Employment in Sub-Saharan Africa

Why African firms create so few jobs

Mar 29th 2014

AFRICAN businesses are reluctant employers. A given firm in Sub-Saharan

Africa typically has 24% fewer people on its books than equivalent firms
elsewhere, according to recent research by economists from the World Bank
and the Centre for Global Development (CGD), a think-tank based in
Washington, DC. Given the links between employment and development,
economists want to figure out the reasons for the shortfall.
The study calculates the missing jobs by crunching information on 41,000
formal businesses globally from a World Bank survey. The data capture only
a sliver of what actually happens in Africa: nine in ten workers have an
informal job. Shunned by the formal sector, workers turn to below-the-radar
employmenttoiling on family farms or otherwise beyond the governments
reach. But a big informal sector makes it harder for Africa to reduce poverty,
even when economic growth is strong. Increases in income on the
production side of the economy translate weakly into higher wages for
workers. Indeed the relationship between economic growth and poverty
reduction is weaker in Africa than any other developing region.
Several factors explain African bosses reluctance to take on new workers.
One is that firms tend to be younger than elsewhere, but even older ones
have fewer employees. More broadly, Africas business climate discourages
hiring. Government officials in search of taxes and bribes tend to chase
large firms, rather than small ones, says Vijaya Ramachandran of CGD,
because they are considered more likely to cough up. The managers of
Nigerien and Liberian firms with more than 100 employees spend 14%
longer dealing with government officials than smaller peers. A recent study
from South Africa revealed that bosses there were desperate to dodge the
attentions of bureaucrats and thus avoided taking on new workers.
High unit labour costs are also culpable. Employing people in Africa should
be cheap, given that many of its countries have rock-bottom income levels.
Yet in half of African countries labour costs are higher than in China because
workers are less productive. They are nearly 80% higher in Africa than those
in other countries at similar levels of income. That lowers competitiveness
and makes hiring less likely.
Economists disagree about the possible causes of this. Red tape and
unionisation may be responsible, though on average indicators of labourmarket regulation are no different in Africa than elsewhere. Nonetheless
there are horror stories. A 2012 report on South Africa, which lays the blame
on greedy unions, calculates that the average employee at Eskom, a stateowned electricity utility, earns 40% more in terms of purchasing-power
parity than a German professor.
Africas commodity-driven export models may be another cause of low
formal employment. Four-fifths of the continents export revenues are from

commodities. That can lead to overvalued exchange rates if their prices rise.
That hurts firms competitiveness, curbs their growth and thus discourages
hiring. (Africas big inflows of aid also contribute to higher real exchange
rates because they result in upward pressure on prices for goods and
services that are not traded internationally.)
Changing labour-market dynamics could exacerbate the job problem. Some
250m people are expected to join the African workforce between 2010 and
2050. In the short term many will go into farming, which employs 65% of the
African labour force. The agricultural sector struggles to create enough jobs.
In the 1990s donors lost interest in using their aid dollars for agricultural
investment. Shame: better farming techniques could bring unproductive
land into use and help Africa shift into higher-value-added crops. According
to a report by McKinsey, a consulting firm, that could create 6m extra jobs
by 2020.
But agricultural improvement can also free up labour to work in more
productive sectorsif the jobs are available. Africa is embracing structural
reform: a recent report from the World Bank shows that of the 20 economies
worldwide making the most progress in improving business regulation, nine
are in Sub-Saharan Africa. Without further improvement, employment
growth in Africas formal sector will remain depressingly stunted.
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