Unlocking potentials: The impact of human capital investment in youth informal employment in emerging markets and developing economies

Abstract

Human capital development has emerged as a crucial factor for economic prosperity, significantly improving the skills of human resources and ensuring more formal employment opportunities in the economy. Using data from the World Bank and the International Labour Organization (ILO) for nineteen years (2006‐2023), the paper investigates the impact of human capital investment on informal employment, specifically the youth informal employment rate for 55 emerging markets and developing countries. The study aims to explore the relationship between these factors and their influence on the labor market dynamics, employing the dynamic panel data estimation method (Generalized Method of Moments) to control the dynamic effect of the youth informal employment rate. The findings reveal that the increase in enrolment ratio in tertiary education five years ago negatively impacts the current youth's informal employment, suggesting that higher education contributes to a decline in informal employment among the young. The result also indicates that increased educational expenditure invested eight years ago has effectively reduced the current youth informal employment rate. These insights emphasize the importance of sustained investment in education to cultivate a skilled and knowledgeable workforce. By fostering educational advancements, emerging and developing countries can improve their economic prospects and reduce the prevalence of informal employment among the youth, leading to more stable employment opportunities and a prosperous economic environment.