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Do microenterprises create jobs? 3ie-LIDC seminar explores

Encouraging microenterprises to employ staff is cost effective, and jobs are kept even after initial subsidies have stopped.  – concluded Chris Woodruff of Warwick University at the latest 3ie-LIDC seminar “What works in international development”.

Half of the labour force in low- and middle-income countries is self-employed. Therefore, a key question for policy makers is: How can microenterprises be encouraged to expand and become employers?

The speaker presented preliminary results from his project in urban Sri Lanka that aimed to examine why the transition from being a non-employer to employer is so difficult. The project introduced and subsequently measured the effects of three different interventions: 1. financial incentives (subisidies) to hire a new worker, 2) a matched savings incentive programme, and 3. A training programme.

The project consisted of multiple surveys spread over several years with a random sample of 1,535 Sri Lankan microenterprise owners.

The study found that wage subsidies indeed led to increased employment, which lasted after the subsidy had been removed. However, no effect was noted on sales, profits or expenses. Savings incentives also had a large, positive effect on employment levels, but after some delay. The matched savings incentives  also led to an increase in capital stock, sales and expenses, but no effect was noted on profits. Training programmes had no effect on employment or profits, but led to increased sales and expenses.

The preliminary results suggest that, with encouragement, some non-employers can become employers. Even if only 10 percent of microenterprise owners were to expand by  a single (additional) job, the change would create work for roughly  3 percent of the labour force in a typical low- or middle-income country.

Oriana Bandiera of the London School of Economics offered discussant’s comments on the presentation. She underlined the importance of growing microenterprises and encouraging them to hire workers. Small microenterprises represent the missing middle in most low- and middle-income countries, and yet they are essential for economic growth. Bandiera said that the project presented addressed the very important issue of barriers to the growth of microenterprises – among them, lack of skills, lack of capital, and liquidity constraints. The discussant noted that in order to compare the three interventions one needs to be able to compare the relative cost of each, as well as to verify what percentage of the jobs created represent new ones and what percentage is reallocation. Because job creation is a slow process, a long-term follow-up study of the project would offer interesting perspectives on these issues. 

The discussion that followed focused on issues such as sector-specific effects versus general effects, and what role the mindsets of microentrepreneurs play in job creation.

The next seminar in the series will take place on 25 January 2012 and will look at the impact of  microfinance in Bosnia and Herzegovina.

Download the powerpoint presentation by Chris Woodruff
Download the powerpoint presentation by Oriana Bandiera
More about the 3ie-LIDC seminar series