Public and private formal sector hiring is insufficient

On current trends the employment outlook for young people in Africa is challenging, in spite of strong job growth before the crisis. The arithmetic of population and job growth illustrates the challenge well: although job growth was strong during the decade preceding the global economic crisis, it was nowhere near enough to absorb the growing labour force. The existing private and public employment capacity is simply too small. For 2000-07, the ILO (2011b) estimates that the working age population of Africa grew by 21% (2.6% per year). Job growth during the same period was even stronger at 23%, i.e. 2.9% per year. But in absolute numbers, while the working-age population grew by 96 million, the number of jobs grew only by 63 million. With 10 to 12 million young people entering the African labour market every year, job growth must be much stronger to make a dent in the number of unemployed and discouraged youth.

Growth of good jobs in wage employment is even more limited. The estimates presented in the preceding paragraph were for total job creation, not only for good jobs in wage employment but also vulnerable employment. Wage employment creation is much more difficult to estimate as data are scarce. Assuming that wage employment is being created at a similar, or even higher, pace than vulnerable employment, its overall growth will still be very small given the low rates of wage employment in most African countries. In Uganda, for example, although wage jobs grew at 13% every year between 2003 and 2006, they only accounted for one out of five of the new jobs created (World Bank, 2011c).

This is especially true of the public sector, which has been significantly downsized in many African countries over the last two decades. According to Gallup World Poll data only 21% of those aged under 30 with at least secondary education work for the government, compared to 37% among adults aged 30 and over, or almost double. In many countries, this discrepancy is even larger. In Egypt, Morocco and Uganda, for example, the proportion of government workers among young people is only one-third that of adults. In South Africa, Nigeria and Tanzania it is around 40% and in Kenya and Tunisia around 50%. To put this in context, in Egypt government work accounts for over 50% of employment among those over 30, in Tunisia 35% in South Africa 25% and in Kenya 16%.

Given strong population growth, the role of the public sector as an employer will continue to shrink. Gallup World Poll data would indicate that African governments currently employ about 25 million people aged 30-64, which corresponds to about 10% of Africa’s population in this age group, and 14 million aged 15-29 which corresponds to about 5% of Africa’s population in this age group. Taking into account rapid population growth, to keep these ratios until 2025, African governments would have to create 29 million new public sector jobs, or 1.9 million a year – an unlikely prospect. North African countries in particular have very high ratios of public sector employment. Based on the same calculation, Egypt would have to create 230 000 public sector jobs annually until 2025 and Tunisia 25 000.

The formal private sector is too small to absorb the growing labour force and transition between formal and informal work seems limited. For most of the young, working as a salaried employee in the formal sector remains a distant dream, especially in countries where the public sector has been shedding labour over the last two decades. Instead, those young people who cannot afford unemployment and a prolonged job search are confined to the informal sector and low quality jobs. Once they are stuck in the informal sector, a move into the formal sector other than through self-employment becomes difficult. Analysing panel data of youth and adults from Ethiopia, Ghana and Tanzania, Falco et al. (2010) and Sandefur et al. (2007) find very low transition rates from self-employment into private wage employment or public employment. In all three countries more than 80% of those in self-employment or unemployment were still in that category two years later (2004-06). Figures 6.12. and 6.13. also suggest a significant degree of labour market segmentation, given that the shares of wage and vulnerable employment remain the same across age cohorts of 30 years and above. Unfortunately, only very few studies exist that follow individuals over time to give a better understanding of the transition dynamics between labour market segments.

Box 6.5. Senegal an example of insufficient employment capacity in the formal sector

The high rate of unemployment and underemployment suggests that not enough jobs are being created: around 100 000 higher education graduates arrive on the labour market each year and fewer than 30 000 formal hiring contracts are registered by the service that gathers employment statistics.

An inquiry carried out as part of the YEN/IYF (2009) study among 378 businesses in 26 key sectors found that 10 264 jobs had been created for young people between 2010 and 2014, of which 6 183 were temporary. The size of the latter category reflects the trend among employers to outsource services for the sake of greater flexibility.

