92280 Creating Jobs and Developing Skills in Latin America and the Caribbean1 10/2014 Creating productive jobs is one of the greatest challenges Basic Definitions in any economy. Concerns about job creation and labor market outcomes are central to the public debate and Countries surveyed in 2010 and how they are grouped policy agenda in the Latin America and the Caribbean for analysis: (LAC) region. One of the main objectives of the Enterprise In 2010, Enterprise Surveys (ES) interviewed 12,855 Surveys (ES) is measuring private sector employment, CARIBBEAN SERIES NOTE NO. 3 enterprises in 30 Latin American and Caribbean as well as job creation and loss. The surveys look at countries. In addition in 2009, 1,802 firms were which types of firms contribute the most to net job interviewed in Brazil also following the standard creation and at the relationship between job creation and ES global methodology. productivity. Additionally, the Enterprise Surveys identify For analytical purposes, the 31 countries are categorized the challenges facing firms when it comes to training and into 3 groups: hiring, information that can be used to inform strategies Small Caribbean countries: Antigua and Barbuda, to match worker skills with job openings. The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Suriname, St. Kitts and Nevis, St. Lucia, and St. Utilizing the ES data, the size of a firm, in terms of Vincent and the Grenadines employees, is measured by the number of full-time Medium-size countries: Bolivia, Costa Rica, Dominican permanent employees plus full-time temporary Republic, Ecuador, El Salvador, Guatemala, Honduras, employees, with the latter adjusted for the average Jamaica, Nicaragua, Panama, Paraguay, Uruguay, and length of employment during the year. Net job creation Trinidad and Tobago is measured by the difference in full-time, permanent AND THE Large countries: Argentina, Brazil, Chile, Colombia, employment over a two-year period, using recall Mexico, Peru, and República Bolivariana de Venezuela. data. Such recall data are not available for temporary employment. Net job creation captures the number of Two waves of Enterprise Surveys, 2006 and 2010: LATIN AMERICA jobs created minus the number of jobs eliminated. Note Fifteen countries were surveyed in 2006 using the that the respondents to the ES are active, “living” firms ES global methodology: Argentina, Bolivia, Chile, and hence aggregate numbers on net job creation do not Colombia, Ecuador, El Salvador, Guatemala, Honduras, capture job losses that result from companies which may Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, have gone out-of-business and were, by definition, not and República Bolivariana de Venezuela. In total, 10,930 firms were interviewed in 2006, of which 3,535 interviewed as part of the survey. were re-interviewed in 2010. Small and medium-size enterprises (SMEs) have long Reference periods of the survey data: been considered to play a vital role in job creation. Prior The information collected in the surveys refers to research using Enterprise Surveys data, including earlier characteristics of the firm at the moment of the data for the LAC region, found that SMEs account for the survey (2006, 2010 and 2009 for Brazil) or to the majority of total employment in developing economies, last completed fiscal year (2005, 2009, and 2007, as well as the largest share of new job creation. The WORLD BANK GROUP respectively). In addition, sales, employment, and contribution of SMEs was found, however, to be labor productivity annual growth rates are calculated smaller in high-income developing economies than in comparing data from the last complete fiscal year of low-income developing economies (Ayyagari, Demirguc- each survey and recall data. Consequently, growth Kunt, and Maksimovic 2011). This study was inspired by rates refer to the period 2002-05 for the 2006 surveys, a well-known paper by Haltiwanger et al. (2010) that 2004-07 for the 2009 Brazil survey, and 2007-09 for the 2010 surveys. found different results in the United States: a systematic negative relationship between firm size and job creation 1 FIGURE 1 WORKERS IN LAC ARE EMPLOYED ALMOST EQUALLY BY LARGE FIRMS AND SMEs (Average share of total employment across all countries) 60 54% 53% 51% 50 40% 40 38% 36% 33% Percent 31% 32% 30 27% 26% 25% 22% 20 18% 16% 10 0 Sub-Saharan Africa East Asia and Eastern Europe and Latin America and South Asia Pacific Central Asia the Caribbean Small firms (5–19 employees) Medium firms (20–99 employees) Large firms (100+ employees) Source: Enterprise Surveys. Note: Percentages may not add to 100% due to rounding error. that is mostly explained by firms’ age. That is, when firms’ employed by large firms; the distribution of employment age is accounted for, the relationship between firm size is similar to that in the