Structural transformation can influence employment creation and poverty reduction through direct and indirect channels. For instance, productivity growth in one sector stimulates employment and wage growth in that sector. It can also impact other sectors through increased demand for labour with similar skill profiles. Higher output in one sector can further spillover to other sectors through increased input demand from other sectors through production linkages thereby increasing incomes. The benefit of such spillovers will be limited if the growing sector does not have strong backward and forward production linkages with other sectors.
However, it is not clear whether Asia-Pacific LDCs have been able to harness the potential backward and forward linkages between sectors to the extent that productivity growth in one sector indirectly stimulates demand for goods and services of other sectors. For a country to fully benefit from such indirect impacts, structural transformation should be accompanied by strong backward and forward linkages.