GENEVA — Working poverty is receding and a middle class is emerging for most of the world. The International Labor Organization’s World of Work Report found that more than four out of 10 workers from the developing world are among the “developing middle class,” or those living on between $4 and $13 per family member per day. The launch of the report comes at a time when Seattle City Council members voted to raise the minimum wage to $15 an hour. Whether we are talking about the U.S. or abroad, the arguments remain consistent: job creation is needed, and not just any job will do. Quality jobs are key for the working poor to lift themselves out of cyclical poverty and into the middle class.
When Senate Republicans blocked Obama’s legislation to raise the federal minimum wage from its current $7.25 to $10.10 per hour, Obama countered, “they (Republicans) prevented a raise for 28 million hard-working Americans. They said no to helping millions work their way out of poverty.” Outside of the U.S., the working poor represent 839 million workers in developing countries who are unable to earn enough to lift themselves and their families above the U.S. $2 a day poverty threshold.
More than half of the developing world’s workers (nearly 1.5 billion people) are in vulnerable employment. This consists of informal employment not registered with the local government. Hence, it is unlikely that the worker would have worker’s benefits like pensions and health care. Paying for those in vulnerable employment tends to be precarious and volatile given its temporary and part-time nature. And because of the informality, those workers normally lack employment protection along with social and legal protection. Examples of vulnerable employment include domestic work, casual or day labor or unpaid work in a family business. For most in these situations, they continue to work because they must in order to survive.
The consequences of vulnerable employment in the U.S. look no different than that of those in the developing world. Workers in vulnerable employment are more likely than workers in formal wage employment to be trapped in a vicious circle of low-productivity employment, poor remuneration and limited ability to invest in their families’ health and education. It reduces the likelihood that current and subsequent generations will be able to move up into the comforts of the middle class.
The non-partisan Congressional Budget Office estimated that Obama’s bill would raise the wages of 16.5 million Americans and lift 900,000 of them out of poverty. It, however, also estimated the bill could cost up to 1 million Americans their jobs because businesses may simply be unable to afford to pay them. This is the reason why Republicans blocked the legislation – they claimed it would be an “unacceptable” trade-off if the bill raised the incomes of 16.5 million Americans while eliminating 500,000 jobs.
The question here, is, what kind of jobs?
The ILO World of Work Report offers many insights about the debate of job creation and raising the minimum wage. The global financial crisis from 2008 has forced many countries to come up with innovative policies to rebalance their economies and find new sources of economic growth and job creation. Many of the adopted economic policies went away from the traditional strategy of exporting commodities to advanced nations. The report draws out lessons from 140 emerging economies and low-income countries and finds that good quality jobs matter for development.
The report showcases Senegal, Vietnam and Peru. In all three countries, the share of working poor decreased while the share of wage and salaried workers increased. In general, those countries that are investing in quality jobs make the most progress.
Senegal, in 1991, was an agriculture-based society, accounting for 54 percent of total employment. As of 2013, it went down to 35 percent of employment. The share of working poor decreased by 34 percentage points since 1991, while productivity (output per worker) increased by an average of 0.5 percent annually. The share of wage and salaried workers increased from an estimated 12 percent in 1991 to 26 percent in 2013.
Vietnam demonstrated similar results. In 1991, 76 percent of Vietnamese workers were involved in the agriculture sector. By 2013, the economy shifted to a more manufacturing-base, leading to an increase in the share of wage and salaried workers accompanied by a dramatic decrease in the working poor – of which resulted in a significant increase in general productivity and prosperity for all.
Peru was no different. While its share of workers in agriculture went down from 35 percent in 1991 to 26 percent in 2013, the productivity of the Peruvian economy grew by 1.8 percent annually. The share of wage and salaried workers rose by 15 percentage points since 1991 while the proportion of working poor decreased by 23 percent.
As an economy becomes more productive, it creates more jobs. It is best explained in the ILO World of Work Report. Because wage and salaried employment is the reciprocal of vulnerable employment, the share of vulnerable employment goes down as the share of wage and salaried employment goes up. The share of wage and salaried employment in total employment also tends to increase as a result of workers moving from self-employment in agriculture to wage employment in non-agricultural sectors. Therefore, improved job quality (as proxied by wage employment) is not only a good indicator of labor market progress but also a determinant of higher per capita incomes.
Improvements in job quality provide a boost up the income ladder into the middle class – resulting in overall development. In countries that have made the greatest investment in quality jobs from the early 2000s, living standards improved more than in developing and emerging economies that paid less attention to quality jobs. According to the ILO Report, among those countries where working poverty – including workers earning less than U.S. $2 a day – declined most steeply from the early 2000s, overall per capita income grew by 3.5 percent, on average, over the 2007–2012 period. For those countries that made least progress in cutting working poverty since the early 2000s the figure is only 2.4 percent.
Over the next five years, 90 percent of jobs will be created in emerging and developing countries. It is estimated that there will be 213 million new labor market entrants given that many in the developing world are youth. Over the next decade, developing countries will need to create around 40 million new jobs every year in order to keep up with their growing working age population.
Not just any job will do will do for these young people. These youth are told to study hard so that they could earn a good job. However, this is not happening, whether we are talking about the U.S. or abroad. Many remain unemployed or underemployed after graduation. A diversified and sustainable economy is needed to ensure that social inequality does not grow and policies that protect big business interests do not continue to go unchecked.
The global achievements thus far in reducing the number and shares of workers living in poverty have been impressive. Nonetheless, more than half of the developing world’s workers remain either poor or near poor, with around 88 percent of the world’s over 7 billion population still living below the U.S.-equivalent poverty line. Furthermore, progress in reducing the numbers of moderately poor and near poor workers has not kept pace with the gains achieved in reducing extreme poverty. Does this sound familiar with the plight of the American middle class?
For overall economic growth, the ILO Report calls for further investment in social protection systems that can shield vulnerable households from economic shocks, allowing them to maintain acceptable minimum living standards and invest in their families’ health, education and skills development. It does not recommend a reduction in worker rights and allow the pool of working poor to grow.
The vote by the Seattle City Council to push the minimum wage into the $15 range may soon be followed by cities like Chicago and San Francisco. Already, 22 states require employers to pay workers more than the $7.25 federal minimum wage. There is much to learn from the ILO World of Work Report, even though it caters to developing nations. The U.S. could learn from developing countries when considering strategies to lift itself up from its own economic crisis, maintain a strong middle class and prevent a widening gap of inequalities.