and social policy reforms in taxation, education, housing, and social security to reduce resource misallocation and promote income equity (World Bank, 1995c). Similarly, policies to raise labor productivity may not be labor policies per se, but more general in nature. For example, “urban policies could be defined as measures to increase positive externalities and decrease negative externalities” (Prud’homme, 1995:732).

On the other hand, Rodgers (1989) has challenged the view that the labor market can be analyzed as if it were just another commodity market. Instead, he argues in favor of emphasizing social, institutional, and legal factors associated with unequal access to the labor market. However, this argument does not undermine the need for freeing up the market, but only emphasizes that such attempts will be more difficult to achieve and more prolonged. Freeing up the urban labor market will weaken the social and cultural constraints on its efficiency.

Others (e.g., Jatoba, 1989) recommend a more sweeping menu of policies, including measures to support small-scale production; stronger enforcement of minimum wage laws; wage subsidies for particular groups; interventions to prevent worker exploitation; better organization of the labor legislation concerning the right to strike, collective bargaining, entry into protected labor markets, and aid to the unemployed; and better labor market information. Such government activism would be unwise, because (among other problems) developing-country governments are not equipped to handle such a broad mandate. The narrower and more conservative principles outlined above provide a sounder basis for

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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intervention. We turn now to specific policy interventions that can address the problems outlined in the previous section.

Policies to Reduce Unemployment

Macroeconomic Policies

There are striking regional differences in macroeconomic policy. In East Asia, there has been generally successful export-oriented industrialization, combined with equitable income distribution policies (e.g., land reform, agricultural development policies) and an emphasis on labor-intensive measures. In Africa and Latin America (with notable exceptions, such as Botswana and Chile), on the other hand, government efforts to promote industrialization have been based on less open (to international markets) and more interventionist strategies, including trade regulation, creation of investment incentives, and direct public investment in manufacturing. These policies favor large firms and discriminate against the smaller firms that generate most jobs.

Structural adjustment policies have a mixed impact on employment. For example, a study of Costa Rica showed that structural adjustment policies helped to stimulate export promotion and private investment, and that unemployment eventually dropped (Fields, 1988). Of course to date, the forced and delayed adjustment in Mexico has had the opposite effect, although the current situation may be no worse than what would have happened in the absence of any adjustment. Structural adjustment strategies are often associated with short-term formal-sector job losses, but the key issue is whether the adjustment costs are short-run, offset in the longer run by the creation of new jobs. The benefits of export promotion tend to be concentrated in labor-intensive industries, and more emphasis on the private sector can fuel the growth of new labor-intensive businesses. Fields (1989) also points out that in the urban modern sector, the employment of unskilled workers has been limited by labor demand constraints; this implies that promotion of economic growth, especially export growth in labor-intensive industries, is critical.

Countries faced with serious debt problems, in particular, must be very careful with respect to policy choices. Wrong-headed policies can result in severe capital flight that almost always inflicts high adjustment costs on workers. For example, in the 1980s real wages fell 15-40 percent in Latin American countries, with a few exceptions, such as Argentina.

International Trade Policies

This is a controversial issue. Krugman (1991) has argued that protectionism and autarky reinforce primacy (i.e., the dominance of the largest city in a country’s urban size distribution). Open markets create a more level playing field between core and periphery

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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manufacturing and between urban and rural economic activities. However, at least in the short run, a dampening of labor demand has ambiguous impacts on the labor market because of doubts about the indirect effects on labor supply (via induced rural-urban migration).

An interesting feature of global interactions since 1970 is the rise in trade and capital flows and the decline in labor flows (World Bank, 1995a). The deceleration in international migration may work to dampen wage convergence, but this effect can be offset by international trade and capital flows that substitute for international labor movements. Also, international trade benefits workers because of lower consumer prices and stimuli to higher labor productivity.

