To understand earnings in Africa, we need to look past the formal/informal divide

Posted on June 1, 2012 by

The debate about whether human capital or labour market institutions are the primary explanation for who earns what in developing countries is a long one. An important waypoint in this debate is the Harris-Todaro model, which came to be used to describe a segmented labour market. While it was initially created to explain urban/rural migration patterns, it ended up being used as a tool for thinking about why some individuals earned more than others in developing countries: formal labour market institutions like minimum wage laws, trade unions and public sector wage setting created higher wages for some while trapping others in unemployment or the “murky” informal sector in which these institutions did not operate. The resulting literature on segmentation has largely become bogged down in a debate over whether the formal sector pays more than the informal sector, despite Bill Maloney’s argument that earnings differentials can’t prove or disprove whether a labour market is segmented.

In a recent working paper with Francis Teal, I argue that earnings differentials may tell us something helpful about how the labour market operates, but that the dichotomy between the formal and informal sectors is unhelpful, as it does not shed much light on what is actually going on in the labour market in question. The fight over whether panel data estimators, propensity score matching or OLS can tell us whether the formal sector pays more than the informal sector means that other factors, such as the role of trade unions, the public sector and the benefits of self-employment versus small firm employment have often been neglected.

Our working paper pays attention to these neglected areas. It uses the KwaZulu-Natal Income Dynamics Study (KIDS),  a rich source of panel data taken from three waves in 1993, 1998 and 2004. The raw KIDS data reveals massive differences in earnings across different kinds of jobs, even when restricting the sample to only black South Africans. The self-employed had average hourly earnings six times lower than private employees, who themselves earned half as much on average per hour as public sector employees in 2004. Our paper investigates whether this comes about as a result of individual human capital differences – both observed and unobserved – or institutional features of the labour market, specifically unions and public sector wage setting.

When we control for educational attainment, we find that the vast differences in earnings within the private sector are substantially reduced, but that a public sector premium still exists. Also, unionised workers enjoy a large, but not massive premium, a finding similar to other cross sectional studies from South Africa. The rub comes when we use panel estimators to control for unobserved and constant individual differences: this wipes out all wage differences within the private sector and the premium to being in a union, but public sector earnings still exceed those in the private sector.

Interestingly, it turns out that the public sector premium is present only for those who move into the public sector and not for those who move out. One explanation is that only higher ability individuals leave the public sector, whilst lower ability workers do not.  Our results on the union premium suggest that the premium is due to selection, with unionised firms hiring workers more carefully than their non-unionised counterparts.

These more nuanced conclusions would not have been possible had we simply divided the sample into the formal and informal sectors, and as a result we suggest that this dichotomy can be unhelpful in trying to understand how complex labour markets operate in developing countries.

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Are contract teachers worth the hype?

Posted on May 14, 2012 by

Everyone complains about ‘failing’ state schools, but some countries are entitled to more of a gripe. State school teachers in a lot of countries just don’t show up for work, students in these schools can’t add and multiply despite years of schooling, and it’s really difficult to get rid of the absent teachers. So what do you do?

One way to improve learning that people have been writing about (see Duflo et al on Kenya or Kingdon and Atherton on India) is to hire more contract teachers. Hired on fixed-term contracts and without public sector job security (or access to public sector unions), these teachers are more likely to show up to school and their students do better. The problem is that this story just doesn’t seem to hold up consistently: in a large RCT in Andhra Pradesh by Muralidharan and  Sundararaman, students didn’t do any better with contract teachers than regular teachers once reductions in class size were accounted for, even though the contract teachers were less likely to be absent from school. Also, in a recent RCT in Kenya by Bold et al, contract teachers do out-perform regular teachers, but only if they were hired and paid by NGOs and not the Ministry of Education!  Are contract teachers just one in a line of hyped interventions that seem to have very limited generalizability?

