Construction sector employment in low-income countries: Executive summary

This executive summary is based on a report, commissioned through ICED, that seeks to explore opportunities for, and barriers to, the construction industry as a source of productive and decent job creation in LICs.

The construction sector in DFID focus countries is important in both economic and employment terms, and continues to grow in size. The sector is labour-intensive, currently employs more than 70 million workers in DFID countries of focus (around 7.6 per cent of total employment), and is expected to continue to expand. There is also low but growing participation of women (11.2 per cent). The evidence suggests that supporting the construction sector is likely to deliver strong economic benefits, as:

• The sector is relatively labour-intensive and tends to generate more jobs (direct, indirect and induced) than other sectors although this is declining over time in all countries;^[1]
• The sector reports a high level of gross economic output per unit invested (in excess of 3:1) across all levels of economic development (high-, middle- and low-income countries);
• Where labour and resource supply chains are domestically sourced, economic value is better captured in the domestic economy;
• Spillover effects associated with construction can play a significant role in the development of the wider economy (e.g. growth in services, health, education), and;
• Investment in the sector and its supply chain can provide an economic stimulus during periods of economic downturn, and can make an important contribution to poverty alleviation.

Employment practices within the construction sector are weak in DFID focus countries, however. Challenges in the sector include high informality (76.5 per cent) with the proliferation of non-standard forms of employment (including part-time, casual and temporary contracts), a poor safety and health record, the presence of child and forced labour in material supply chains (such as brick kiln and stone quarrying), a lack of social protection benefits (such as pension schemes, maternity leave, and unemployment benefits) that are often correlated with poverty and vulnerability, and significant skills shortages that affect sector productivity and can indirectly contribute to lower wages and slower economic growth. The extent to which each country is affected requires a more granular level of understanding than is currently available in international data sets, particularly in LICs.

In deciding whether and how to engage with the construction sector, there are a number of dependencies to consider and key questions to answer. However, the report finds that there is only limited availability of indicators and evidence in global data sets (e.g. ILO, World Bank) that might usefully inform programming decisions at the country level (particularly for LICs). For example, data on the share of economy represented by construction is not disaggregated within the World Development Indicators, which is split only by services and industry. While the ILO provides some insight into the nature of labour market issues by country, contextual information on the underlying causes and constraints is limited. Economic linkages between construction and other sectors, and the potential opportunity costs associated with investing in construction, can only be understood through more detailed country-level analysis, a review of locally available data and stakeholder interviews.

Care should be taken to ensure that interventions to raise employment in the construction sector are sustainable, and supported by growth in aggregate construction demand within the economy. Key considerations also include whether engaging to improve standards of employment deliver benefits to significant numbers of marginalised or exploited workers, and whether the lack of domestic capacity to deliver high quality and cost-effective infrastructure is limiting the enabling economic benefits of improved transport, power or other services. Where labour and materials are heavily import dependent, engagement in the domestic market may not be as effective as other models (e.g. engaging with MNCs). Meanwhile, FCAS states may benefit from the direct investment in basic services provision, or in social protection rather than the quality of the construction supply chain.

Identifying suitable interventions requires a comprehensive understanding of the political economy. The report presents a number of potential types of engagement for addressing identified challenges. However, these engagements must be tailored to the particular country context. For example, the structure of the construction industry in DFID focus countries is often not conducive to collective bargaining and union density (due to the high prevalence of informal and casual workers and micro-enterprises). In these countries, it may be better to promote more inclusive forms of social dialogue (e.g. associations of informal workers and micro-enterprises, and the promotion of linkages between workers and employers’ associations).

Good practice programmes exist in several developing countries from which lessons can be learnt as to how poor employment practices in the sector can be addressed. For example, market growth and consolidation can support the dynamic towards greater formalisation and improved supply chain standards. Yet rapid market growth can also exacerbate challenges (e.g. around skills and safety), requiring additional institutional and regulatory support. The report identifies a range of potential programming interventions that can help address construction employment issues, including programmes on:

• Women’s participation in the construction industry.
• Mobilising engagement with foreign contractors.
• Increasing formality.
• Strengthening Occupational Safety and Health (OSH) approaches.
• Reducing child labour.
• Improving the provision of training to fill skills gaps and address some of the above challenges.