Ades and Glaeser (1994) found that the share of trade in gross national product (GNP) was negatively related to the size of the largest city; in a large cross-section, a 10 percent increase in the trade share was associated with a 6 percent decline in the size of the primate city. High tariffs (measured by the ratio of import duties to total imports) were associated with increasing primacy (a 1 percent increase in the tariff variable increased primate city size by 3 percent). In an earlier study, Krugman (1991) found that a 1 percent increase in the share of GDP spent on government transport and communications investments was associated with a 10 percent reduction in primate city size, indicating that barriers to internal trade reinforce primacy. Tests of these hypotheses on Pacific Rim countries by Richardson (1995) produced ambiguous results.

Nevertheless, outward-oriented countries do grow more rapidly than inward-oriented countries. In the Pacific Rim, manufacturing accounts for three-quarters of exports, and manufacturing is overwhelmingly urban. Measures to increase urban productivity (e.g., human resource investments, infrastructure provision, and alleviation of negative externalities such as traffic congestion and air and water pollution) have direct and favorable effects on growth and export competitiveness (Richardson, 1995).

Human Resource Policies

Although there is a serious problem of the educated unemployed in some megacities, provision of better education is generally associated with rising labor productivity and higher wages; examples are offered by many East Asian countries, such as Singapore and South Korea (see Park, 1988). However, there is no clear evidence that there are public benefits to education beyond the private benefits (Psacharopoulos, 1985). 6 On the other hand, some recent studies (e.g., Behrman, 1995; Rosenzweig, 1995) have found that more education has externalities that include facilitating the spread of knowledge about new production techniques and new markets. Also, there is evidence of positive rates of return to education even in the informal sector (Cohen and House, 1995).

Government training programs have a poor record, but on-the-job training programs in the private sector can be very important. Of course, government stimulation of the private

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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sector can also be important. For example, in the mid-1970s, Chile changed from a centralized government training system to one where the government subsidized decentralized private training programs and supervised both government and private employment offices through a coordinating and supervising agency called SENCE (Servicio de Capacitacion y Empleo). Tax credits have induced the provision of training for about 5.5 percent of the labor force, or about 250,000 workers. Also, educational reforms in Chile since the 1980s have resulted in a 50 percent expansion in the provision of secondary education, especially by offering additional subsidies at different rates to technical, agricultural, industrial, and commercial schools and by attracting private providers into the system.

Policies to Reduce Poverty and Income Inequality

Minimum Wage Policies

It is difficult to draw a clear-cut conclusion about whether minimum wages have favorable consequences. The consequences depend on the employment impact, determined in turn by market structures, the threshold level, and the degree of enforcement. To the extent that minimum wages are effective in the formal sector, they tend to protect the labor elite employed in that sector at the cost of restricting access to formal sector jobs by others.

Minimum wages relative to average incomes tend to be higher in poor countries (World Bank, 1995a). For example, some sectoral minimum wages in Bangladesh are more than double GNP per capita. To the extent that this is true, minimum wage legislation reduces employment.

Minimum wage legislation has no impact on wage levels of the unprotected informal sector that dominates income-generating activities in the megacities of low-income countries. Conversely, the minimum wages are often irrelevant to privileged formal sector workers who earn much more.

In periods of crisis, real minimum wages fall drastically (as they lag behind inflation), e.g., by more than 40 percent in the 1980s in countries such as Mexico, Chile, and Kenya. Yet minimum wage legislation is often not enforced, with substantial proportions of the labor force being paid less than the minimum wage. In Mexico City, for instance, a 1985 study by the Mexican Labor Congress found that 56 percent of workers were earning less than the minimum wage (United Nations, 1991). However, Gregory’s (1986) data did not support this conclusion, with average wages in all service sectors found to be well above the minimum. In expanding economies, minimum wages tend to be irrelevant as productivity growth fuels real wage increases.

The impact of the contribution of minimum wages is less in very big cities. Why? People are more productive in larger cities. The “natural wage” (i.e., the wage without legislative constraints) is higher, and fewer people are paid less than the minimum wage; the

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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minimum wage constraint is not binding (Prud’homme, 1995). Nevertheless, especially in Latin America, minimum wages can be an instrument for keeping wages down because they are used as a reference standard and are usually set far below the market wage.

