Tackling Youth Unemployment in Arusha: From Knowledge to Action

By Nicola Banks

One of the consistent battles I face as a researcher is the feeling of uselessness I experience in each and every interview I conduct. This is not to say that I believe our research is ‘useless’ – anything but. Research must continue to play an important role in revealing the realities and the complexities of poverty and social injustice. And by doing relevant and timely research we can continue to press for greater prioritisation of important development issues. One of these priorities simply must be youth unemployment.

Read more →

How do Rural Labour Markets Respond to Shocks?

By Ralitza Dimova

The occupational portfolio choice of small farmers in rural environments is among the most high profile areas of research and policy debate in development economics. One key focus area is the choice between relatively risk-free – though less profitable – activities such as subsistence farming and higher-risk and higher return activities like livestock and cash crop production. The consensus is that relatively asset-poor and risk-averse households are likely to opt for subsistence farming and out of higher value cash crop alternatives, thus potentially going down the slope of further destitution. By contrast, off-farm (especially non-agricultural) labour market opportunities tend to be seen as an escape route for farmers out of poverty, especially in the event of shocks. However, most of the related literature highlights lack of availability of such opportunities for households that have failed to reach a certain wealth and education threshold.  In both cases, the policy advice is in favour of asset reallocation from relatively wealthier to relatively asset poor households.

The paper on Off-farm labour supply and correlated shocks: New theoretical insights and evidence from Malawi, published by Ralitza Dimova and co-authors in the January 2015 issue of Economic Development and Cultural Change challenges this policy consensus. The paper explores intriguing cases of labour market dynamics in the face of correlated shocks – namely shocks experienced by the majority of households in a village – and examines cases of deepening poverty even when there are no obvious barriers to entry in the off-farm labour market.

The starting point of the analysis is the phenomenon of off-farm ganyu labour in Malawi, namely low skill and poorly remunerated labour that farmers supply off their own farms. Approximately half of the rural people in the country supply ganyu labour and there are virtually no other (better remunerated) off-farm job opportunities in the rural areas. To learn more about the ganyu market, we build a theoretical model that explores labour allocation of farmers between low risk and low return food crops (such as maize), higher risk and high return cash crops like tobacco and groundnuts and off-farm ganyu labour. The main focus is on identifying the determinants of these livelihood choices and exploring the general equilibrium (demand and supply) conditions of the ganyu labour market in the event of correlated shocks, namely shocks in the form of drought, flood or pest that affect all villagers simultaneously.

In keeping with historical analyses on Malawi, the statistics presented in Figure 1a indicate that land distribution is very skewed: while large farmers (plantations) hold average land sizes of approximately 40 hectares, smaller farmers (in the first and second quintiles of the land distribution) are practically landless, while even farmers in the fourth quintile hold average land sizes of approximately 5 hectares.

 Figure 1a: Land distribution in Malawi

land in malawi

Source: Authors’ calculations, based on the Second Integrated Household Survey on Malawi

Larger land endowments are a key determinant of entry into the higher risk, but significantly more profitable cash crop market, especially that for tobacco and groundnuts. For instance, the statistics in Figure 1b indicate that while almost none of the farmers in the lowest quintile of the land distribution is involved in tobacco production, approximately 30% of the farmers in the highest quintile produce tobacco. Similarly, approximately half of the largest farmers produce groundnuts, while only 20% of the smallest farmers are involved in the production of this cash crop.

Figure 1b: Crop choice of farmers by quintiles in the land distribution

crop choices malawi

The most interesting finding from our rigorous theoretical and econometric analysis is that while during shock- free periods, smaller and asset poor farmers are by default reliant on the (low return) off-farm ganyu market and larger farmers are large buyers of ganyu labour, the situation changes dramatically in the event of a shock. Large farmers, who have opted for the more profitable and higher risk cash crops (the production of which is more likely to be affected by a negative shock) are disproportionately affected by the natural disaster. They have no other choice but to leave their own farm production, reduce the intake of ganyu labour and enter the low skill and low return ganyu labour market themselves. This leads to a reduction of ganyu wages, which – in turn – reduces the number of hours supplied by smaller farmers.

Our theoretical results, backed by evidence from Malawi, provide at least some ground for re-thinking policy advice. On the one hand, we observe that larger land endowments do not ensure better off households against risk in uncertainty ridden environments. On the other hand, we find evidence that challenges the consensus of much of the focus of the off-farm labour literature that dismantling entry barriers to the off-farm market may be a panacea to poverty and income inequality. This may indeed be a viable prescription in contexts where good non-farm jobs exist and there are high (wealth related) access barriers to these jobs. However, we find that even when there are no barriers to entry, the off-farm labour market may still struggle to provide successful consumption smoothing and poverty alleviating occupational alternatives to poor farmers. In such conditions, direct interventions as in the case of public works programs could be a preferable policy agenda.

The links between employment and development

By Ralitza Dimova

Approximately 200 million people around the world are actively looking for work; if they formed their own country, it would be the fifth largest in the world.[i] [ii] Developing countries account for more than half of these people. The number of those who neither work nor look for work in these countries is in the hundred millions, while among those working, the majority hold occupations in farming, small household enterprises or in casual or seasonal day labour. Their labour productivity is between 10 and 40% of that in advanced economies.

