Urban Labor Markets and Development

Economic growth and the distribution of its benefits depend on how well the labor market mobilizes human resources in new activities, locations, and skills. This article surveys the literature on the functioning of labor markets in developing countries. It shows that broad analyses of population, national income, and urbanization dominated early thinking, but there was little detail on how rural and urban labor markets functioned. The urban economies were seen as being dominated by high-wage modern sector employment, which provided the motive for rural-urban migration. Although migrants swelled the ranks of the urban unemployed, wages were said to remain high because of organized pressures that spanned the urban economy and encouraged a chronic excess of job seekers and urban problems. Current research, in contrast, shows that the urban economy is quite diverse and economic growth has increased the range of opportunities. A considerable number are in viable self-employment and small-scale economic activity with variable economic returns. However, many are denied access to opportunity because of the limited employment, credit, and educational infrastructure. Accelerated development and broadened access will thus strengthen the effectiveness of the labor market in a strategy of growth with equity.