Informal Sector Promotion

Measures to facilitate the expansion of informal sector activities and small-scale family businesses (discussed under “Policies to Reduce Big Firm Bias” below) can have an important role in relieving poverty. Not only do they create income-generating activities for low-income populations, but they also open up opportunities for upward mobility, given the significant overlap in the wage distributions of formal and informal sector work.

Policies to Eliminate Job Mobility Constraints

Labor Unions

Labor unions in developing countries vary widely in bargaining power and impact. Generally, they defend the interests of a relatively privileged group of regular workers, and the interests of this group may diverge widely from those of workers on the margins of the labor market. However, union membership tends to be low in developing countries, typically less than 20 percent of the urban labor force.

Labor unions are often not independent, but under indirect government control. For example, in Egypt the labor syndicates operate under the umbrella of the General Union of Labor (GUL); tensions persist between the workers and the syndicates, and between the syndicates and the GUL. In India, too, the major labor federations are affiliated with political parties, and their collective bargaining is subject to compulsory adjudication.

The influence of labor unions is mixed. On the positive side, they minimize labor turnover; improve productivity; and reduce wage dispersion and discrimination, e.g., against women workers. On the negative side, their monopolistic behavior boosts member wages (union wage premiums being in the 10-30 percent range) at the expense of nonunion labor, consumers, and stockholders, and they oppose necessary structural adjustments. Appropriate policy would attempt to create an environment that would promote the positive impacts of unions while mitigating the negative. Such policy would involve creating competitive product markets, facilitating workers’ freedom of association, and promoting decentralized bargaining (as in Seoul since the late 1980s). In addition, in some developing countries (e.g., Bangladesh, Egypt), the repression of unions has often been coupled with actions (such as featherbedding in the public sector, job security provisions, and high minimum wages) that exacerbate labor market distortions. In general, wages and the terms of working conditions should be left to voluntary agreements between workers and employers.

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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Social Policies and Job Security Laws

Social policies covering housing, pricing of “essential” goods, public services, and social insurance may have an important impact on poverty and welfare. When they are job-attached, however, they can impede labor market efficiency. Similarly, job security legislation mandating severance pay and long notices (as in Mexico and Sri Lanka) can impede the growth of formal-sector employment by encouraging firms to rely on casual labor and/or subcontracting.

Transportation Strategies

Many megacities suffer from inadequate transportation that undermines labor productivity. Bangkok and Cairo are merely two of many examples. Bangkok’s problem is insufficient allocation of land to road space in the central city. Dealing with the problem by investments in intersection flyovers has had a negligible impact. Decentralization of jobs and population would appear to be a more viable strategy. Cairo has also invested heavily in intersection flyovers, in elevated freeways at the 6th of October and 15th of May satellite cities, and in the Ring Road project. By 1993, more than 96 percent of the Greater Cairo Project Implementation Agency’s investments were in transportation (Yousry, 1995). However, the experience of developed-country cities suggests that it is impossible to build enough roads to control congestion. There are lower-cost and more effective approaches to overcoming the inaccessibility obstacles to higher worker productivity, including spatial reorganization (i.e., the decentralization of both jobs and people); the promotion of small-scale, private paratransit operators in peripheral settlements; and a combination of transportation demand management and transportation supply management strategies.

Spatial (Geographical) Redistribution Policies

Explicit spatial redistribution policies have had a mixed record. Job growth has slowed down in Seoul, but there is a great deal of controversy about whether this was the result of direct policies or of many other considerations, including market forces. In many other countries, however, spatial redistribution policies have been ineffective and often costly.

Secondary city strategies have value in helping those individual cities, but they have a negligible effect in reducing labor market pressures on megacities. Rural development strategies have done little to relieve megacity labor force growth, although labor-intensive public works programs may have a modest but discernible effect. The slowdown in megacity growth, where it has occurred, has been largely a natural consequence of declining national population growth rates and has had little to do with spatial redistribution.

