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Why so Idle? Wages and Employment in a Crowded Labor Market
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  • December 2016

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STORY HIGHLIGHTS
  • In its 5th Economic Update, the World Bank Group identifies challenges and opportunities in Ethiopia’s economy and labor market
  • The report notes that while Ethiopia’s economy was remarkably resilient to the effects of the drought, the 2015/16 growth rate declined to 8%
  • Addressing key constraints in the economy and labor market will enable Ethiopia to further facilitate economic growth and structural transformation

ADDIS ABABA, December 6, 2016 – Addressing major obstacles in the labor market would enable Ethiopia to accelerate structural transformation, ensure inclusive growth and lead to further poverty reduction, according to the World Bank’s latest economic update for the country.

The country’s fifth economic analysis, “Why So Idle? Wages and Employment in a Crowded Labor Market,” identifies urban areas as centers of innovation and industrial development and key players in advancing structural change in Ethiopia.

“Well-functioning and efficient urban labor markets are a key ingredient for this transformation to take place, and to ensure that its benefits reach all segments of the population,” said Michael Geiger, World Bank senior economist and main author of the update. “As unemployment in Ethiopia is by and large an urban phenomenon, increasing the efficiency of urban labor markets is not only key for structural transformation but also for overall economic development.”

Economic Growth, Outlook and Challenges

Despite being affected by drought, Ethiopia’s overall economic growth has remained positive with agriculture, construction, and the services sectors accounting for most of the growth, according to the report, as well as investment and private consumption on the demand side.

Despite positive achievements, the report reveals that low commodity prices and an appreciating real exchange rate led to a decline in exports from Ethiopia in 2015/16. Similarly, Ethiopia’s current account deficit is remained high at above 10%.

“Over the past two years, weak external environment and a supply shock from the drought that meant foregone agriculture production lead to weak exports performance,” said Paloma Anos Casero World Bank Director of the Macro Economics & Fiscal Management Global Practice for Africa Region. “Moreover the overvalued currency limits Ethiopia’s export competitiveness and is a concern for the economy, especially with exports falling for three consecutive years.”

Ethiopia’s medium-term economic growth is unlikely to be affected by the recent drought and the country should be able to sustain the growth momentum, the update says. The report highlights the government’s investments in key areas, including the Addis Ababa -Djibouti railway line, the launch of new industrial parks and the power sector, which are also expected to increase export performance and contribute to economic growth in the short- to medium-term.

However, the report warns that if the performance of the industry and service sectors do not live up to expectations, it could negatively affect the growth. Additionally, the report notes the current unrest in the country could also pose potential risks to the country’s economic outlook.

The report also predicts further poverty reduction; based on data on the impact of growth on poverty reduction in the country in the past decade, the report estimates that the proportion of households living below the international poverty line of $1.90 per day will decline from 27.2% in 2015 to 24.6% in 2018.

The Nature of Ethiopia’s Labor Market

As Ethiopia is rapidly urbanizing, the report points out that understanding the nature of urban labor markets provides valuable insights for further poverty reduction and for a successful transition to a manufacturing and service-oriented economy.

While labor market trends are moving in the right direction, there has been little change in Ethiopia’s structure of urban labor markets. Real wage trends have not reflected the increasing educational quality of the workforce although there have been some improvements. While wages were more than double for those with a degree compared to those without, returns on education have fallen in the last decade. Additionally, while jobs are being created, there are not enough jobs available for those with primary and secondary education. The report also points out that the high cost of job search is a factor in the high urban unemployment rate.

For Ethiopia to sustain economic growth, reduce poverty and make its structural change more inclusive, the report recommends:

  • Encouraging firm creation and growth that create jobs for non-graduates with a special focus on service and manufacturing sector growth.
  • Increasing labor productivity in the low-skill segment by addressing constraints faced by firms in accessing capital (financial and physical) to ensure that the marginal product of labor increases above the nutrition-based wage. Investing further in job and technical training programs to build the skills of those in the job market, both for low skilled workers and at higher levels of education in order to increase their productivity.
  • Introduce targeted urban safety nets and labor market programs to invest in skills of low-skilled employees and the unemployed and provide financial support to enable their job search.
  • Enhance the use of ICT to provide information on job vacancies throughout Addis Ababa and reduce the cost of job search.