The formal private sector, therefore, does not provide a significant number of job opportunities. The IMF (2010) reports that the volume of employment in the formal sector has stagnated for the past 15 years; the informal sector remains the chief source of jobs. The World Bank (2007), the YEN/IYF (2009) study and the national report on competitiveness in Senegal estimate that the informal sector accounts for 80% to 97% of jobs created. Commerce is the main sector of activity in the informal sector and the principal source of employment in the periurban areas with a large number of street vendors. USAID (2011) shows that the great majority of young Senegalese think the informal sector could not be a best final choice and accept a temporary job while waiting for a formal one.

Source : AEO 2012 Country Note Senegal.

The recent economic crisis had a strong negative impact on the employment outlook for young workers. Across a sample of 19 countries where the Gallup World Poll survey was done in both 2008 and 2010, the occupational profile of youth deteriorated significantly during that period. Figure 6.17 shows that professional work and services, the two occupational categories with the highest education and income profile, shrank significantly among employed youth. Business ownership, which largely includes informal self-employment, as well as sales and agricultural work, the two occupational categories with the poorest education and income profiles, instead expanded. Although there is reason to hope that this trend will be to some degree reversed with growth picking up again, it falls within the larger trend of a labour market for youth in Africa that is becoming more rigid.

 

 

Figure 6.17. Youth employment by occupation 2008 and 2010: Informal sector activities and farming have absorbed the impact of the crisis

Youth employment in the informal sector: an opportunity, not a nuisance

The preceding analysis leads to three conclusions.

  • First, the formal sector is incapable of absorbing the large amount of new entrants to the labour market.
  • Second, informality and vulnerable employment are the norm for many young Africans and provide an alternative to unemployment and inactivity.
  • Third, given quantity constraints on formal sector employment, the informal sector will continue to play an important role in absorbing young entrants to the labour market and has to be part of any policy that addresses youth employment.

The fact that labour markets are segmented and that developing economies often contain several sectors operating at very different levels of productivity has been among the early insights of development economists. Although true, this had led to ignoring the potential of rural and informal employment. For Lewis (1954) the movement of workers from unproductive agriculture into the productive industrial sector is the very process of development itself. Once most agricultural workers have migrated to industry and the rural workforce has been reduced to a size at which its members can work with high productivity, wages across the economy would start to rise, like a tide lifting all boats. The rural or “traditionalist” sector has since been primarily seen as the pool of unproductive agricultural surplus labour and urban areas as the centres of industrial growth. The informal sector has suffered a similar fate in the development debate. The traditional view holds that it consists of a large share of subsistence entrepreneurs and a rather small share of growth-oriented firms. As a result, little attention has been paid to the potential of the rural and informal sectors as engines for growth.

At first glance the rural and informal sectors do indeed seem to have little to contribute to development and growth. Most entrepreneurs operate at very low levels of capital and productivity. Figure 6.18 from Yoshino (2011) shows the dilemma of Africa’s micro and small enterprises: they absorb labour but the returns they make on this labour are very small. Rural work does not look much better. Rural youth are more likely to be poor and less likely to be in school. Only 37% of the rural young are full-time students, compared to 49% in urban areas. Rural youth also have a much worse employment profile than urban youth, with higher rates of vulnerable employment and higher rates of food poverty.

Figure 6.18. Aggregate sales and number of enterprises in sub-Saharan Africa, by size

African policy makers face a dilemma presented by a large informal sector that suffers from very low productivity and wages, but at the same time absorbs all those who cannot find good quality jobs elsewhere and provides a livelihood for the vast majority of young people. Informality and unemployment are both a result of the type of development that fails to generate enough good jobs for all. This phenomenon has been accentuated by the poor capacity of the private and public sectors to accommodate rapid growth in the population and labour force and has been worsened by labour market discrimination and segregation between men and women, social groups and different occupations (Jütting and Huitfeldt, 2009). Figure 6.19 shows the important trade-off between vulnerable employment and unemployment. Given the informal sector’s sheer size in most African countries, and the fact that it is born out of the absence of other opportunities, it has to be seen as part of the solution, not the problem.