Productive employment is key to growth and poverty alleviation, but there is no consensus on whether migration of labourers from the rural/agricultural sector to the urban/industrial or service sector is the answer, or if instead it is better to focus on agriculture as a growth engine. There is even less clarity on self-employment and informal employment in the urban and/or industrial sector. Are these forms of hidden unemployment or dynamic entrepreneurship? The 2013 World Development Report placed labour in the spotlight of development policy making, but there are few systematic analyses of the multifaceted nature of the link between labour and economic development, largely due to conceptual gaps and data limitations.

The Special Issue on Understanding the Links between Labour and Development in the 26th volume of the European Journal of Development Research, co-edited by Ralitza Dimova and Christophe Nordman, provides some more definite answers to key questions in the academic literature and policy debate. The Special Issue highlights new paradigms and offers new interpretations of phenomena in the interrelated areas of labour informality, self-employment, agricultural employment and its link to rural-urban migration and labour market discouragement. It uses stylized secondary data sources and unique primary surveys spanning developing countries from a number of continents in search of generalizable messages and policy recommendations.

Much of the focus of the Special Issue is on providing better understanding of self-employment and informal employment in developing countries. Contrary to views highlighting the dynamic entrepreneurship nature of these labour dimensions, the evidence presented suggests that less than 40% of the self-employed people in low-to-medium income countries can be characterised as “high potential” employers and less than half of them are even able to cross the poverty threshold of $2 a day.[iii] Indeed, as countries move up the development path, one observes a steady reduction in self-employment and increase in wage employment (Figure 1).

employment trends

Source: Guindling and Newhouse (2012), cited in Margolis (2014).

This evidence appears to be consistent with the hidden unemployment view of entrepreneurship in a dual labour market. Yet, detailed analysis of the nature and dynamics of the links of informal labour with the formal sector in the modern environment of global production networks and exchange highlights its complexity as a concept and reality, transcending the simplistic dichotomy of dual economy versus dynamic entrepreneurship.[iv] [v] In particular, the evidence presented in the Special Issue suggests that informal (typically unregistered) firms perform much better if their links to the formal sector and related institutions are stronger. Informal firms with low levels of capital are, in turn, less likely to have strong links with the formal sector. In sum, enhancing the links of (informal) firms with the formal economy is desirable, while increase in wage employment is highly correlated with higher level of economic development.

Despite this compelling evidence, small informal firms are the norm in developing countries.[vi] Moreover, employment is generated to a larger extent through the creation of new (typically informal) businesses than through a larger intake of hired labour by either newly created or existing businesses, especially during economic crises.[vii] Indeed, even in high growth periods of relatively fast growing emerging markets, the number of jobless people who are ready to work, but are not even searching for work is rather high, highlighting the presence of structural stagnation of productive employment in developing countries.[viii]

Stagnation in the urban labour market of developing countries is typically explained with institutional constraints and mismatch between the skill levels of available employees and the skills demanded by potential employers. Unfortunately, productive employment generation through agricultural growth poles does not appear to be a panacea either. For instance, the Special Issue highlights theoretical and empirical evidence that when farm incomes increase in the context of imperfect rural markets in developing countries, thus stimulating investment of credit constrained farmers in their children’s education, better educated children migrate to other sectors in search of better paid jobs instead of becoming farmers themselves.

In sum, the Special Issue argues that the mobility of labour from low productivity towards higher productivity and better remunerated jobs geographically and across sectors and enterprises is a crucial ingredient in ensuring sustainable growth and poverty alleviation. Contrary to prevailing arguments, it highlights (formal) wage employment in the context of enhanced employment and firm formalisation and firm growth as key elements in these dynamics. The policy implication is that government and international policy effort should focus on dismantling institutional and (correspondingly) skill generation constraints to this successful transition, while factoring in context specific peculiarities, social norms and household and firm level dynamics.

[i] The World Bank (2013). World Development Report 2013. http://siteresources.worldbank.org/EXTNWDR2013/Resources/8258024-1320950747192/8260293-1322665883147/WDR_2013_Report.pdf

[ii]               IMF Direct (2014). Are jobs and growth still linked? http://blog-imfdirect.imf.org/2014/02/07/are-jobs-and-growth-still-linked/

[iii] Margolis, Davis (2014). By choice and by necessity: entrepreneurship and self-employment in the developing world, The European Journal of Development Research, 26(4), 419-436.

[iv] Chen, Martha (2014). Informal employment and development: patterns of inclusion and exclusion, The European Journal of Development Research, 26(4), 397-418.

[v] Böhme, Marcus and Thiele, Reiner (2014). Informal-formal linkages and informal enterprise performance in urban West Africa, The European Journal of Development Research, 26(4), 473-489.

[vi] Goyette, Jonathan (2014). The determinants of the size distribution of firms in Uganda, The European Journal of Development Research, 26(4), 456-472.

[vii] Vaillant, Julia, Grimm, Michael, Lay, Jann and François Roubaud (2014). Informal sector dynamics in times of fragile growth: The case of Madagascar. The European Journal of Development Research, 26(4), 437-454.

[viii] Gürbüz, Akançay, Ayça, Polat Sezgin and Ulus, Mustafa (2014). In Limbo: Exploring transition to discouragement, The European Journal of Development Research, 26(4), 527-551.