Economic regulation and employment

elasticities of output growth in Sub-

Saharan Africa

Abidemi C. Adegboye1, Monday I. Egharevba2 and Joel Edafe2

1. Department of Economics and Statistics, University of Benin, P.M.B. 1154, Benin City, Nigeria (Ph.D
Candidate) [Corresponding author: cornabi@gmail.com; +2347033227614]
2. Department of Finance and Economics, Benson Idahosa University, Benin City, Nigeria
 Outline
• Introduction

• Data Presentation

• Methodology

• Empirical Analysis

• Conclusion
 Introduction
 Economic growth Productive employment Poverty reduction
 Productive employment will only ensue from growth if (Kuznets,
1946; Lewis, 1954; Chenery, 1960; Agenor & Montiel, 2008):
 the growth is accompanied by structural transformation
 the growth occurs in all the sectors simultaneously
 demographic transition accompanies growth
 there are institutional setups that facilitate labour absorption in the
economy due to economic dualism
Introduction
 Jobless growth in sub-Sharan Africa (SSA) economies
 More of employment, rather tha unemployment problem in SSA
 Presence of duality and market segmentations in developing
economies which may lead to irregularities that may not be self-
adjusting (Krueger, 1983; Agenor & Montiel, 2008), requiring
institutional regulations
 Population dynamics in the SSA region present an emphatic
consideration in employment
 In pursuing employment enhancing growth, regulatory institutions
could have strategic roles population control, factor reallocation,
and aiding balanced growth
Objective
 Despite the attractiveness of regulations to enhance transitions in
the growth-employment relationships for SSA economies, its use
has been noted to also possess certain inhibitory abilities, especially
on formal sector employment

 We seek to assess in this study whether economic regulations in SSA

economies provides the stimulating background for employment
expansion when output changes
 The Data
Demographic transition is contrary to theoretical expectations
Growth appears to be leading employment 1961-1980 1981-1990 1991-2000 2001-2010 2011-2014
12 0.6
Demographic factor
0.5
10
0.4
8

Employment growth (%)

0.3 Sub Saharan Africa
Real GDP growth (%)

6 0.2
0.1 Population growth (%) 2.62 2.88 2.76 2.73 2.76
4
0 Urban population growth (%) 4.77 4.93 4.11 4.13 4.19
2 -0.1
-0.2
Labour force growth (%) -- -- 2.98 2.82 3.07
0
-0.3 Labour force participation rate -- -- 70.29 70.52 71.06
-2
-0.4
Age dependency ratio 89.77 94.55 92.44 89.69 87.55
-4 -0.5
2000
1991
1992
1993
1994
1995
1996
1997
1998
1999

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
rgdpg empl
South East Asia
Population growth (%) 2.29 2.33 2.04 1.63 1.39
Urban population growth (%) 3.78 3.51 2.95 2.90 2.69
Labour force growth (%) -- -- 2.24 1.77 1.61
Labour force participation rate -- -- 60.74 59.55 56.23
Age dependency ratio 80.13 76.54 71.17 62.40 56.61

World
Population growth (%) 1.92 1.76 1.47 1.25 1.20
Urban population growth (%) 2.72 2.67 2.30 2.28 2.13
Labour force growth (%) -- -- 1.72 1.45 1.39
Labour force participation rate -- -- 83.93 82.14 81.54
Age dependency ratio 75.37 67.66 63.13 56.35 53.86
Structural changes have not followed the proper trajectory required for employment growth
Country Period Employment Productivity Country Period Employment Productivity

1 services industry 1 agriculture industry

Botswana Nigeria
2 services industry 2 agriculture industry
cor. = 0 cor. = 0
3 services industry 3 agriculture industry
1 agriculture industry 1 agriculture industry
Cameroon Rwanda
2 agriculture industry 2 agriculture industry
cor. = 0 cor. = 0
3 agriculture industry 3 agriculture services
1 agriculture industry 1 agriculture Industry
D R Congo Senegal
2 agriculture industry 2 agriculture services
cor. = 0 cor. = 0
3 agriculture industry 3 agriculture services
1 agriculture industry 1 agriculture industry
D R Congo South Africa
2 agriculture industry 2 agriculture industry
cor. = 0 cor. = 0
3 agriculture industry 3 agriculture industry
1 agriculture industry 1 agriculture industry
Ethiopia Tanzania
2 agriculture industry 2 agriculture industry
cor. = 0 cor. = 0
3 agriculture industry 3 agriculture industry
1 agriculture industry 1 agriculture industry
Ghana Uganda
2 agriculture services 2 agriculture industry
cor. = 0 cor. = 0
3 agriculture industry 3 agriculture industry
1 agriculture industry 1 agriculture industry
Kenya Zambia
2 agriculture industry 2 agriculture industry
cor. = 0 cor. = 0
3 agriculture industry 3 agriculture industry
1 agriculture services 1 agriculture industry
Mozambique Zimbabwe cor.
2 agriculture Industry 2 agriculture industry
cor. = 0 =0
3 agriculture industry 3 agriculture industry
Estimation of Employment Elasticities (Intensities)
• Elasticity estimation based on Kapsos (2005) Islam (2015) and Anderson (2015) approach
𝒏 𝒏

