What works to get firms hiring? Support small businesses — but not the smallest ones
There are 472 million people in the world who need a job, either because they are out of work or are not working as many hours as they want, according to the International Labor Organization. The vast majority — 86 percent — are in low- and middle-income countries, and more than two thirds are over 25 years old.
In the last two weeks, we've talked about how to train youth for existing jobs and how to push young people to start new businesses. But those strategies only touch parts of the world's employment problem. So what strategies create jobs by encouraging existing firms to hire more workers?
Interventions to support small- and medium-sized enterprises in low- and middle-income countries increase the number of people those firms employ. And such interventions seem to work better when they are not targeted at the smallest micro-enterprises — those with fewer than 5 employees — but rather slightly-larger (but still small!) businesses. The strongest evidence is for firms with between 5 and 19 employees, while the evidence is less clear about firms with between 20 and 250 employees.
Which exact types of interventions work best? Unfortunately, it's hard to say. Microfinance programs do not look like a good bet, but beyond that, the evidence is hazy. Many programs have been implemented, but they've been done differently from one place to another. On the aggregate, they work. But we can't yet say which kinds work best.
This evidence comes from two systematic reviews, one published by 3ie and one published elsewhere, which combine the results from numerous studies from around the world. This approach provides stronger evidence than relying on a single case, where idiosyncratic issues can affect program outcomes.
These two reviews take different statistical approaches to analyzing similar data. Some of the underlying studies are the same across both reviews, but each includes some that the other does not, and vice versa.
The review published by 3ie identifies an overall effect for a class of interventions. This analysis tells us that the interventions work, in general, to raise employment at targeted firms. It did not provide conclusive results about which types work better, however. And it excludes all microfinance interventions.
The other review compares different categories of interventions to each other, using one type of intervention ("training") as the reference category. This analysis tells us that "finance" interventions — which are mostly microfinance programs, in their sample — are less effective than other types. They cannot distinguish which other type is most effective in the quantitative meta-analysis. The narrative synthesis nevertheless indicates that business development services seem to generate somewhat better employment outcomes, at least for small and medium-sized enterprises in Latin American countries.
Included types of interventions are business development services, technical assistance, trainings for business owners, tax simplification, matching grants, and export promotion programs.
In terms of firm size, both reviews agree: targeting the smallest microenterprises is less effective at increasing employment than targeting small businesses that are slightly larger. As noted above, the strongest evidence is for firms with between 5 and 19 employees.
The explanation for this finding proposed by Grimm and Paffhausen, the authors of one of the reviews, is that the decision to hire an extra person is a discrete choice, so it's a bigger shock for the smallest businesses. (A person can be hired part-time, but it's still an additional person with associated upfront costs.) Therefore, it's harder to induce a firm with fewer than 5 employees to add an extra one. For a slightly-larger firm, it's less of a shock.
So for interventions targeting already-existing businesses, if the only goal is to increase the number of people who are employed, it seems that avoiding the smallest micro-enterprises increases the programs' effectiveness. (There may be other great reasons to support such businesses, though!)
For more information about the studies' findings and methodology, the full studies are available here and here. Beyond this study, hundreds of other systematic reviews and thousands of impact evaluations are available in our evidence hub here.
This blog is part of our campaign 2020 Hindsight: What works in Development. Learn more about the campaign and read past blogs here.