In many low- and middle-income countries, economic growth has been stronger than job creation. Output is increasing, firms are investing, and labor participation remains high, but fixed income employment is growing slowly. The informal system is still prevalent, and the working hours are often short. Recent evidence from different countries shows that GDP-employment elasticity in developing countries is usually less than one, usually between 0.25 and 0.75, which indicates that economic expansion produces only a certain increase in employment. In fact, low GDP-employment levels do not necessarily indicate low job creation. They often show growth in line with output that raises output without a proportionate increase in employment, which can further reduce the relative GDP balance. However, the question of why these benefits do not translate into stable and productive relationships at work remains.
A common explanation focuses on the weak demand for workers. Firms are often seen as investing too little or growing cautiously, and therefore strategic responses emphasize improving investment conditions, raising productivity, and stimulating growth.
This review is incomplete.
In many areas, economic expansion is accompanied by moderate unemployment and high labor force participation, but stable wage employment remains scarce. Many people work, but jobs are often temporary, informal, or interrupted by continuous productivity gains, a trend seen in many low- and middle-income countries. The challenge is not only to create jobs, but to transform the potential relationships between firms and workers into sustainable and productive employment relationships.
From job creation to job transformation
Economic growth creates opportunities for firms to grow and hire. Whether those opportunities translate into sustainable employment depends on how labor markets connect firms and workers and maintain those connections over time.
We refer to this process as the transformation of work, the way in which the relationship between firms and workers can become stable, work relations compatible with production over time, from initial coordination to life, formalization and development.
When labor turnover is efficient, growth creates more and better jobs that support rising wages. When it is weak, work is likely to be temporary, unplanned, or disconnected from productivity gains.
What differentiates this view is that it links the same conflicts with the number of jobs created and the quality and sustainability of those jobs, with their impact on the game’s expected surplus. Unlike broad institutional approaches that focus on helping markets in general, this framework focuses more on the processes that determine whether potential relationships turn into lasting and productive work relationships.
Why potential jobs fail to turn into real jobs
Central to this framework is the expected residual of the game, which is defined as the expected benefits of the game compared to its costs, taking into account the uncertainty of the outcomes of the game. Before creating a job, firms weigh the expected benefits against the costs of hiring, the uncertainty of labor productivity, and the risk of early separation.
When these risks reduce the expected profits of the game, firms set fewer vacancies, rely on short-term or informal arrangements, and reduce investments in training and development. Less turnover, therefore, reduces not only the employment that depends on growth, but also the demand for labor itself. This is why unemployment and the loss of better jobs often represent the same obstacle. This also helps to explain why productivity-driven growth can be met with limited job creation, as the mechanisms for change are often weak.
Hiring and joining conflicts
Labor markets are frictionless. Workers search, firms recruit and watch, and both face uncertainty about the quality of the game. In many developing economies, these conflicts are exacerbated by limited labor market information and limited evidence. As hiring becomes more costly and uncertain, the expected surplus decreases, and firms reduce hiring.
Experimental evidence shows these trends. In Ghana, reducing employment conflicts and inspecting small firms increased employment and productivity, without changes in demand or investment.
Skill constraints and weak marks
Employers often report difficulty in finding workers with the right skills, but the binding constraint is often poor labor productivity indicators. Years of schooling is an imperfect proxy for job-related skills. When credentials provide limited information about a worker’s abilities, employers face high testing costs and high uncertainty, reducing the game’s expected profits and discouraging sustainable employment.
Evidence from Uganda shows that improving the expression of informal skills has shifted workers into productive jobs without increasing labor supply. Therefore, improving skill indicators can enhance career change even when the underlying skills are unchanged.
Risk, mobility, and barriers to participation
Even when jobs are available, workers may be reluctant to enter or stay if the job involves significant risks or costs. Long commutes, unreliable transportation, safety concerns, childcare responsibilities, and unstable incomes limit return to work. These factors increase the rate of division and shorten the expected game time, which lowers the expected game profit for workers and firms.
Evidence highlights the importance of mobility problems. In Ethiopia, transport subsidies have improved employment outcomes by increasing access to better jobs. In Bangladesh, facilitating seasonal migration has increased incomes and access to higher productivity opportunities.
Well-designed social security can reduce income volatility and strengthen the stability of labor relations by reducing risk and supporting continued participation in the workforce.
Why strategy is important, and where to focus
These obstacles arise in labor markets but reflect well-known market failures, including information asymmetries, coordination failures, and underinsurance. In such settings, isolated market interactions alone may not produce effective or sustainable interactions. The role of strategy is not to replace markets, but to resolve these conflicts and help coordinate, maintain and improve. Where private solutions can effectively resolve these conflicts, the role of policy should remain limited.
This shifts the policy’s focus from job creation alone to strengthening the mechanisms that link sustainable growth and employment. Three areas are particularly important.
- To reduce risks and costs of participation. Expanding childcare and elder care, improving transportation, and strengthening social security can generate injury-adjusted wages and support sustainable employment.
- Improving marks and skill marks. Strengthening employer-related certification, education, and training can reduce information asymmetries and audit costs.
- Supporting sustainable working relationships. Improving contract enforcement and aligning labor laws with firm productivity can increase uptime and support investment in training and development.
Rethinking the jobs challenge
The employment challenge is often framed as a quantitative question: How to encourage firms to hire more workers. But it is also a question of change, corresponding to form, survival, and improvement over time.
When job turnover is low, growth can produce employment without turnover. Strengthening these mechanisms increases the likelihood that growth will generate not only more jobs, but also sustainable and productive ones.
This blog is about Belli, Paolo, and Dhushyant Raju. 2026. “Past Jobs Are a Change Problem, Not Just a Search Problem.” Social Security Discussion Paper 2615. Washington, DC: World Bank.
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