Formal private sector growth and job creation are key to improving the population’s welfare and living standards. By improving the quality and the availability of domestic jobs, people will have the opportunity to increase their incomes and have a higher quality of life. Yet, the reality is that despite economic growth, the number of formal private sector jobs has remained low over the last few years.
What is it that stands in the way of private sector job creation? The report, Transitioning to Better Jobs in the Kyrgyz Republic, takes an in-depth look at the trends in jobs over the past decade. In particular, it reviews the behavior of small, medium, and large firms (as measured by the number of employees) since these categories of firms have exhibited different employment, growth and survival rates. The difficulty of the formal private sector to create jobs can be traced to problems affecting output and firm growth, largely related to firm size and age.
Though the majority of private sector jobs are in large firms with 60 or more employees, these firms rarely hire new workers on a net basis. This is despite the fact that they are growing and profitable firms. One possibility is that large firms face limited competitive pressures which may reduce their incentive to invest and hire more workers. Despite achieving productivity improvements, large firms did not increase wages. For example, a small number of large firms account for more than half the formal sector’s growth—without hiring any additional labor.
On the other side of the spectrum, small firms with 10 or less employees, are much more dynamic in terms of entering and exiting the private sector. They create jobs but as quickly destroy them as the business dies. Those that survive, create jobs but few make the transition to medium-sized firms—which may be due to the high costs associated with growing in size, including higher tax, labor and social security payments and higher degrees of government regulation.
Addressing the jobs challenge in the Kyrgyz Republic requires a range of policies, from removing the barriers to firm entry and growth to making the challenging geography of the Kyrgyz Republic work better for trade. The jobs diagnostics report sheds light on these challenges and helps to disaggregate the problems faced by different groups of firms in the country.