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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The most striking change in direction in spatial redistribution policies is post-Mao China’s abandonment of its long-established anti-urban policy to discourage rural migrants from entering urban areas. This shift may reflect the view that reducing rural surplus labor is key to efforts to raise rural living standards, in part because of urban-rural remittances. As a result, the growth rates of China’s two largest megacities have soared--l.8 times faster growth than in the 1970s and 1980s in Beijing and 2.62 times faster growth in Shanghai (United Nations, 1995). This rapid growth has aggravated the job creation problem in those cities, and there have been recent attempts to reimpose strict controls by sharply raising the cost of urban entry.

Policies to Protect Labor

Child Labor Laws

Legislative mandates against child labor are symbolic rather than effective unless incentives can be developed to shift children out of work and into school and/or to implement income security programs (e.g., food for work). Premature enforcement of labor laws is less desirable than “a comprehensive approach that takes into consideration the interaction between labor market conditions, school availability, child labor, and poverty” (World Bank, 1995b:72).

Nevertheless, child labor laws are a test of the effectiveness of government intervention in the face of market trends. Everyone agrees on the central objective--to improve child welfare; the potential disagreement is about the measures used to achieve this goal. Banning child labor outright, other than its public relations value, is ineffective if enforcement procedures are weak and if the ban conflicts with household goals. A preferred strategy is to create an environment in which child employment declines through expansion of primary and secondary education facilities, promotion of economic growth, and other non-labor market policies.

Health and Safety Legislation

The costs of occupational injuries comprise up to 4 percent of GNP in developed countries and are probably much higher in most developing countries. In general, the rural and informal sectors have received little protection from health and safety standards. Also, there are enforcement problems in the formal sector, especially with respect to small firms. In developed countries, the unions play a significant watchdog role; this could be an important contribution in low-income countries where enforcement capacity is so weak. Furthermore, developing effective liability measures may have more concrete results than relying on unenforced safety regulations.

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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Trying to link labor standards to international trade sanctions is ill advised because it panders to protectionist interests, unless the focus is limited to core standards (e.g., no forced labor, freedom of association, and prevention of extreme forms of discrimination). It should also be recognized that such provisions, if effective, may worsen rather than improve the income-generating opportunities and the welfare of the alleged beneficiaries.

Privatization

For the past 15 years there has been a strong trend toward privatization, including private-sector participation in shelter, infrastructure, and services. The more typical privatization strategy, however, involves the sale of the assets of inefficient public enterprises. For example, in Egypt privatization reforms were one element in the structural adjustment program adopted in 1987. A direct result was Business Sector Law 203 of 1991, which initiated cutbacks in the bloated public sector by the sale of shares and other assets of state-owned enterprises, most of them located in Cairo (Yousry, 1995).

Privatization of public-sector activities, including production establishments, can have beneficial effects on labor productivity through the incentives offered to both employers (managers) and workers. Nevertheless, it is frequently opposed by labor unions, which fear job losses, wage cuts, and the erosion of benefits. In many countries (e.g., Thailand), the strongest labor unions are found in the government sector (Rondinelli and Kasarda, 1993).

Policies to Reduce Big Firm Bias

Small-Scale Sector Policies

There is a case for intervention to overcome obstacles to entry, including limited access to credit, high start-up costs, a lack of technical assistance, marketing problems, an uneven playing field in competition with large firms, inadequate training, and a lack of managerial skills.

There is a clear policy choice between “removing regulatory restraints” (de Soto, 1989) and providing a “battery of costly supports” (International Labour Organization, 1986). Bromley (1993:133) argues that the former course is insufficient, while the latter is costly and difficult to implement. “The crucial issues are how to generate a macroeconomic and macropolitical climate favorable to the growth of small enterprises; how to ensure sustained and consistent application of government promotion policies; how to encourage simple, easily replicable pilot programs; and how to encourage the diffusion of successful innovations among small enterprises.” Measures to facilitate on-the-job apprenticeships in the informal sector are cost-effective (Cohen and House, 1995). However, there remains “an inherent contradiction between the flexibility and adaptability of the IFS [informal sector] and the bureaucratic rigidities that so often accompany intervention in developing countries. The IFS

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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is the product of a competitive environment and, by and large, it flourishes best in an environment unhampered by government regulation. If the government regards its role as supportive and facilitating, this may be enough” (Richardson, 1984:30).