Eastern Europe and Central Asia and job creation disappears. (Haltiwanger, Jarmin, and region (ECA). Only in Sub-Saharan Africa (AFR) and in Miranda 2010). In contrast, Ayygari et al. found that both East Asia and the Pacific (EAP) do SMEs contribute to firm and age are significant in explaining employment more than 50 percent of employment. Note that these growth rates with small firms exhibiting higher growth figures are arrived at by computing the average share rates at all ages. of employment by size group, across all countries in the region. Looking at regions as a whole, instead of Moreover, SMEs in developing economies have also computing averages over countries within a region, the been found to lag behind large firms when it comes share of employment accounted for by large firms is even to investment in job training (Almeida and Aterido higher than what figure 1 reveals. In fact, in all the regions 2010). Investing in human capital is crucial to fostering of the world, the majority of workers are employed in technological adoption and increasing productivity. Firms’ large firms. In the case of LAC, considering the region investment in human capital is particularly important in as a whole, large firms employ two-thirds of the working LAC, where evidence suggests a shortage of labor with population, under this alternative form of aggregation.3 needed skills, especially among growing firms (Pagés, Pierre, and Scarpetta 2009). More than two-thirds of total employment in LAC is in the service sector In Latin America, employment is divided almost equally between large firms and An average Latin American worker is twice as likely to SMEs be employed in the service sector than in manufacturing. Relative to other regions of the world, the share of Contrary to what most existing studies show, the ES data employment in services is similar to that in EAP region show that in LAC total employment is divided almost (figure 2). By contrast, the contribution of manufacturing equally between large firms,2 defined as those with and services to total employment is roughly the same more than 100 employees, and SMEs. Figure 1 shows the in Sub-Saharan Africa, and considerably higher for distribution of employment by firm size for the average manufacturing in the South Asia region (SAR). In the LAC country in LAC and other regions. As the figure shows, region, even when total employment is added across all in LAC slightly more than half the working population is 2 CREATING JOBS AND DEVELOPING SKILLS 3 Creating jobs and developing skills FIGURE 2 AN AVERAGE LAC WORKER IS TWICE AS LIKELY TO WORK IN THE SERVICE SECTOR (Average share of total employment across all countries) 80 70 67% 64% 61% 60 55% 49% 51% 50 45% Percent 40 39% 36% 33% 30 20 10 0 Sub-Saharan Africa East Asia and Eastern Europe and Latin America and South Asia Pacific Central Asia the Caribbean Manufacturing Services Source: Enterprise Surveys. countries by sector, instead of averaging across countries, Within LAC, large firms also contribute more to total the service sector represents 60 percent of total employment than SMEs in the large and medium- employment. Nonetheless, it should be noted that shares size economies. In the small Caribbean economies, of employment by firm size and/or sector may differ from however, SMEs account for more than two-thirds of the ones presented here, depending on the relative share total employment (figure 3). The larger contribution of micro firms (those with less than 5 employees) or to total employment by SMEs in the small Caribbean informal sector employment in an economy. economies holds even if employment is added across all countries in the sub-region grouping: in this case, the SME contribution to employment falls from 69 percent to 58 percent, but it is still the dominant employer in this FIGURE 3 IN THE SMALL CARIBBEAN ECONOMIES, SME sub-region. For medium-size and large economies, adding CONTRIBUTION TO TOTAL EMPLOYMENT employment across all countries in the region does not SURPASSES THAT OF LARGE FIRMS (Average share of total employment across all countries) drastically change the contribution to employment by SMEs vs. large firms in the other two sub-regions from 80 69% the ones shown in figure 3. 