Functioning labour markets for structural transformation

Structural transformation refers to the shift of labour and other resources from low-productivity sectors to higher-productivity ones and is essential for sustainable economic growth and development. Efficient resource allocation facilitates this process. In developing countries, where labour is relatively abundant compared to capital, policies that promote gainful employment are especially important for broad-based income growth. Supporting the establishment and expansion of productive enterprises along value chains creates higher-productivity, higher-income jobs and advances structural transformation.

Many developing economies have labour forces concentrated in primary sectors, particularly agriculture and extractive industries, while urban employment is largely informal. Improving the productivity of informal and small enterprises, together with enabling labour mobility from low- to high-productivity sectors, remains a core development priority. However, labour market imperfections often hinder efficient job matching. Information frictions—such as weak skill signalling, skills mismatches, limited information on job requirements, and restricted access to vacancy information—contribute to suboptimal employment outcomes. Addressing these gaps through effective public institutions is critical to improving labour market matching.

The Government of Ethiopia identifies sustainable job creation as a central policy objective and takes concrete steps to expand access to gainful employment. The Jobs Creation Commission, established in 2019, evolves into the Ministry of Labour and Skills, which oversees technical and vocational education and training (TVET), labour affairs, and employment and labour market services. Reducing labour market information frictions is a key mandate of the Ministry, implemented through the Labour Market Information System (LMIS).

The IGC supports these efforts by generating policy-relevant evidence. An upcoming event, co-organised with Addis Ababa University, showcases four IGC-funded research projects on structural transformation, local employment spillovers, and skills–jobs matching, alongside a complementary paper on labour market dynamics.