Figure 6.19. The trade-off between vulnerable employment and unemployment

The informal sector presents opportunities and is part of the solution to Africa’s youth employment challenge. Recent evidence for a number of countries in Latin America, Africa and Asia shows that returns to capital in the urban informal sector are high, often in the range of 60% to 70% annually, in particular at very low levels of capital (Banerjee and Duflo, 2004; McKenzie and Woodruff, 2006; De Mel et al., 2008; McKenzie and Woodruff, 2008; Kremer et al., 2010; Fafchamps et al., 2011; Göbel et al., 2011; Grimm et al., 2011a). This finding contradicts the conventional wisdom that there is little potential in subsistence activities and that most own-account activities are a simple reaction to a lack of alternatives. Quite to the contrary, there seems to be significant potential for growth among micro‑entrepreneurs. Yet high returns remain largely unexploited as a result of a number of economic, institutional and social constraints (Grimm et al 2011a; Grimm et al., 2011b). Removing these constraints would enable entrepreneurs to grow their business, achieve their full productive potential and create good quality jobs for themselves and others.

In the same way, the rural sector has potential as an engine of inclusive growth and youth employment. Although rural youth face tougher conditions than urban youth and have higher rates of vulnerable employment and working poverty, in several countries rural economies are showing strong potential for economic growth and poverty reduction. For many households farming is an important part of their livelihood, involving many young workers. More and more households in rural areas are branching out into other sectors, initially complementing farming and later supplementing it with economic activities that yield higher returns. Fox and Pimhidzai (2011) show that in Uganda “the phenomenal growth of farm household enterprises in the informal sector drove household livelihood transformation; ownership of a non-farm enterprise is a significant predictor of welfare”. In sub-Saharan countries, higher country income levels are associated with a growing number of household enterprises and less subsistence farming, rather than a significant increase in wage jobs (Figure 6.20.) Figure 6.9 tells a similar story for countries of all income levels: MICs have fewer young people engaged in farming and more business owners, who are largely micro-entrepreneurs. In upper middle-income countries this trend is even stronger. Yet the proportion of young people who are professional workers, which is the core category of wage employees, is only marginally larger in MICs than in LICs.

Figure 6.20. Household enterprises are the fastest growing livelihood sector in low income countries, ordered by GDP per capita

Already today more than half of young workers in rural areas pursue activities other than farming. With 47% of all working youth in rural areas primarily engaged in agriculture, that is the largest sector, but more than half of the rural young pursue non-farming activities for their livelihoods (Figure 6.21): 17% provide services, including public services, installations and repairs, transport and clerical work; 11% are in sales; 7% work in manufacturing and construction; 7% are white-collar professionals, government officials or teachers; 12% run their own businesses. In spite of low earnings, young people in the rural non-farm sector are on average much better off than their counterparts in farming and are closer to their urban contemporaries in their employment and poverty profiles (Figure 6.22). Of youth in rural areas who work in non-farm activities 34% are wage employed, compared to only 10% of rural youth working in farming. Among the young in rural non-farm work 5% are unpaid and 37% part-time employed (voluntary and involuntary), compared to 18% unpaid (family) workers and 50% in less than full-time employment. With 22% and 24%, the rates of self-employment are similar for rural youth on and off-farm.

Figure 6.21. More than half of rural youth work outside agriculture

Figure 6.22. Rural youth working in agriculture are the poorest group of working youth, youth in rural non-farm activities are only slightly poorer than urban youth.

Young people in the countryside are the most enthusiastic about creating their own businesses. Across the Gallup World Poll sample, 23% of the rural young have plans to start a business, compared to 19% of urban youth. Similarly, it is the least educated youth who have plans for a business: 28% of youth with primary education or less have business plans, compared to 22% of youth with secondary or tertiary education.

