Youth employment in Africa: what to do when informal is normal

Shantayanan Devarajan is the Chief Economist of the World Bank’s Africa Region. Prior to joining the World Bank in 1991, he was on the faculty of the John F. Kennedy School of Government at Harvard University. The author or co-author of over 100 publications, Mr. Devarajan’s research covers public economics, trade policy, natural resources and the environment, and general equilibrium modeling of developing countries. Born in Sri Lanka, Mr. Devarajan received his B.A. in mathematics from Princeton University and his Ph.D. in economics from the University of California, Berkeley.

In low-income African countries, most people cannot afford to be unemployed. Lacking any significant safety net, 70 to 80 percent of the labor force ekes out a living by working in low-productivity, informal farms or household enterprises. Private-sector wage and salary jobs have been growing at a fairly rapid clip—at 7.3 percent a year between 1992 and 2005 in Uganda, for instance (Exhibit 1)—but this growth is from such a small base that it cannot come close to absorbing the 7 million to 10 million young people entering the labor force every year. Furthermore, some of these young people are not qualified for the wage jobs that are available. As a result, most young people will end up working in the same place as their parents—small farms or household enterprises. Taking the example of Uganda again, under optimistic assumptions about economic growth and wage-employment creation, the share of the labor force in informal activities will only fall from 79 percent today to 74 percent in 2020 (Exhibit 2). In short, informal is normal.

The challenge of youth employment in Africa, therefore, is not just to create more wage and salary jobs—important as this may be—but to increase the productivity, and hence earnings, of the majority of young people who will be employed in informal farms and household enterprises. How can this be done? In general, workers’ productivity can be increased by (i) “demand-side” measures, such as better infrastructure and business climate, that lower the costs of production and thus increase the demand for labor; and (ii) “supply-side” measures that improve the skills of workers. In the case of farms, agricultural development is already geared toward increasing agricultural productivity. This will result in higher incomes but lower demand for labor in agriculture. This is how all economies develop; Africa is no exception. In the case of household enterprises (where the farm labor will move to), most are tiny—mom-and-pop or pop-and-son shops—that do not benefit from capital investment and economies of scale of larger enterprises. Small and medium enterprises that hire 5 to 20 people enjoy higher productivity. The problem is that very few of the household enterprises grow into larger ones; most remain very small or die.

There appears to be greater scope for supply-side measures. People with a primary education or less are disproportionately concentrated in the informal sector. By increasing the skills of those who leave school, we can increase their productivity in farm and nonfarm household enterprises. With higher skills, new entrants can increase their earnings by moving out of the farm sector and eventually the household-enterprise sector. Such an investment will not be lost if the worker moves out of the informal sector: they can take their human capital with them.

How can the skills of these new entrants be increased? Even among students who have completed primary school, a disturbingly high share has difficulty with reading and writing. A survey in Tanzania showed that, among seventh-grade students, 20 percent could not read a sentence in Kiswahili, 30 percent could not perform a two-digit multiplication problem, and 50 percent could not read English, which is the language of instruction in secondary school. One reason for these disappointing results is that teachers in public primary schools in Tanzania are absent 23 percent of the time. When present, they spend just over two hours a day teaching. And only 11 percent of the teachers had minimal language skills. Thus, increasing informal workers’ productivity by strengthening their skills requires reforms in basic education—making teachers more accountable to students, and politicians accountable for delivering on education outcomes.

Does this mean that there should be no effort on the demand side? No. Large-scale efforts are unlikely to work, especially if workers are eventually going to move out of agriculture. But it is possible for local governments to support the growth of informal nonfarm-sector enterprises by enabling them to conduct business—rather than suppressing them for violating property rights. Increasing access to financial services would also help these capital-strapped enterprises.

Finally, what about the wage and salary sector? Jobs in factories and services will be the final destination for all workers (possibly over a generation), so the growth of this sector is clearly important. Achieving this growth will involve a multitude of efforts to raise the competitiveness of the economy, with a better investment climate and improved infrastructure the main ingredients. Programs that support matching the skills of educated workers (secondary school and university graduates) to jobs will probably not see returns as high as those produced by simply creating more formal-sector jobs.

In sum, because most young Africans will work in informal farms and household enterprises, the challenge of increasing their productivity needs to be met by first, increasing their basic skills, which they can take with them when they move to new enterprises; and second, creating jobs in the formal sector by improving the economy’s competitiveness, so that this sector can absorb more qualified workers into a productive workforce.

Source: voices.mckinseysociety.com