World Development Report 1995: Workers in an Integrating World

The World Bank released, in late June, its 1995 World Development Report dealing with labor issues. Some of the most important thoughts, conclusions, and statistics from the 250-page volume are summarized below, with special attention to issues related to transition.

Postsocialist Workers, Unite!

Of the world's 2.5 billion workers, 1.4 billion live in countries struggling with transition from central planning or high degrees of protectionism. Moves from central planning to market systems, and from protectionism to openness, are key to increasing opportunities and incomes. Economic reform can create opportunities for some workers, but it can have wrenching effects on others. But the costs lie in the disease, not the medicine: effective reform brings gains for workers. Governments can reduce the costs of transition by supporting mobility (reforming housing markets), providing transfers (through unemployment insurance or public works), and equipping workers for change (through training and education).

In the short term workers often feel the pain as real wages fall, unemployment rises, and employment shifts toward informal activities. In Bulgaria, the Czech Republic, Poland, Romania, and Russia official statistics show that real wages fell between 18 and 40 percent in the first year of transition. Moving the economy as quickly as possible toward a new growth path is key to minimizing the pain and social costs of adjustment. In this process macroeconomic stability and credibility of the overall reform are critical.

Structural change will hurt workers, either temporarily if reallocations are involved, or permanently if labor productivity is below what earlier wages justified. The main challenge is to allow the transformation to a private economy while minimizing social dislocations and transitional costs in unemployment.

In transition economies wages have exhibited a fair degree of downward flexibility; the challenge is to increase mobility across sectors. Nonwage labor costs are high and should be reduced in the context of comprehensive reform of social insurance schemes. Unions are expected to continue playing a positive role at the firm level in improving workers' wages and conditions. However, they are likely to continue opposing rapid reforms unless the workers that stand to lose receive proper support and compensation.

There is a serious risk of a stalled or incomplete transition if social tensions are not addressed. Managing the social dimension of the transition, maintaining the quality of social services, enabling rapid job creation, and avoiding the spread of poverty are all key goals, but they must also be balanced with fiscal probity to ensure both social and macroeconomic stability.

Blame Domestic Policy

• Countries that engaged in the international economy and relied heavily on domestic markets achieved the most rapid growth in wages and jobs. Where exports have risen fast, so have real wages.
• International competition has undoubtedly increased over the past two decades, but current import levels with developing countries-at about 3 percent of industrial countries' GDP-are too small to account for much of the woes in the industrial-countries' labor market. The occassional sharp rise in unemployment in these countries owes more to reduced demand for unskilled labor, due to technological change combined with rigid wage and social security systems, than to competition from cheap labor in emerging economies. The key to helping the unskilled in industrial countries lies in domestic policy.
• Industrial countries already reap benefits from the integration of developing and transition countries into the global economy, as these countries are purchasing a large and growing share of industrial country exports. Expansion of trade brings all workers immediate gains through lower prices for consumer goods and enables workers to move, over time, into better jobs, instead of remaining hostage to domestic demand.
• For emerging and industrial economies alike, investing in education and training gives people skills that they can transfer from job to job and improves workers' ability to perform standard tasks, to process and use information, and to adapt to new technologies and production practices.

Stronger Labor Force

• Twenty years ago two-thirds of the world's workers were largely cut off from international markets by protectionism and central planning; by 2000 more than 90 percent of the world's labor force will be working in countries with strong links to the global economy.
• Over the next three decades the world's present 2.5 billion labor force (almost twice as large as in 1965) will increase by another 1.2 billion. Ninety-nine percent of that rise will be in low- and middle-income countries.
• Well over half the world's working-age population of 2 billion people live in low-income economies where average income per person was below $695 in 1993. Another 600 million live in middle-income countries and a fortunate 300 million live in high income countries with an annual income per person of around $8,830 in 1993. Some 120 million workers-3 percent of the working-age population-are unemployed globally.
• In low-income countries 61 percent of the labor force work in agriculture and 22 percent are employed in rural nonfarm jobs, or obtain urban informal employment. Only 15 percent of workers have formal wage contracts-mainly in industry and services. In high-income countries only 4 percent work on the land, 27 percent in industry, and 60 percent in services.

World Development Report 1995: Workers in an Integrating World (New York: Oxford University Press, 1995). To order: World Bank Publications (see ordering information under New Books and Working Papers section).