Stronger efforts should be made to convert paid workers to self-employment (e.g., bicycle rickshaw drivers in Dhaka). Family-based enterprises also offer substantial benefits (stimulating capital accumulation, a long-run planning horizon, and incentive-based labor productivity).

Industrial Incentive Policies

Relatively few governments offer incentives for firms to start businesses or expand in megacities, or if offered, the incentives are higher for establishing businesses at alternative, more peripheral locations. However, most of these programs are targeted at the larger firms that are capable of meeting subsidy application requirements.

Labor Policy and Key Megacity Issues

Another way of slicing the policy cake is to relate the policy reforms discussed above to four key megacity issues: productivity, poverty, the environment, and management.

Productivity would be improved, perhaps dramatically, by policy reforms in several areas, including macroeconomic stability, open international markets, informal sector promotion, and labor policy reforms.

The informal sector is also important from the point of view of poverty alleviation, as is eliminating barriers to female employment (e.g., offering more flexible working hours or providing community-based child care).

The relationship between improvements in the labor market and protection of the environment is an important issue that has not been addressed in detail in this paper. Policies for intrametropolitan location of industry to reduce stationary-source air pollution can contribute to the spatial dispersion of the labor market. Moreover, there is substantial scope for expanding labor-intensive informal sector work in recycling and the management of waste, especially if associated with some organizational and managerial improvements in transportation. Trade-offs between environmental protection and employment can be exaggerated: introducing cleaner technology is not necessarily associated with reducing labor inputs, and servicing pollution-abatement activities is labor-intensive.

The goal of improving megacity management has implications for the upper end of the labor market, especially from the point of view of training engineers, planners, and city managers. In addition, strategies are needed for making public sector management careers

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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more attractive to the high-quality educated people who currently, and overwhelmingly, look to the private sector for employment.

Finally, we note that the analysis in this paper is restricted to megacity labor markets because traditionally, the development literature has emphasized the importance of the urban economies in absorbing surplus rural labor into a modern industrial sector. Nevertheless, it is important that planners not neglect the direct needs of both rural areas and other, smaller cities. Hence all the above-mentioned policies need to be evaluated at the national, and not just the megacity, level.

THE ROLE OF SCIENCE AND TECHNOLOGY

How can megacity labor markets benefit from rapidly changing technology? In several developing-country megacities, there are pools of unused educated talent. The back-office telecommunications jobs (e.g., in credit card divisions of major banks) that have decentralized to places such as South Dakota and Ireland could equally go to developing-country megacities if it were possible to finance and undertake the massive capital investments required. The latter would involve further freeing up the privatized telephone companies and facilitating the development of joint, i.e., domestic-foreign ventures.

International transportation and communications costs (for commodities, capital, labor, and communications infrastructure) have fallen by 82-97 percent since 1920. Accordingly, national economies cannot be insulated from global pressures, except by self-defeating autarkic interventions. However, megacities are much better placed than other locations within developing countries to take advantage of these falling costs because intranational transportation and communications costs have fallen much more slowly than international costs.

The telecommunications lags in many developing-country megacities threaten to widen the disparities between these cities and their developed-country counterparts. However, privatization offers an opportunity to overcome some of these telecommunications infrastructure deficits (e.g., by expanding cellular telephone services). As an example of what is possible, a large-scale telecommunications infrastructure project (Teleport) is being implemented in the decaying downtown of Rio de Janeiro. It involves a 62,000 cubic meter building on a 250,000 cubic meter site, incorporating a satellite ground station; a fiber-optic vertical transmission system; a server for voice mail, e-mail, and fax; a telecenter for voice, data, and image terminals; a video conference facility; and hotels and restaurants (Tolosa, 1995). Similarly, Tehran recently inaugurated the largest telecommunications center in the Middle East (El-Shakhs and Shoshkes, 1995).

