Growth & Labour Market in Developing Countries

Economic development is deemed to be the process whereby a low-income nation improves the economic, political and social well-being of its citizen and transform into a modern

industrialised nation. Although growth is vital and necessary for development, it is not a sufficient condition as development cannot be guaranteed. Over business cycle, growth

fluctuates and this triggers movement between different labour market states. If there is positive growth, labour market tightness improves and with more vacancies available job finding rate goes up whilst separation rate declines. All in all, more individuals move to employment which in turn improves living standard. Hence, in a way, development, growth and labour markets are all interconnected.

In this research project, first, we examine the impact of FDI on growth which is considered to be one of the primary determinants. In the literature, there is a debate on-going regarding the effectiveness of FDI on growth due to the conflicting empirical evidences. In addition to that, whilst it is claimed that BRICs over time have attracted quality FDI, there is no empirical support. Therefore, we take this opportunity to derive an augmented Solow model that accounts for different forms of capital investments as well as country-specific institutional characteristics and conduct panel estimations using 32 years of data on 54 developing countries to address those issues. Our main result is that FDI, GDI, human capital and infrastructure are all important factors and promote growth in developing countries. However, only FDI and GDI are more effective in BRICs whilst investment in human capital is detrimental to the growth of BRICs and as such in varying degrees contributed to the growth disparity.

Second, we elucidate the dynamics of the Brazilian unemployment for the period 2002 to 2014 in the presence of temporary and permanent contracts. In the literature, there has been many studies which address the gross flows, transition rates and unemployment dynamics but almost all focused on developed countries due to the lack of micro-data required for such investigation. The new Monthly Employment Survey (PME-Nova) was modified in 2002 for greater coverage and to make it more aligned for international comparison in line with ILO recommendation. With the availability of information on contracts, we take this opportunity to work out the worker flows and transition rates in a 6-state model and subsequently observe business cycle properties of these transition rates and their contribution to unemployment dynamics so as to compare our findings to those from other countries. Our main result is that transition rates involving permanent contracts are more important in explaining the cyclical fluctuations in unemployment and play a crucial role in job creation but even more so in job destruction.

Finally, we explore the dualistic nature of labour market in developing countries where there are different tiers of informal job such as informal employer, self-employed and informal salaried. In the literature, informal sector is often claimed to be an unregulated microentrepreneurial enterprise where individuals find work through word-of-mouth

communication. However, this has never been explicitly modelled. Therefore, we take this opportunity to develop a matching model where the formal sector is characterized by search frictions whilst the informal sector is frictionless and perfectly competitive but comprising of different categories of informal job. Afterwards, this 5-state model is calibrated using the stylized facts from Brazil and a policy simulation is performed. Our main result is that a payrolltax aggravates labour market tightness, deter firms to open new vacancies, reduce search intensity and willingness of workers to leave non-formal states and last but not the least, widens inequality. Therefore, tax plays an integral role in increasing non-employment as wellas the size of informality.