Missing Jobs Are a Conversion Problem, Not Just a Demand Problem

Paolo Belli and Dhushyanth Raju

No 208695, The Social Policy and Labor Discussion Paper Series from The World Bank

Abstract: In many low- and middle-income countries, the missing jobs problem is typically framed as a shortfall in labor demand. Yet sustained output growth often coexists with limited durable wage employment, high informality, and weak job upgrading. This paper argues that in such settings the constraint frequently lies not in insufficient labor demand alone, but in weak job conversion, defined as the institutional and market mechanisms that determine whether potential matches between firms and workers are formed, sustained, formalized, and upgraded over time. We develop a surplus-based framework in which expected match surplus shapes vacancy posting, match durability, and investment in productivity-enhancing activities. When hiring and screening frictions, weak skill signaling, mobility barriers, regulatory misalignment, instability, or employer market power depress expected surplus, vacancy creation slows, matches are short-lived, and upgrading stalls. In equilibrium, this reduces observed labor demand and lowers the employment elasticity of growth, so that expansion generates employment without transformation. This perspective unifies missing jobs and missing better jobs within a single framework and clarifies why labor market policies underperform when they fail to address the relevant conversion constraint. Strengthening job conversion by improving matching efficiency, skill alignment, mobility, retention, and regulatory coherence complements growth-oriented reforms and increases the likelihood that output expansion translates into durable employment, rising productivity, and structural transformation.

Date: 2026-03-01
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