Telecommunications may also offer developing-country megacities an opportunity to exploit the benefits of being late starters. It is well known that many of these cities (e.g., Bangkok) have woefully inadequate levels of investment in transportation. Would it be

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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feasible to jump a stage of technology and, instead of building more highways and transit systems, invest heavily in telecommunications, building a quaternary sector (both national and global) dependent on decentralized, satellite office centers? (Of course, in low-income developing countries, home-based information processing would be more difficult until housing and infrastructure conditions had dramatically improved.) Some analysts (e.g., Schuler, 1992) have argued that telecommunications and transportation are more complements than substitutes, but this relationship--if true--is likely to hold only in the short run, not the long run.

The two major innovations already widely in use even in developing countries are the computer and the cellular telephone. For example, Brazil is one of the fastest-growing computer markets in the world. Although most developing countries are not yet competitive in producing state-of-the-art hardware, cities such as São Paulo and Bombay have generated significant numbers of highly skilled jobs in producing software. In the United States, computerization has had destabilizing impacts-on the labor force, creating many jobs in some sectors and destroying jobs in others (e.g., bank tellers, telephone operators, and secretaries). In developing countries, on the other hand, in part because of the availability of cheap labor, the prospects for net job creation are excellent. Moreover, significant opportunities are being created in related activities, such as the expansion of electronic repair services in the informal sector and subcontracting for CD-ROM production and desktop publishing from developed-country corporations.

The cellular telephone has penetrated into surprising markets. For example, women participants in the Grameen Bank’s microenterprise loan program in Bangladesh were provided with cellular telephones to increase intervillage communications. More generally, the cellular telephone has enabled developing-country megacity businesses to overcome the frequently severe lags in obtaining regular telephone service. Diffusion could increase rapidly as cellular transmission costs drop; the rate at which this might take place depends not only on privatization, but also on the creation of a competitive rather than a monopolistic environment.

SUMMARY AND CONCLUSIONS

Developing countries (especially when the so-called transitional economies are included) span a wide range of income and development levels, and their megacities reflect these differences. Yet most of the megacities share some key labor market characteristics: a formal manufacturing sector that is usually dwarfed (in employment terms) by the service sector; a large government sector, often riddled with inefficiencies; and an informal sector whose size depends on the level of economic development, business cycle influences, and the degree of government tolerance and support. Moreover, almost all megacities have been impacted substantially by globalization and the opening up of world markets; these trends have accelerated the need for increasingly flexible labor markets.

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
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While acknowledging that there are always exceptions to any rule, several key conclusions can be drawn from the analysis presented here.

  1. The promotion of economic growth and economic (and political) stability offers the best guarantee of expanded employment opportunities, higher wages, and labor productivity growth. Appropriate macroeconomic policies (e.g., fiscal discipline, the control of inflation, and financial reforms), combined with both tariff and nontariff trade liberalization, offer the most promising strategy for promoting employment growth and generating enough resources to pay for the infrastructure investments needed to achieve income equity.

  2. For this strategy to work efficiently, the economy in general and the labor market in particular need to adjust quickly to changing market conditions. Many developing countries have labor policies in place (such as minimum wage laws, job security provisions, job-related housing provision, pension systems, and centralized--often government-controlled--labor unions) that, when enforced (often they are not), aggravate labor market distortions and impede adjustments. Deregulation of the labor market offers prospects for increasing its flexibility, especially by recognizing that policy interventions should work with rather than against market forces and should pay attention to the incentives driving the behavior of individuals and households. At the same time, improved access to credit markets for potential entrepreneurs, as well as to job information and to skills acquisition for potential employees, will help megacities’ labor markets run more efficiently.

  3. Whereas redistribution policies tampering with spatial variations in labor supply and demand are unlikely to be effective, efficiency-oriented urban policies (e.g., low-cost improvements in transportation, broadly based educational investments, privatization of government services, access to credit for small-scale enterprises, and creation of a favorable entrepreneurial environment) can promote labor productivity growth and improve the competitive efficiency of megacities, directly impacting macroeconomic performance.