Interventions that integrate a broad range of activities at multiple levels (pilots, policy, market linkages) are more likely to be successful. Market and political economy challenges that can undermine efforts to reform construction markets include a focus on lower costs, ever increasing informality, the oversupply of cheap unskilled labour and capacity issues among employers and regulators. Evidence from existing programming indicates benefits from engaging simultaneously across a range of appropriate intervention areas. This allows programming risk diversification, and also promotes cross-learning and synergies. The most successful construction sector programmes seek to combine demonstration initiatives (e.g. specific job creation or improvement activities) with scale-up approaches (either through regulators, construction industry associations, or other sector bodies). The demonstration effect is key to creating trust; showing proof of concept; and reducing employer concerns around costs, labour issues, and productivity.

Construction employment interventions offer good opportunities to deliver other development priorities, and can be integrated into wider programming. Construction sector employment interventions can potentially deliver strong value for money (VfM) co-benefits where they are integrated with more focused sectoral interventions (e.g. roads, transport, housing), or other cross-cutting priorities (e.g. climate change, poverty alleviation, female empowerment). DFID might therefore explore opportunities to include measures to improve construction employment as sub-components to larger programmes. One example is green construction (e.g. Zambia Green Jobs Programme) which simultaneously delivers job growth and reform within a larger low carbon development supply chain. Such projects may have a different primary purpose (e.g. developing supply chains for an emerging sector), but can accommodate measures to promote job creation, reskilling, or regulatory reform.

There are good practices in stakeholder engagement and programme design that can enhance VfM. A review of existing construction sector interventions indicates that there are a number of important key success factors (KSFs) in implementing successful employment practice programmes. These include:

• Engagement with high-level stakeholders (particularly to support regulatory reform and / or the adoption of voluntary best practice).
• Focusing efforts in a small number of high impact initiatives (to build visibility and trust).
• Engaging with both workers and private sector employers so that incentives are aligned, and proposed solutions are acceptable.
• Anchoring initiatives in larger scale construction capital investment projects (for greater chance of economic viability, labour demand, and skills relevance).
• Adopting a market supply chain based approach that looks at skill sets beyond pure construction labour, thereby supporting sector viability.

The presence of foreign contractors should not be regarded as a barrier to engagement, although migrant labour requires a differentiated programming approach. Foreign contractors potentially can be assets in improving employment markets in construction, as they can raise standards in the supply chain, and deliver investment in training or apprenticeships. Also, it should not be assumed that high levels of international contractor involvement (e.g. Chinese Engineering, Procurement and Construction (EPC) contractors) is automatically associated with migrant labour (as this is more likely to be at managerial level).  The economics of imported labour mean the trend towards greater use of domestic labour is likely to continue. There are, however, few models of successful engagement between donors and contractors from emerging economies from which to draw lessons about successful engagement. Where migrant labour does form a sizable proportion of construction sector labour, then the focus should be on conditions (informality, OSH), rather than on skills, the benefits of which are unlikely to be captured in the domestic economy.

Trends in supply chain integration and mechanisation have the potential to reduce or change the pattern of labour intensity in the construction sector. The design of labour-intensive programmes in the construction industry (i.e. where job creation is the primary focus) may run counter to prevailing efficiency trends associated with increased pre-fabrication and mechanisation, particularly for larger projects in more developed (lower) middle-income economies. As such, there is potential for temporary employment gains to be promoted at the expense of improved efficiency and quality of delivery, rather than maximising ‘total factor productivity’ (added value) within the sector. In developing countries, trends towards mechanisation and pre-fabrication are more likely to emerge initially in larger-scale construction projects, with greater involvement of foreign contractors and more complex supply chains. Such scenarios favour investment in worker upskilling and retraining (potentially moving up the supply chain into fabrication). The use of the construction sector to create lower skilled jobs is better done in market contexts where there is no immediate prospect of greater efficiency or economies of scale (i.e. in community-scale construction works) or in poorer / low-wage markets where there is less immediate opportunity for improvements in efficiency.

There are opportunities to undertake cost benefit analysis on programme development, but the current evidence base for similar benchmarks is weak. There are several potential quantifiable benefits associated with construction sector programme appraisal, including avoided loss of life and injury, improved wages, new supply chain jobs, greater inclusion, improved productivity and wider spillover effects to the local economy. However, care should be taken to ensure that additional costs to employers are also recognised, as improved labour systems often represent an economic transfer from employers to employees and the social system. Care should also be taken in the use of shadow wage rates to value changes to employment.  These benefits can be incorporated into a cost-benefit model as part of programme development. However, the report finds that the use of cost benefit analysis on construction employment interventions is currently limited in the literature, and there is therefore scope for using future DFID interventions to help build the methodological robustness of such approaches and generate important evidence.

Footnotes:

[1] Job generation in the sector, however, seems to be lower in low-income countries (LICs) than in higher income countries, perhaps due to the lower level of development within the construction industry supply chain.