70 60 58% 50 Most countries in Latin America and the 44% Caribbean are net job creators Percent 40 31% 30 28% 25% In the LAC region, net job losses are not common: in 19% 20 12% 14% 2010, only 6 out of 31 LAC economies experienced job 10 losses at the country level. Two were large economies 0 (Mexico and Peru), three were medium-size economies Large economies Medium-size Small Caribbean economies economies (Ecuador, El Salvador, and Honduras), and only one Small firms Medium firms Large firms was a small Caribbean economy (St. Vincent and the (5–19 employees) (20–99 employees) (100+ employees) Grenadines). In virtually all of these countries, job losses were driven by the contraction of jobs in large firms. Yet Source: Enterprise Surveys. compared to other regions of the world, LAC had a higher IN LATIN AMERICA AND THE CARIBBEAN 3 FIGURE 4 SME CONTRIBUTION TO JOB CREATION IN LAC IS CONSIDERABLY HIGHER THAN THE CONTRIBUTION OF LARGE FIRMS (Average contribution to job creation across all countries) 500 400 377% 300 222% 200 Percent 100 89% 88% 78% 11% 0 12% 22% -100 -122% -200 -300 -277% -400 Sub-Saharan Africa East Asia and Eastern Europe and Latin America and South Asia Pacific Central Asia the Caribbean SMEs Large firms (100+ employees) Source: Enterprise Surveys. percentage of countries with net job losses. No country in small Caribbean economies the creation of new SME in the South Asia region experienced job losses and only jobs is much higher, counterbalancing the average job two out of 39 countries in the Sub-Saharan Africa region losses experienced by large firms. experienced net job losses. In total, out of 118 countries with comparable ES data, only 14 countries experienced In LAC, older firms contribute most to new jobs, in net job losses. absolute numbers, and to total employment. On average, firms 10 years and older create 79 percent of new jobs SMEs are the largest contributors to job creation in LAC, and account for 85 percent of total employment. High generating 88 percent of new jobs in 2010.4 Interestingly, labor productivity firms generate more new jobs than this figure is one of the lowest in the developing world lower productivity firms; an average of 67 percent of new (figure 4): only in the South Asia region did SMEs contribute a smaller share to overall job creation. Indeed, FIGURE 5 SMEs ARE THE MAIN JOB CREATORS IN THE the East Asia and the Pacific and Eastern Europe and LAC REGION Central Asia regions experienced considerable SME 80 contribution to job creation, which counterbalanced 70 69% considerable job losses among large firms.5 In LAC, 60 56% as in South Asia and Sub-Saharan Africa, large firms 53% 50 experienced positive net job gains but their contribution 40 38% to overall job creation was considerably smaller than that Percent 33% 30% 30 of SMEs. 20 17% 14% Among all countries in the LAC region that exhibit 10 positive, net job creation,6 the bulk of job expansion 0 -10 comes from SMEs. Among large economies, small firms -9% -20 Large Medium-size Small Caribbean are the most dynamic in generating new jobs: almost economies economies economies 70 percent of new jobs are generated by these small firms (figure 5).7 In medium-size economies and small Small firms (5–19 employees) Medium firms (20–99 employees) Large firms (100+ employees) Caribbean countries, both small and medium-size firms contribute significantly to the creation of new jobs, but Source: Enterprise Surveys. 4 CREATING JOBS AND DEVELOPING SKILLS 3 Creating jobs and developing skills jobs come from high productivity firms while only the Comparing training and labor productivity in manufacturing remaining 33 percent are created by lower productivity firms across the region, high-productivity firms are firms. more likely to offer training than low-productivity firms among small and medium firms. Large firms, however, do While more workers are employed in older and larger not exhibit differences in frequency of training between firms in the region, the rate of growth of employment high and low productivity firms. Indeed, small firms that is higher for smaller firms of all ages. As Ayygari et al. offer formal training are more than twice as productive found using earlier ES data for the Latin America and the as those that do not. This difference in training by labor Caribbean region, the new data show that both age and productivity of the firm is less remarkable for medium- size are significant elements that explain employment size firms. For large firms, productivity levels are similar growth rates: smaller firms exhibit higher employment for those that offer formal training and those that do not. growth rates and so do younger firms.8 In addition to information on training frequency and intensity, the Enterprise Surveys in LAC also collected More than half of manufacturing firms in information on labor market frictions faced by employers: LAC provide training to workers the number of firms with unfilled vacancies at the time The Enterprise Surveys also provide information on of the survey and the percentage of firms with unfilled training and skills of the workforce for manufacturing. vacancies for more than four months. As expected, the Manufacturing firms in LAC are as likely to provide likelihood of having unfilled vacancies increases with firm training as their counterparts in East Asia and the size, but the probability of experiencing vacancies that Pacific, but more likely than those