How can the Nobel-winning “experimental approach to alleviating global poverty” contribute to research on job creation?

A job fair in New York. Photo: rblfmr | Shutterstock.com

“We want to create more and better jobs.” Sound familiar?

Job creation is an all-time favorite talking point for politicians around the world, as economies adapt to new trade patterns and technological innovation causes tectonic shifts in older industries. It’s particularly relevant to countries with growing youth populations, where the supply of labor is outpacing the rate at which new jobs open up.

But how do we actually create more jobs, and what role do private sector firms play in expanding opportunities for job growth?

As empirical economists, we use randomized evaluations to draw out lessons on what works—and what doesn’t—in programs designed to help firms grow and create jobs. Randomized evaluations in the social sciences, particularly in firms research, have tremendous potential to provide evidence on previously unanswerable questions.

Earlier this month, the Nobel Memorial Prize in Economics was awarded to three of our colleagues at J-PAL and MIT, Abhijit Banerjee, Esther Duflo, and Michael Kremer, for their pioneering work in advancing the use of this methodology in social policy research. As the Nobel committee recognized, this research has already made profound contributions to our understanding of social policies and holds great potential to continue to do so.

Our work as co-chairs of J-PAL’s Firms sector is focused on applying this Nobel-winning methodology to identify the best ways to create jobs while ensuring fair wages, good working conditions, and job security for workers.

How CAN we create better jobs?

Job creation is a key ingredient for poverty alleviation. In theory, helping private firms grow could lead to better jobs. However, there is relatively little rigorous evidence from randomized evaluations that can help us understand what could be effective strategies.

While the past few years have seen a rapid growth in the number of firms-related randomized evaluations, many of these studies have focused on growth and employment outcomes among microenterprises—firms with zero to ten employees—with a concentration around access to credit and business training as a means of firm growth and job creation.

To really move the needle and expand the evidence base around job creation, research on firms would benefit from a broad but unified agenda that focuses on addressing policy relevant questions that can inform the decisions of implementing partners, donors, and governments.

What could a unified research agenda aimed at job creation look like?

In low- and middle-income countries, it is often more common for people to work in small family farms, microenterprises, and family businesses. Larger firms—those with ten or more employees—tend to be scarce in these settings, and the larger firms that do exist are often state-owned enterprises, or tend to be less productive compared to firms of similar sizes in high-income settings.

The dominance of micro-firms and the relative absence of larger firms may be indicative of barriers preventing businesses from growing. If true, understanding and dismantling these obstacles to growth could unlock new opportunities for better job creation and potentially make huge strides toward poverty reduction.

These firm-size dynamics raise important policy questions, as highlighted by World Bank researcher David McKenzie: what are the development payoffs to supporting the many microentrepreneurs versus supporting a smaller number of high-growth or larger firms? Will the growth and development of microentrepreneurs, high-growth entrepreneurs, or larger firms have a greater impact on employment, wellbeing, and economic growth?

These are some of the big questions that we believe should form the foundation of a frontier research agenda on firms.

Opportunities for innovative research

While randomized evaluations play an important role in helping us answer these big policy questions, they can be tricky to conduct in the unique context of firms research.

For instance, it can be difficult to rely on firms to follow through on promised interventions, but many researchers have tackled this issue in innovative ways. Anderson et al (2018) offered training participants a certificate upon completion; Martinez et al (2018) offered in-kind grants conditional on completion to simultaneously investigate the effects of an additional asset transfer, and Giné and Mansuri (2014) provided training participants a travel allowance, a snack and lunch, as well as an awards ceremony on the last day to celebrate completion. Take-up rates of interventions for firms in these studies were relatively high.

Moreover, firms tend to be highly varied along a number of dimensions (for example, measures of sales and profits). Small sample sizes, combined with the diversity of firm characteristics make it much harder for an evaluation to detect any meaningful changes in outcomes of interest.

Adjusting for small sample size

In my experimental study of consulting on business practices in India, I (Nick) and my co-authors circumvent this issue by focusing on delivering a more intensive intervention to a smaller sample of seventeen relatively similar textile firms.

The small samples were complemented with more frequent data collection over an extended period of time. As a result, my co-authors and I were able to detect a productivity increase of seventeen percent as a result of improved management practices in the first year.

Identifying spillover effects

Furthermore, the benefits to a firm or enterprise of a policy intervention may come at the expense of neighboring firms.

For instance, a business training program may help firms attract customers--but these customers may have been diverted from competitor firms that don’t have access to the program, who then stand to lose business.

David and Susana designed an innovative randomized evaluation in Kenya to understand these spillover effects. They first randomly assigned 157 rural markets to receive a business training program, then randomly assigned the offer of business training to firms within treated markets. Using this approach, not only were they able to evaluate the impacts of training, but they were also able to understand if these impacts were displaced from competitor firms who had not received the training (McKenzie and Puerto, 2017).

This demonstrates that understanding and measuring spillover effects requires creativity and careful research design (and resources to implement), but can really expand our understanding of the broader implications of supporting firm growth.

A path forward

The examples we have listed here illustrate the challenges--and potential--of tackling big questions around firm growth and job creation. With creative and thoughtful collaboration between researchers and policymakers, we can build a groundbreaking global and policy-relevant research agenda.

Understanding the role of firms in job creation and economic development is an important and worthwhile endeavor in the fight against global poverty. In order to produce the rigorous research required to inform this endeavor, we need greater partnerships and engagements between researchers, governments, policymakers, private sector organizations and civil society.

Fortunately, the development community, including J-PAL affiliates, are well positioned to bring the rigor of randomized evaluations into understanding promising approaches to firm growth and job creation.

We hope that the incredible achievements of Nobel winners Abhijit, Esther, and Michael can inspire others to develop new experimental strategies to improve our collective understanding of how best to create new jobs.

Posted by David Atkin, Co-Chair, J-PAL's Firms sector and Nicholas Bloom, Profesor Afiliado, J-PAL's Firms sector