How much does it cost to create a job?

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CREATING JOBS VS CREATING BUSINESSES

Creating more and better jobs is a central discussion in every country, particularly in times of crises. It is also a long term goal to end extreme poverty and foster sustainable development. Economic growth alone has not always created the right number and distribution of jobs for the growing workforce. Creating opportunities also requires economic transformation to high-quality jobs. For instance, not all jobs equally contribute to sustainable individual wellbeing and have substantial spillover effects on the community and the economy. Governments and Development agencies design and sponsor programs that support job creation with a mix of different tools and strategies: new policies, technical assistance, seed capital, soft loans and tax-exemptions.

In this regard, start-ups and SMEs attract significant attention and funding because micro and small enterprises (M-SMEs) are recognised as the backbone of economies and a meaningful job creation source.

However, entrepreneurs seek funding to create and grow businesses and provide product and services, not to create jobs. For entrepreneurs, new jobs are a by-product, a beneficial side effect. To put it bluntly, smart and innovative companies tend to seek efficiency also by limiting overheads. A business does not look for headcount growth unless trying to get money and support from governments programs. Fortunately, businesses’ strategic role in job creation provides a wide range of opportunities for developing win-win collaborations among stakeholders. Governments and development agencies can design job creation programs with strong additionalities, limited market distortions and high impact. At the same time, companies can access government funding and technical support to develop new business initiatives to the extent they measure and guarantee a triple bottom line (financial, social and environmental sustainability).

NOT ALL JOBS ARE CREATED EQUAL

Governments design programs using a top-down approach. The aim is to allocate a budget, associate specific actions and tasks and monitor the achievement of an expected number of jobs. While job creation programs can include a variety of complementary approached (Access to Finance, Access to infrastructure, Investment Climate, Skills and Training), they tend to focus on two main categories, with different underly methodologies, costs, and outcomes:

a) ALMPs (active labour market programs) such as training, job search assistance, wage subsidies, or public works connect workers to existing jobs or public careers that create low productivity jobs with earnings below the minimum wage.

b) Direct Investments in the private sector: start-ups and SMEs growth.

Creating new jobs is not easy nor cheap. It is not possible to associate the cost of a job with salaries. For that job to be created, a new company or business line had to be launched, with associated capital, funding and operational expenditures. It is, therefore, important to correctly account for job creation by tracking its different features (direct, indirect and induced job creation, net-job creation, quality of the job, added-value of the employment, formal or informal job, gender, education and age of the jobholder).

ECONOMIC MODELS

The International community continuously develop and refine models to better estimate direct, indirect and induced jobs effects from investments and interventions in a country’s economy or a specific sector. While accounting for direct jobs is relatively straightforward,  it is more complex to simulate indirect job creation’s based on the initial investment’s ripple effect in the whole supply chains and distribution networks or assess expected changes in wealth and consumption.

Three models have emerged to measure investments for jobs creation:

  1. The value chain method uses surveys to identify and understand job creation patterns along a value chain at the sector and firm level. Before an intervention, it helps forecast results and post-intervention to analyse the number of jobs created from investments.
  2. The tracers method aims to calculate the long-term effects of job creation by evaluating the impacts of private sector investments on beneficiaries.
  3. The macro models are simulation models that explore the range of possible outcomes resulting from investments within a sector before an intervention. Examples of macro models are the IO (Input-Output) model, the Social Accounting Matrix (SAM) and the Structural models, including a computable general equilibrium model (CGE) and dynamic macroeconomic models.

Different agencies and governments have used these models to evaluate projects all over the world. All methods required a learning-by-doing exercise. The tools and models are continuously revised, adapted and refined. There is no agreement between practitioners over the best approach; it is more realistic to recognise how some models are more accurate than others under certain circumstances (country, sector, data available). 

BUDGETING FOR JOB CREATION INTERVENTIONS: THE INVESTMENT MULTIPLIER

Public sector officers are interested in being able to estimate the job creation effects of their activities. In reverse, they also need to budget how much money is required to create 100 jobs, 1,000 jobs, 10,000 jobs in a particular sector or country. While rigorous evaluations are the ultimate way to establish private sector interventions’ job creation results, some useful metrics have been used to design and budget programs for benchmarking purposes. The “Investment Multiplier” is one of those metrics. It refers to the total number of (direct & indirect) jobs created by $1 million invested.

Let’s look at an anecdotal example and some IFC macro-cases.

1) ALMPs vs Private Sector Investments. Development agencies are generally acquainted with a budget for single job creation figures between 2,000 jobs/$1M ($500 per job) and 333 jobs/$1M ($3,000 per job). Therefore, 50 jobs/$1M ($20,000 per job) could sound like an inflated figure for many practitioners.  However, these smaller budget are often related to active labour market programs (ALMPs) such as training, job search assistance, wage subsidies, or public works, that connect workers to existing jobs or public works that create low productivity jobs with earnings below the minimum wage. On the other hand, job creation investments in the private sector are more complex and expensive.

2) Direct investment in businesses vs investment through Financial Institutions. An IFC investment in Ghana in 2011 reported an Investment Multiplier of 40/$1M ($25,000 per job) investment through SMEs and 228/$1M ($4,400 per job) investing through Financial Institutions.

3) IFC financing in Jordan (2012) reported different results based on the target economic sectors. Agriculture reported an IM of 208/$1M ($4,800 per job); industry reported an IM of 57/$1M ($17,500 per job); services reported an IM of 19/$1M ($52,000 per job). The weighted average was an IM of 32/$1M ($ 32,200 per job).

4) IFC financing in Tunisia (2012) reported different results based on the target economic sector: Food processing reported 586/$1M, Construction 613/$1M, agriculture 654/$1M, manufacturing 213/$1M, transports 125/$1M, utilities 54/$1M, mining 46/$1M, public services 248/$1M, business services 44/$1M, communication 37/$1M, trade 99/$1M. The weighted average among the segments was an IM of 247/$1M.

4) IFC financing in Ghana (2012) reported different results based on the economic sectors: agriculture, 1,398/$1M ($715 per job), industry 181/$1M ($5,000 per job), services 50/$1M ($20,000 per job). The weighted average was $116/$1M (8,600 per job created).

5) The economists Mohamed Marouani and David Robalino used a GEM (general equilibrium model) to estimate the number of new jobs created – across different countries and the economic sectors – with a $10 million investment. The results suggested an average of 200 direct jobs for a $10 million investment, or 20/$1M ($50,000 per new job).

Overall, identifying the most appropriate budget for an upcoming program is more an art than a science and must be done on a case-by-case approach. The Investment Multiplier is a useful benchmark but must be applied with caution.

Until next time, Sweat your Assets.

References

World Bank Blog: https://blogs.worldbank.org/jobs/how-much-does-it-cost-create-job

World Bank Blog: https://blogs.worldbank.org/jobs/partnering-measure-impacts-private-sector-projects-job-creation

IFC Jobs Study: Assessing Private Sector Contributions to Job Creation and Poverty Reduction

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