# **Background: Why is employment growth important for South Asia?**

South Asia’s impressive GDP growth of the last decade has also created employment. Yet, the region has been afflicted by asymmetrical structural change. Performance differed widely across informal versus formal status, across firm sizes, across sectors (manufacturing and services), and across location (leading versus lagging regions) in recent decades, with adverse effects on employment creation. Even though available data indicate that enterprise dynamics have improved over the past two decades, and South Asian economies are more able to reallocate resources to more productive activities, several challenges remain (see The World Bank, 2011; Dutz et al, 2011).

**Small and large firms make for most employment, while medium sized companies are underrepresented in South Asia.** There is evidence of a persistent “truncated competition”, with the constrained market selection process having generated a lack of medium sized firms. This may point to difficulties of new entrants and microenterprises to grow into the 10 to 99 worker size category. Industrial survey data for Bangladesh, India and Sri Lanka for the manufacturing sector exhibit this bimodal distribution, with the lion’s share of workers engaged in micro enterprises (less than 10 employees) and in large firms (over 100 employees) – characteristic of a “missing middle” employment problem. Employees in microenterprises make up 18 to 30 percent of total employment, while employees in large firms account for between 35 and 65 percent (Dutz et al, 2011).

**South Asia requires jobs to accommodate a young workforce that already struggles on the labor market.** The demographic pyramid already shows a significant share of young people who are already demanding jobs. Current employment rates, however, are low, and the situation is expected to worsen since the labor force is forecasted increase significantly by 2050 (Bloom et al. 2010). In addition, the region is struggling with post conflict and conflict situations. Employment opportunities are central to reduce tensions there, since they offer potential combatants alternatives outside the conflict.

## **Rural regions have missed out on employment generation, and there is a persistently high share of**

**informal and unorganized employment.** There is evidence for a strong divide between urban growth poles and rural regions, which are lagging behind in both economic growth and social indicators (The World Bank, 2011). For instance, small and medium sized firms in Bangladesh and Sri Lanka failed to grow, increasing the “missing middle” problem. Similarly, larger firms in India have created most jobs in urban areas. At the same time, the informal sector of India has grown from approximately 47% to an estimated 62 percent of non-household manufacturing employment in the period of 1989 to 2005 (Dutz et al, 2011). Hence, this paper will discuss the following topics:

- The missing middle indicates that established companies are performing better than new firms. Hence, we will analyze if there is a link between size and age, and firm growth patterns.

- Census evidence shows that urban areas have been growing faster than rural areas (The World Bank, 2011). This suggests a disadvantage of being rural. In particular, we explore if rural and small (large) firms doing relatively worse (better) than their urban counterparts?

- South Asia is a conflict ridden region, however, to varying degrees. We seek to establish a link between conflict and employment growth at the establishment level.

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