 

The rural farm and non-farm economies are closely linked. Higher agricultural productivity leads to more non-farm activities and non-farm income increases demand for agricultural goods. As agricultural productivity increases, savings and labour become available for households to diversify and invest in small-scale activities outside agriculture, such as simple services (repairs, hairdressing), manufacturing (handicrafts, sewing and textiles etc.) and sales. At the same time an increase in rural incomes also translates into an increased demand for non-food products, creating an opportunity for the provision of such goods to become viable and profitable. Haggblade et al. (2009) estimate that an increase of agricultural value added of one US dollar translates into an additional 30 to 50 cents value added in the rural non-farm economy. “Ensuring that most households are able to diversify their livelihoods into the non-farm sector through productive informality not only increases growth, but it allows the majority of the population to share in the growth process” (Fox and Pimhidzai, 2011). See Box 6.1 for a discussion of the link between rural and urban employment creation.

To develop their full potential the young in informal work in urban and rural areas need specific support and an environment that allows them to develop professionally. Young people struggling with their own businesses, but showing potential in the form of managerial skills, can benefit greatly from targeted support. Capital market constraints and risk stand out as important barriers (Grimm et al., 2011b). Rural youth often face similar problems. In addition, they are put at a special disadvantage by government programmes that target only urban youth and jobs. Adapting schooling and skills training in rural areas to rural needs would be an important step in supporting rural youth.

Box 6.6. Settlement dynamics and rural employment creation in West Africa

In 1950 West Africa was a sparsely populated, predominantly rural area with six urban centres of more than 100 000 inhabitants and a level of urbanisation of 7.5%. Today the region counts almost 300 million people, 122 cities exceeding 100 000 inhabitants and an urbanisation rate of 40%. These fast evolutions have profoundly transformed the region’s economy. It went from one in which agricultural activities dominated the lives of local people, living mostly in semi-autarchy, to one that saw the emergence and concentration of a non-agricultural economy in both urban and rural areas. Urbanisation, and with it the increasing division of labour, is the underlying process in this complex rural-urban transformation.

This transformation also greatly alters the rural economy. Today, densely populated and well-connected rural areas are far more diversified local economies than a simple rural–urban distinction captures. Studies show that in certain rural areas only 50% of the population are involved in agricultural production, with others mainly employed in upstream and downstream activities such as extension services, marketing, banking and other basic services such as health and education. This diversification reflects an increasing integration of agriculture into the market economy: a process that started with the rapid development of export crops and later accelerated with the demand originating in a rapidly growing urban food market.

Settlement dynamics & rural employment creation in West Africa

One way of capturing the diversification of the rural economy and the structural transformation of agriculture is to look at the changes in the ratio of non-agricultural producers to agricultural producers (NAP/AP). This relationship expresses a division of labour between agricultural producers and consumers and an estimate of the market size for agricultural food production. Only when a critical size is reached will farming techniques evolve through investments in labour and capital. The NAP/AP ratio is strongly correlated to the ratio of urban to rural population (U/R), with increases in the level of urbanisation having an accelerating effect on agricultural transformation. For instance, in Nigeria between 1960 and 2000 the NAP/AP ratio increased twice as fast as the level of urbanisation.

This rural transformation is not a geographically blind process. Rural areas close and well connected to large urban markets have higher productivity and greater product diversification and division of labour. Today many farms in Nigeria, Ghana and Côte d’Ivoire operate as businesses and create demand for a variety of non-farm products and services. By contrast, farming techniques and livelihoods in rural communities distant from commercial opportunities have barely changed. Settlement dynamics will continue to influence the economic geography of West Africa. Urbanisation and increasing food demand will create opportunities for rural farm and non-farm employment. The success and speed of this transformation will depend on the adoption of more intensive practices in labour, capital and services. However, not all areas will have the same opportunities in terms of resource endowments and market development. Policies need to integrate the economic interactions between urban and rural spaces and its geographic disparities.

 

Source: Sahel and West Africa Club Secretariat, West African Futures: Settlement, Market and Food Security; www.oecd.org/swac/waf

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