Cracking the incentives puzzle in MSD4E

Understanding employer incentives is key to making employment outcomes stick.

Blog 1 argued against comparing MSD4E interventions on headline numbers alone. This second blog asks what drives behaviour change in employment systems and why incentives between market actors and programmes don’t always align.

More and better jobs are often a by-product, not core business

MSD is about aligning incentives so that businesses and other market actors have lasting reasons to improve outcomes for poor and marginalised people. In a classic example, a seed producer introduces smaller pack sizes for smallholder farmers. As a result, farmers’ productivity and incomes increase and so do the firm’s sales. The pro-poor outcome and the commercial incentive reinforce each other.

MSD4E sometimes operates in murkier territory because improving employment outcomes - particularly creating jobs or improving job quality - is often a secondary consideration for employers.

So how are programmes finding or shaping incentives in ways that encourage employers to adopt new behaviours that benefit workers while still making commercial sense? Understanding this tension is the starting point for unpacking how incentives play out across different employment outcomes - job creation, job quality and access to work.

1. Job creation requires growth that is not just profitable, but also creates new positions (often for a particular target segment)

In the landscape assessment, job creation interventions typically focused on addressing barriers to sector and firm-level growth with the potential to create jobs for target groups. But programmes can’t force firms to hire from specific segments or sustain those positions, at least not for very long. Their influence depends on shaping conditions that make continued hiring a good commercial decision.

The crux is understanding enough about internal employer dynamics and sector conditions to predict whether growth will create jobs. An enterprise facing rising demand must decide whether to hire or invest in technology. High wages or training costs might push firms towards automation, while high capital costs or difficulty automating certain roles might push them towards hiring.

These combined factors help explain why in Bosnia and Herzegovina, ICT and BPO firms supported by MarketMakers had to grow their teams to take on new contracts. Strong demand, a pipeline of young workers and few technological substitutes made hiring the most logical way to scale.

In the seed pack example, the classic MSD challenge is simpler because it focuses on product adaptation for smallholders rather than how the company runs its internal operations. If, however, we tried to grow the firm’s market share and require it to expand its workforce, incentives might have collided more than they did.

Job creation lasts when firms have internal, commercial reasons to keep hiring – reasons that depend on the sector, the nature of demand and the role labour plays in scaling. Programmes can shape these incentives, but they can’t substitute for them.

2. Job quality improves when employers have lasting incentives to treat workers better

Incentives for job quality can be just as difficult to align. Improvements in pay, safety or working conditions only become attractive when employers believe the benefits outweigh the costs. Tight margins and weak enforcement of labour laws often push in the opposite direction.

The challenge is understanding the commercial incentives facing employers and the institutional environment around them. For example, in Bangladesh’s garment sector, productivity-focused training models improved operator skills, reduced defects and lowered turnover. This worked because of a commercial incentive to continue investing in training and safer, more stable working conditions.

Influencing the terms of employment for existing workers is often more nuanced than increasing demand for labour. A business may welcome support that boosts sales, but convincing managers to allocate part of that increased revenue to improving working conditions requires understanding the firm’s internal trade-offs and the pressure points that shape decision-making.

3. Access to work offers examples where incentives can line up a little more naturally, but important gaps remain

Access to work – including job matching and skills development – presents a more mixed picture.

A job matching platform’s success depends on how many people it connects to work, creating natural alignment: platforms grow by solving a pain point for employers (unfilled vacancies) while helping jobseekers access opportunities they might otherwise miss.

Similar logic applies to skills initiatives, though incentives can diverge when public skills reforms are judged on access and throughput rather than employer demand or job placement. Initial reforms may look aligned, but structural incentives tend to pull back toward lower-cost delivery and more affluent learners once resources tighten.

By contrast, employer-led training models aim to demonstrate clear benefits for firms in the form of better-skilled staff, improved productivity and reduced turnover. In Kosovo’s pastry and wood processing sectors, EYE Kosovo partnered with input suppliers to set up training centres that strengthened skills across the sector while promoting the suppliers’ products.

It becomes more challenging when trying to reach harder-to-serve groups. Jobseekers with limited education, weak networks, or facing other forms of exclusion often require more intensive support which increases delivery costs for providers. Some MSD4E initiatives are experimenting with new approaches – for example, Youth Impact Labs partnered with Jordan’s largest job-matching platform to launch the country’s first online service for blue-collar jobs. But it is not always clear which models can sustain themselves financially (or whether this is even a fair expectation for services targeting marginalised segments). So it’s important to build a realistic understanding of delivery costs, potential revenues and where ongoing subsidy may be needed, rather than assuming commercial sustainability will follow.

Making changes stick

The central challenge in MSD4E is finding or shaping incentives that shift the behaviours of employers and other market actors in ways that support more jobs, better jobs and better access to jobs over the long term. Evidence remains limited on which incentives last, which weaken over time and where gaps remain, especially for the most excluded.

The task now is to build and document a stronger understanding of what drives investment in better employment outcomes over the long term.

See also our:

• first blog in this series: Apples and oranges: making sense of employment outcomes
• third blog in this series: Why MSD4E needs more ex-post evaluations