Creating jobs in higher productivity sectors

Africa’s working-age population is projected to increase from 705 million in 2018 to almost 1.0 billion by 2030. As millions of young people join the labor market, the pressure to provide decent jobs will intensify. At the current rate of labor force growth, Africa needs to create about 12 million new jobs every year to prevent unemployment from rising. Strong and sustained economic
growth is necessary for generating employment, but that alone is not enough. The source and nature of growth also matter. Africa has achieved one of the fastest and most sustained growth spurts in the past two decades, yet growth has not been pro-employment. A 1 percent increase in GDP growth over 2000–14 was associated with only 0.41 percent growth in employment, meaning that employment was expanding at a rate of less than 1.8 percent a year, or far below the nearly 3 percent annual growth in the labor force. If this trend continues, 100 million people will join the ranks of the unemployed in Africa by 2030. Without meaningful structural change, most of the jobs generated are likely to be in the informal sector, where productivity and wages are low and work is insecure, making the eradication of extreme poverty by 2030 a difficult task.

One of the most salient features of labor markets in Africa is the high prevalence of informal employment, the default option for a large majority of the growing labor force. On average, developing
countries have higher shares of informal employment than developed countries. While data on informal employment are sketchy, it is clear that Africa has the highest rate of estimated informality in the world, at 72 percent of non-agriculture employment— and as high as 90 percent in some countries. Furthermore, there is no evidence that informality is declining in Africa.
While evidence from other developing countries shows a fairly competitive labor market structure, Africa has a more segmented labor market. Segmented labor markets tend to improve with
economic policies that facilitate labor mobility, a competitive environment for private sector operations, and better skill development programs.

Growth accelerations and job growth

Growth accelerations, or economic take-offs, are often underpinned by structural change, which is the result of changes in growth fundamentals. In Africa, long-term economic performance is
closely related to these growth episodes. Sectoral labor re-allocations that capture structural change patterns are important aspects of these growth dynamics. In Africa, most growth acceleration episodes were associated with a reallocation of labor to services (18 of the 20 episodes) and to industry (16 of the 20 episodes). Of nine industry-driven growth acceleration episodes, seven were characterized by a higher growth in employment shares in industry than in services. Growth acceleration episodes are also associated with a rise of employment in the mining sector (10 of 20 episodes), confirming the specific role of the extractive sector in Africa. The overall picture is consistent with the notion that growth accelerations are associated with structural change.

Industry-driven growth acceleration episodes increased total employment growth considerably and had stronger effects on employment elasticities, boosting employment’s elasticity by about
0.017 percentage point (or by 3 percent)— three times higher than the effects of service-driven episodes. Moreover, industry-driven growth acceleration episodes have larger cross-sector
effects— 0.034 percentage point higher growth elasticities of employment for industry, 0.038 for services, 0.022 for agriculture, and 0.053 for mining. In addition, mining-driven growth
acceleration episodes had a similarly robust effect as industry-driven episodes. This could be explained by the simultaneity of the two types of growth acceleration episodes in a large
number of cases: of the eight mining-driven growth acceleration episodes, six were also industry-driven.

Overall, industry-driven growth acceleration episodes led to positive structural change, with potentially stronger dynamic effects in the long run. The implications of such a strong association
between industry-driven growth episodes and jobs is that industrialization is the key to the employment conundrum in Africa. Large firms are more productive and pay higher wages than small firms. For instance, a 1 percent increase in firm size is associated with a 0.09 percent increase in labor productivity. The return to firm size is even higher in Africa than in other developing regions, with a 0.15 percent increase in labor productivity for a 1 percent increase in size. The size effect is even stronger for manufacturing firms in Africa, with 1 percent increase in size associated with a 0.20 percent increase in labor productivity— well above the 0.12 percent increase for firms in the services sector. Wages are also much higher in medium and large enterprises than in small firms— and in manufacturing than in services. Wages are twice as high in large manufacturing firms as in large service firms and 37 percent higher in small manufacturing firms than in small service firms. Differentials in productivity and wages by firm size are partly due to the fact that large firms tend to have more educated and skilled workers and to be more capital intensive in production than smaller firms, commanding higher output per worker.

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