Not really: across all these studies, contract teachers never do worse than civil service teachers, despite being younger, more inexperienced and more likely to not have had formal teacher training. In value-for-money terms, each contract teacher is at least four to five times as productive as a regular public service teacher: in Kenya, the average pay of a civil service teacher is $261 per month compared to $56 for a contract teacher. The problem is not that the contract teachers are being paid too little (they get paid salaries comparable to private school teachers in these countries) but that public sector employment just has a huge premium attached. In the Andhra Pradesh study, the authors present this graph of the salary distributions of each type of teacher:

In their own words: “private school teacher salaries are even lower than those of contract teachers and so much lower than regular teacher salaries, that there is almost no common support in the two distributions.”

The contribution of the Bold et. al. paper is to show that many gains in RCTs should be accepted only with caveats  – the findings may not generalize even in the same contexts if the implementation differs a bit – something that’s been talked about for a while but it’s nice to have proof of.  However, it shouldn’t really change our priors about contract teachers: governments don’t hire them because they’re better at teaching, they hire them because they’re cheaper and just as good– and nothing that has come out of any of these papers changes that.

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The 2012 CSAE Conference

Posted on March 17, 2012 by

The 2012 CSAE Conference begins tomorrow at St. Catherine’s College, here in Oxford. The conference is probably the largest annual gathering of economists working on Africa.

There will be an impressive array of speakers at the conference, including Stefan Dercon, Jakob Svensson, Martin Ravallion and Shanta Devarajan. All plenary sessions will be broadcast live on the CSAE website (look for a link here starting tomorrow), as well as a the following paper sessions:

The full schedule of talks and papers being presented is here. If you’ll be attending the conference and happen to be a fervent tweeter, we’ll be using the hash tag #CSAE2012.

 

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Policies for jobs in Africa: why we need more bad jobs (and fewer good ones)

Posted on March 1, 2012 by

Jobs are back on the policy agenda in a big way. The World Bank is proposing to move Jobs to the Center Stage for its 2013 World Development Report. The ILO has created a “Decent work agenda” which includes creating jobs, guaranteeing rights at work, extending social protection and promoting social dialogue. The last is defined as “involving strong and independent workers’ and employers’ organizations” which the ILO argues is “central to increasing productivity, avoiding disputes at work, and building cohesive societies”.

The motivation for this new concern is obvious: OECD unemployment rates have been rising and rates of unemployment amongst the young in some countries are now extraordinarily high. The Arab Spring has focused attention on the problem of joblessness for the relatively-educated young. It would seem rather obvious that an agenda focused on jobs is what the world needs now if these pressing social and economic problems are to be alleviated.

However, will an agenda focused on jobs and the need to create decent ones help us understand the causes of poverty in Africa, where an increasing proportion of the world’s poor live? Is it true that if more decent jobs were to be created in Africa the problem of poverty would be alleviated?

I want to argue that the evidence we have suggests the answer to both those questions is no. Labour markets are very different across the world and, in understanding the causes of poverty in Africa, the enormous diversity in employment outcomes within the continent needs to be understood [see this paper for an overview].1

In poor African countries people overwhelmingly want jobs because of the incomes that they provide. Everyone can get a job – working in the home is a job in the sense that it generates output – it’s the meagre income from those sorts of jobs that is problematic. So the answer to my first question is clearly no: unless we know more about the incomes that these jobs provide, focusing solely on employment itself is irrelevant for understanding the problems of poverty.

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The price of crossing a border

Posted on February 27, 2012 by

Crossing a national border in East Africa can be a ponderous, aggravating affair. I experienced this firsthand a few years ago while attempting to temporarily bring a car into Tanzania from Malawi. The process took several hours and involved a never-ending amount of detailed paperwork on both sides of the border, as well as multiple and seemingly-illogical shifts back and forth between offices, a minor panic attack when the resident soldier inadvertently pointed his machine gun at me and finally a mad dash into an adjacent village to find someone who could photocopy our documents.