in the Sub-Saharan are “hard to fill” decreases with firm size (figure 6). Africa, Eastern Europe and Central Asia, and South Asia In sum, the recent Enterprise Surveys in the Latin America regions. For a typical country in LAC, 43 percent of firms and Caribbean region confirm that SMEs show higher offer formal training to permanent, full-time employees, employment growth rates than large firms even though compared with 42 percent for East Asia and the Pacific, employment is divided almost equally between them. 36 percent for Eastern Europe and Central Asia, 33 Naturally, large firms create more new jobs than SMEs in percent for Sub-Saharan Africa and 19 percent for South absolute numbers but the growth rate of employment is Asia. higher for SMEs. The percentage of manufacturing firms offering formal training is higher in the region’s largest economies than in medium-sized economies and the Caribbean. In 2010, 56 FIGURE 6 LABOR MARKET FRICTIONS FOR BUSINESSES IN LAC percent of such firms in large economies offered formal 50 training compared with 46 percent in medium-size 45 economies and 32 percent in small Caribbean economies. 40 Percentage of firms (%) Large manufacturing firms are more likely to invest in 35 workers. On average, more than three out of four large 30 manufacturing firms in LAC provide formal training 25 20 to employees compared with one in three small 15 manufacturing firms. This finding is consistent with the 10 existing evidence for OECD economies (Ammerman 5 and Cuddy 2012). However the intensity of training, 0 or the percentage of workers receiving training in Small Medium Large (5-19 employees) (20-99 employees) (100+ employees) manufacturing firms, is similar across firm sizes with firms on average offering training to roughly 60 percent Have unfilled vacancies Have vacancies that are hard to fill of their employees.9 Source: Enterprise Surveys. IN LATIN AMERICA AND THE CARIBBEAN 5 Endnotes: 8. This was confirmed by regression analysis following the model developed by Haltiwanger, et al. 1. Lead authors: David C. Francis, Silvia Muzi, Jorge Rodriguez 9. Due to differences in the questionnaire the intensity of training Meza, and Federica Saliola with the collaboration of the LAC can only be computed for medium-size economies and large report team. economies. 2. As in the earlier research this result is for the universe of inference of the Enterprise Surveys: it includes only the formal References: sector and it does not include micro (less than 5 employees) nor firms and or firms in the agricultural, extractive, financial, or Almeida, R., and R. Aterido. 2010. Investment in Job Training: Why public sectors. are SMEs Lagging So Much Behind? Policy Research Working 3. Considering the region as a whole is equivalent to considering Paper 5358. World Bank, Washington, DC. each region without frontiers, or to adding up all employment Ammerman, Phillip, and Natalia Cudy. 2012. “Training for Working across countries within a region. People: How to Assure Sufficiency, Efficiency, Impact?” IDB 4. When analyzing job creation, size is defined using the baseline Technical Note (forthcoming). year which is 2007 for all countries with the exception of Brazil, Ayyagari, Meghana, Asli Demirguc-Kunt, and Vojislav Maksimovic. for which the baseline year is 2004. 2011. “Small versus Young Firms across the World,” World Bank 5. Given that the 100% contribution to job creation is divided Policy Research Working Paper 5631, Washington DC. between SMEs and large firms, net job losses in any of these Haltiwanger, John C., Ron S. Jarmin, and Javier Miranda. 2010. “Who groups necessarily mean that the other group must have a Creates Jobs? Small versus Large versus Young,” NBER Working contribution greater than 100%. Paper 16300, Cambridge, MA. 6. Excluding the 6 countries with negative job creation. Pagés, C., G. Pierre, and S. Scarpetta. 2009. Job Creation in Latin 7. If Venezuela is excluded, however, large firms become the main America and the Caribbean: Recent Trends and Policy Challenges. job creators among large economies, with a 49% share of job World Bank, Washington, DC. creation. Enterprise Surveys provide the world’s most comprehensive firm-level business environment data in developing economies. An Enterprise Survey is a firm-level survey of a representative sample of an economy’s private sector. The surveys cover a broad range of business environment topics including access to finance, competition, corruption, crime, gender, infrastructure, innovation, labor, performance measures, and trade. The World Bank has collected this data from face-to- face interviews with top managers and business owners in over 130,000 companies in more than 135 economies. Firm-level data and summary indicators are available on the website. www.enterprisesurveys.org 6 CREATING JOBS AND DEVELOPING SKILLS