Development Brief Number 64
November 1995

Winners and losers

Workers suffer during the wrenching transition from a failed development strategy, even if in the long run tey benefit from the change

The poor may find it especially difficult to cope with the falls in wages and employment that tend to occur during the transition. Sometimes women are disproportionately affected. And the pain can be deeply felt if the transition is accompanied by recession or if the renewal of growth takes longer than expected.

Who bears the burden of major changes?

Most households depend largely on their incomes from work. Therefore household living standards during periods of major change are closely---though not exclusively---tied to what happens in the labor market. But looking at wages alone can be deceptive because other factors influence current standards of living, such as labor force participation rates, rates of personal saving, the variety and quality of products consumed, and formal and informal income transfers.*

The demand for labor has fallen in almost all episodes of transition and adjustment (except perhaps in those of China and Viet Nam) as a result of some combination of macroeconomic decline and labor redeployment. The reduction is most pronounced in sectors that are no longer economically viable. Almost no adjusting economy entirely escapes a temporary decline in real wages and increase in unemployment, but the size and duration of both effects differ from country to country. What ultimately makes the difference is how many new jobs are created and how quickly---and that depends on the speed and credibility of reform.

Among workers who remain employed, the effects of reforms can vary greatly. Table 1 looks at who wins and who loses in transitions. Workers are grouped by their participation in the formal or the informal labor market, place of residence (urban or rural), sex, and skill level. The effects of transition on each group are compared with the effects on the average worker across the four broad categories of countries.

• Formal and informal sectors. Informal employment tends to swell during adjustment, as workers laid off in the formal sector seek new jobs, and women and other household members find outside employment to help offset declines in household income.

  Workers in the informal sector have generally fared better than those in formal employment during major transformations. In Poland informal sector wages were initially several times higher than formal sector wages---in part because workers and employers operating in the informal sector were earning high profits outside the taxed economy, and in part because these workers were moving into new, profitable sectors where demand was extremely high. In parts of Sub-Saharan Africa, too---for example, in C™te dÕIvoire---adjustment hit workers in the formal public sector harder than those in agriculture and informal urban employment. But in much of Latin America self-employed urban workers---particularly those in the informal sector---saw their position erode relative to that of formal wage workers. During the 1981Š83 recession in Brazil, for example, the ratio of formal to informal sector incomes increased by 7%. In the Asian countries, even though formal sector workers may have lost ground relative to informal sector workers, the welfare of both groups has risen in absolute terms.

• Rural and urban areas. In almost all countries the poor are most numerous---and poorest---in rural areas. But poor rural households have often benefited from adjustment. In Ghana agricultural real wages rose by 27%, whereas wages in nontradable-goods sectors (mainly commerce) declined by about 22% following adjustment. In Latin America and Asia the rural population also benefited in relative terms during the adjustment period, even though poverty remains concentrated in rural areas. Only in the formerly centrally planned economies of Europe do rural households appear to have suffered more in relative terms during the transition, as policies of agricultural protection were discontinued.

• Women. In Latin American adjustment episodes the hourly earnings of women declined even more dramatically than those of men, partly because women were concentrated in the informal sector and in hard-hit low-paying sectors such as apparel. But women in poor households also exhibited strong increases in labor force participation---what is often called the added worker effect. In Ghana women working in the informal sector also saw their wages decline, as excess labor released from formal employment moved into informal activities. Women were further affected by a shift in resources away from food crop agriculture---where women predominate---toward cash crops. Women played a distinct role during the transition in Asian countries as well. Although Vietnamese women faced particular challenges resulting from the collapse of childcare services provided by cooperatives, their overall position improved in line with economic growth, and female-headed households are now no poorer than those headed by men.

  The evidence on the effect of adjustment on women in the formerly centrally planned economies is mixed, but their situation is clearly not as gloomy as is usually portrayed. Studies in the Czech Republic and Slovenia indicate that, when individual characteristics are controlled for, women have actually gained relative to men in both wages and employment, either because women are better educated (and returns to education have risen) or because they disproportionately occupy jobs in sectors that have been hurt less by labor demand shocks, especially services and labor-intensive industries.

• Skilled and unskilled workers. The burden of adjustment falls most heavily on the unskilled and uneducated in both formerly centrally planned and market economies in transition. These workers are more vulnerable to structural change because they are less able to adjust to a changing environment and to take advantage of new job opportunities. In formerly centrally planned economies there is a strong inverse correlation between skill levels and the probability of sliding into poverty. The relative position of manual workers and low-skilled clerical staff, often with only a vocational education or less, has deteriorated more than that of any other group during the transition, whereas returns to education increased sharply in Poland and Slovenia. In some market economies, such as Chile and Mexico, the relative wage structure has also shifted in favor of the more highly skilled, possibly as a consequence of trade liberalization. In Mongolia and Viet Nam the largest wage gains have taken place in the booming services sector.

Severe shocks to the economy can thus create opportunities for some workers and have wrenching effects on others. Transformation follows diverse patterns in different countries, but it always involves a marked acceleration in the destruction of unviable jobs and the creation of new ones. That process is almost always accompanied by macroeconomic decline, requiring a reduction in the demand for labor and a fall in real wages. The net effects are often large drops in labor incomes, rising unemployment, and a shift from the formal to the informal sector. Even the best-designed reform produces gainers and losers in the short term, with losers particularly concentrated among the unskilled and formal sector workers in urban areas. Moving the economy as quickly as possible to the new growth path is key to limiting welfare losses, whereas giving up halfway hits poor workers hardest.

* For more details, see World Bank, World Development Report: Workers in an Integrating World, New York: Oxford University Press, 1995.