Fix talent misallocation: Not enough women at work means not enough economic growth

While economists and policymakers have long recognized the accumulation of human capital—particularly through investments in education—as a driver of growth and development, they have devoted far less attention to the efficient allocation of existing human capital. An economy at any level of development can achieve its full potential only if individuals pursue occupations that best suit their talents and preferences.

Eliminating, or at least reducing, misallocations of talent should therefore be a top priority. A growing body of economic research has shown that even in advanced economies such as the US, reducing talent misallocation can have meaningful economic effects.

For example, an influential paper published a few years ago attributed 20-40% of US per capita market output growth from 1960 to 2010 to improvement in talent allocation. This additional growth was achieved by reducing labour market discrimination against women and African-American men, and by lowering the barriers these groups faced in developing human capital.

The potential to unlock such gains is probably even greater in less affluent countries, where the misallocation of talent is plausibly more pervasive. While the relevance of race or other identity-based barriers varies across contexts, gender is a universal issue. Because women comprise roughly half the population in any given country, ensuring that they can fully use their skills and talents could generate substantial economic returns.

It is well established that labour market outcomes vary significantly by gender. In most of the world’s countries, women have lower labour-force participation rates and earnings, are over-represented in unpaid or informal jobs, and spend more hours on household production and chores. If these differences reflected innate comparative advantages or genuine preferences, they would be efficient, and reallocating men and women to different activities would not improve an economy’s productivity. But if they reflect distortions, policymakers are leaving money on the table.

In a new study with the World Bank, my colleagues and I developed a methodology to distinguish between these two potential sources of observed differences and applied it using publicly available labour-force data from many countries. The results confirm the insights from the US study: distortions are widespread. In many countries, removing barriers to women’s participation in the labour force could raise output by 15-20%, which implies large income gains.

On average, richer countries exhibit fewer distortions. But the differences among countries at similar stages of development are striking. For example, Egypt could increase output by about 24% by removing gender barriers, while Peru could achieve only a 5% gain, despite having similar income levels.

Comparing the evolution of distortions also reveals interesting patterns. While the allocation of talent in most countries has improved over time, there are exceptions. Despite rapid economic growth, India, for example, experienced little change in distortions between 1990 and 2022. As women remained largely excluded from high-productivity jobs, the Indian economy grew less than it could have. Growth alone does not automatically guarantee equal opportunities; a well-formulated process of reforms is needed to unlock additional gains.

Our methodology also allows us to distinguish between two types of distortions: ‘demand-side’ barriers that come from employers (such as hiring discrimination or unequal pay), and ‘supply-side’ barriers that reflect women’s own constraints (including household responsibilities, lack of childcare, safety concerns or restrictive social norms).

For most countries, demand-side distortions play a more significant role than supply-side ones. Dismantling only the former generates economic gains nearly as large as those achieved by tackling both sides.

This result has important implications, because it helps policymakers decide where to invest resources to reduce misallocation. Demand-side distortions—such as labour-market discrimination—are more amenable to policy intervention than supply-side distortions, which may reflect longstanding social norms. Thus, focusing on the former might allow countries to capture most of the welfare benefits from reducing gender-based misallocation.

Sceptics might argue that the economic gains from reducing talent misallocation are modest compared with those from productivity improvements. That may be true. But while productivity gains are often costly and increasingly uncertain in today’s volatile global environment, reducing the misallocation of human capital is relatively inexpensive and more easily achieved.

As sustaining growth in low- and middle-income countries becomes more difficult and uncertain, policymakers must pursue every available growth path. Ensuring that the skills and talents of roughly half the population are fully utilized is not only a matter of social justice but also a pragmatic economic strategy. ©2025/Project Syndicate

The author is a former World Bank Group chief economist, editor-in-chief of the American Economic Review and professor of economics at Yale University.