  4. With respect to the role of science and technology, more rapid diffusion of known and already widely applied technologies (e.g., computer information systems, cellular telephones) may transform the structure and composition of employment in developing-country megacities, especially given the global competitive environment.

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
×

ENDNOTES

1.  

Definitions of what actually comprises the formal and informal sectors are not always very consistent. Nevertheless, “the basic distinction [between the formal and the informal sectors]. . .turns on the idea that employment in the formal sector is in some sense or senses ’protected’ so that wage levels and working conditions in the sector are not available, in general, to job seekers unless they manage somehow to cross the protective barrier. This kind of protection may arise from the action of trade unions, of governments, or of both acting together” (Mazumdar, 1981:85). However, this is not to imply that wages to employees in the formal sector are always superior to those in the informal sector with similar education and skills. Indeed, heads of more established enterprises frequently have considerable labor market experience and earn more than their formal sector counterparts.

2.  

The availability of hard data on labor characteristics and labor markets in megacities is very limited. Some of the information presented in this paper refers either to nationwide data or to urban data generally, rather than to megacities specifically. In many cases, extrapolation of the more general findings to the megacity case is appropriate. However, the limitations of the database are a major problem.

3.  

The share is even larger (70-90 percent) in secondary cities.

4.  

Characteristics of the informal sector in Manila include the following: 80 percent sold food and other items; 57 percent were unpaid family workers, while only 20 percent earned fixed wages; two-thirds of enterprise heads had not finished high school, compared with one-third of all workers; one-half of enterprise heads had worked at the same place for at least 4 years; and 56 percent were primary breadwinners (Alonzo, 1989).

5.  

An externality occurs whenever the actions of one person or firm affect another person or firm in ways that are not taken into account by the operation of the market (Varian, 1984).

6.  

Calculations of the private and social rates of return to education are often hindered by a paucity of appropriate data. Theoretically, the decision by an individual or a government to invest in education entails weighing all the costs against the expected benefits of such an

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
×

   

investment. The private rate of return to education equals the internal rate of return that equalizes the discounted present value of the private costs of attending school--including all private outlays for school fees, books, uniforms, and other school materials and the opportunity cost of lost earnings while attending school--and the discounted present value of the higher earnings that the individual enjoys in subsequent years apon completion of his/her education (Schultz, 1993). To calculate the social rate of return to education, one must add the public costs and benefits of education. The public cost of education includes public expenditure on buildings and teacher salaries. The public benefits of education include the higher taxes that better-educated workers pay, as well as the effects of raising education on improving the status of women, lowering fertility aspirations, improving maternal and child health, reducing infant and child mortality, and lowering crime, each of which may be significant. Rarely are these calculations even close to complete, although estimates of the private rate of return to education tend to be closer to its conceptual measure:

In practice, few studies even deduct from labor earnings or wage rates what the more educated worker is likely to pay in increased taxes (both income and indirect), although doing so is not conceptually difficult. This deduction is irrelevant if the number of hours worked is independent of education and if taxes are proportional to wages. . . .The calculation of the social return to education also tends to be flawed. In most empirical studies, the only distinction between the private and social returns to schooling is that the latter adds public expenditure per student into the calculation of the internal social rate of return (Schultz, 1993:52).

Suggested Citation:"Options for Improving Labor Markets for Megacities in the Developing World." National Research Council. 1996. Meeting the Challenges of Megacities in the Developing World: A Collection of Working Papers. Washington, DC: The National Academies Press. doi: 10.17226/5267.
×

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Cities in developing countries are experiencing unprecedented population growth, which is exacerbating their already substantial problems in providing shelter and basic services. This volume draws on the significant advances in technologies and management strategies made in recent decades to suggest ways to improve urban life and services, especially for the poor. Four challenges to developing countries' megacities are addressed: labor markets, housing, water and sanitation, and transportation, along with a synthesis of general thinking on how to meet megacity challenges and be competitive in the twenty-first century.

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