Louis Kasekende, Deputy Governor, Bank of Uganda
Although the growth in SSA has spurred an expansion of formal sector employment, this is from a very low base, while the labour force itself is growing at almost 3 per cent a year. As a consequence, only about 10-15 per cent of the labour force in SSA currently has a formal sector job, a share that is only increasing slowly in most countries (unfortunately it is difficult to be more precise because accurate and up-to-date labour market statistics are scarce in SSA). Most of the rest of the labour force work in informal jobs or are self-employed. Formal sector employment in SSA is much lower as a share of the labour force than it is in South East Asia, even in the low income countries of that region.
Why have the economies of SSA not been more successful in translating growth into formal sector employment? The reasons are not entirely clear but probably involve both the demand and supply sides of the labour market. On the demand side, Africa has not been able to attract very much private investment in labour intensive export-oriented manufacturing industry, which is a major source of employment in developing economies elsewhere in the world. Private investment in manufacturing industry has been held back for a multitude of reasons, especially those which raise the costs of doing business, including: weaknesses in the business climate, poor contract enforcement, corruption, inordinate delays in clearing goods through customs, unreliable power supplies and deficiencies in the transport infrastructure. Africa has attracted major private sector investment in fuels and minerals, but these are capital intensive industries which create few jobs. The labour intensive services sector has also grown rapidly in SSA, but the jobs created in this sector are mostly informal, such as petty trading.
Labour markets in some SSA economies are subject to greater institutional rigidities than in other developing regions although it is not certain whether this is an important obstacle to employment generation. On the supply side of the labour market, the lack of formal sector job creation reflects a paucity of requisite skills in the workforce, especially the technical and managerial skills required to operate modern businesses, which is itself a consequence of low levels of educational attainment and lack of effective systems of vocational training.
Does it matter that most of the jobs created in SSA are informal, casual jobs rather than formal sector permanent jobs? It matters for both social welfare and long-term development. Formal sector employment provides greater security of income for workers than does informal employment, which itself contributes to enhancing welfare. It also creates incentives for on-the- job training and it helps to inculcate attitudes to work - reliability, punctuality, etc. - which are essential for creating a modern economy. Strong growth in labour productivity, which is integral to long-term development, is much more likely to be realised in the context of formal sector employment than it is in informal, casual employment.
What can be done to generate more formal sector jobs in SSA? Employment creation should be prioritised as a goal of development policy, at both the national and international levels. Framing quantitative targets for raising the share of the workforce with a formal sector job might be a useful addition to the MDGs. Job creation should also be accorded priority in national Poverty Reduction Strategies. There is an urgent need for more empirical research to identify the binding constraints to job creation in different countries. To facilitate this, we need to develop a tractable research methodology which can be used in developing countries where reliable high frequency labour market data are scarce. National statistical offices should strengthen their coverage of labour market data. A better understanding of the binding constraints to formal sector job creation will help policymakers to formulate feasible strategies to alleviate these constraints. As noted above, it is likely that policy interventions in multiple dimensions will be needed, to tackle constraints in the business environment which discourage private investment, in the institutional characteristics of labour markets which impede labour market flexibility, and to improve the quality and vocational skills of the workforce.