High rates of unemployment and underemployment are widespread in many low- and middle-income countries (LMCs). Progress has been disappointing during a period in which the historical policy focus on capital accumulation and structural transformation was superseded by microeconomic policy interventions aimed at education and skills development, and reforms to promote efficient institutional structures and financial systems. The specific challenges of macroeconomic management for structural transformation do not receive substantial discussion in the contemporary development literature.

Since the 2008 crisis, however, the wider consensus has shifted. The emphasis on skills promotion has lessened, and increasing focus is placed on the demand side. It is widely accepted that rich countries have suffered from secular stagnation – persistent deficiency of aggregate demand alongside weak growth in capital investment and productivity – and from hysteresis – persistent negative labour market responses to weak demand. Both the academic literature and policy organisations increasingly conclude that monetary policy acting alone is insufficient to counter stagnationary tendencies, fiscal policy has an important role, and weak demand can have permanent negative effects on growth and productivity and thus the creation of good jobs.

In this paper we provide a structured review of the relevant literature, and an exposition of key concepts for the analysis and design of demand-side policy for sustainable employment promotion. We hope this will be useful to those involved in policy design who are not familiar with all of the literature and debates on these issues.