It’s easy to see how these sort of hurdles can disrupt markets, even without the distortions caused by formal tariffs or other restrictions on trade. This is of particular concern for countries in sub-Saharan Africa, many of which already face large transportation costs due to poor infrastructure. Landlocked countries are especially reliant on their neighbors for access to imports, so there is great interest in getting goods across borders as efficiently as possible. This motivates a search for finding good ways to measure the impact of international borders on market efficiency.

As much as they enjoy wallowing in theory, economists also like to learn from situations where theoretical predictions don’t hold. One of these `predictions’ which might be useful for examining border effects is the law of one price (LOP), the assertion that identical goods will always be sold for the same price within a market. The standard example is that if shop A on one side of town is selling bread for $0.80 a loaf and shop B on the other side is selling it for $1.00 a loaf, there is an arbitrage opportunity, with gains to be made from buying bread at $0.80 and selling it outside of shop B for $0.99. In an ideal setting this incentive to exploit differences in prices eventually drives those prices to equalize through competition.

Yet there are a lot of reasons why the LOP might not hold – one common one is the presence of transportation costs (in my example above the arbitrage opportunity vanishes if it costs me $0.25 to move a loaf of a bread between the shops). While the LOP is more of a theoretical ideal than an empirical reality, it is a reasonable benchmark for testing whether or not markets are working efficiently: if two identical goods are being sold for separate prices  in otherwise identical settings, we know something is amiss. Looking at the prices of identical goods on either side of a border might tell us the extent to which borders are preventing prices from equalising.

In a new working paper, Bruno Versailles uses monthly price data from cities in Uganda, Kenya, Rwanda and Burundi to do exactly this. To disentangle the effect of a border from that of distance, he compares prices between cities both within and across these countries, while also trying to account for other factors that might drive a wedge in prices, such as disruptive changes in the exchange rate or non-tariff barriers to trade (think number of offices one has to run between in order to get their car cleared).

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Babatunde Fashola and the return of public goods

Posted on December 16, 2011 by

"The population of Lagos is bigger than that of London, so I don't see why we cannot have another airport"

Babatunde Fashola, the governor of the state of Lagos, recently came to speak at the Rhode’s House in Oxford for the Oxford Research Network on Governance (you can watch or listen to that talk at the Democracy in Africa blog).

Fashola has been an intriguing figure for quite some time, being somewhat of an outlier in a country with an unfortunate reputation for poor governance and excessive corruption. His efforts to reform the city of Lagos were even praised earlier this year in The Economist,  which is not itself known for overly-upbeat coverage of sub-Saharan Africa.

The first thing that jumps out when you listen to Fashola, both at the Rhode’s House talk and his `I See Lagos’ speech here, is his fixation on public goods – most often new types of transportation and infrastructure. This stems from exposure to reliable public services during his childhood – as a little boy, Fashola recalls taking a bus to school every day. He has laid out his vision for the city in recent campaining, and it looks very similar to the type of public transportation networks we’re used to in Europe – high speed rail, bus and ferry networks, all looking very clean and efficient.

This may all seem terribly optimistic, but it’s clear that Fashola’s zeal for public goods is paying off politically: despite some rumblings from the political elite, he was re-elected for a second term this May in a landslide victory – carrying over 80% of the vote.

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Introducing the CSAE Blog

Posted on December 7, 2011 by

Welcome to the first post on the Centre for the Study of African Economies (CSAE) blog. This is our first foray into the blogosphere, and while my job with this preliminary post should be to entice you to keep an eye on this feed, my hope is that the content we’ll be providing will be intriguing enough to warrant your attention.

To keep things short, I’ll just tell you a bit about what this blog will be about. Not only will we have the standard news and updates commonly featured on institutional blogs, but we also aim to have more in-depth posts which go into more detail about the research that we do and the greater context. On top of that, a great deal of our content will eventually come from our own CSAE researchers, as they both discuss their own work and share their thoughts on work in similar areas.

For now, you can subscribe to our main feed here and follow us on twitter @Oxford_CSAE. We’d really love to have your comments on anything you write – you’ll find a comments section attached to each post, or e-mail us directly at csae.socialmedia@economics.ox.ac.uk

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