𝒍𝒏𝑬𝒊𝒕 = 𝜶 + 𝜷𝟏 𝒍𝒏𝒀𝒊𝒕 + ෍ 𝜷𝟐𝒊 𝒍𝒏𝒀𝒊𝒕 × 𝑫𝒊 + ෍ 𝜷𝟑𝒊 𝑫𝒊 + 𝝁𝒊𝒕

𝒊=𝟏 𝒊=𝟏
E is employment; Y is output; D is dummy variable for country
𝜷𝟏 + 𝜷𝟐 represents the change in employment associated with a differential change in output

Elasticities performed based on:

 Sectoral shares
 Employment for different demographic, occupational, status, and vulnerability groups
 Sub-periods 1991 – 1999; 2000 – 2008; and 2009 – 2014

Elasticity determinants
 Economic governance factors, including labour market flexibility, quality of legal system, rate
of government participation in economic activities, and a measure of overall governance
 Structural factors
 Demographic factors
 Estimation Procedures
 Due to the endogeneity between employment and output, the elasticity
equations are estimated using an instrumental variable technique.
 In particular, the Two Stage Least Squares technique is adopted for the
estimation and the first lag of output is used as instrument in the
estimation.
 In estimating determinants of elasticity of employment the Feasible
Generalised Least Squares estimation technique (FGLS) is better suited to
produce unbiased and consistent estimation.
 The estimations used data for 37 sub-Saharan Africa countries for the
period 2000 to 2014 based on data availability
Employment Elasticities
1991-1999 2000-2009 2010-2014
Employment elasticity Mean Mean Mean
(Std. Dev) (Std. Dev) (Std. Dev)
0.16 0.36 0.45
Total employment elasticity
(0.20) (0.21) (0.21)
Demographic groups
0.16 0.34 0.45
Male employment
(0.20) (0.21) (0.21)
0.17 0.39 0.46
Female employment
(0.21) (0.22) (0.22)
0.16 0.30 0.38
Youth employment
(0.20) (0.21) (0.21)
Status in employment
0.18 0.58 0.62
Wage employment
(0.19) (0.22) (0.22)
0.25 0.24 0.25
Self
(0.23) (0.22) (0.22)
Economic status
0.09 -0.02 -0.15
Extreme poor
(0.26) (0.25) (0.25)
0.17 0.57 0.59
Poor
(0.21) (0.25) (0.24)
0.22 1.03 1.11
Midclass
(0.21) (0.29) (0.24)
0.14 0.23 0.30
Vulnerable employment
(0.23) (0.24) (0.24)
0.18 0.57 0.64
Non-vulnerable employment
(0.19) (0.22) (0.22)
GDP growth rate 3.77 4.92 5.01
Employment growth 2.90 2.90 2.90
Productivity growth 1.12 2.01 2.31
Determinants of Employment elasticity with Overall Economic Freedom Index (a)
Variable templ maleempl femply yemply wage self
constant -0.13 -0.16 -0.10 0.15 -1.18 1.01***
Economic freedom
0.08*** 0.08*** 0.08*** 0.05*** 0.15*** -0.03
index
log govt size 0.16 0.14 0.17 0.16* 0.10 0.16*
log share of industry -0.40*** -0.40*** -0.39*** -0.42*** -0.17 -0.46***

log share of services -0.57*** -0.56*** -0.57*** -0.57*** -0.34* -0.67***

log investment rate -0.06 -0.06 -0.06 -0.07 -0.07 -0.02

log rent 0.02 0.02 0.03 0.02 0.06* -0.01
log trade open 0.31** 0.32*** 0.29** 0.26** 0.43*** 0.11

growth volatitlity -0.01** -0.01** -0.01** -0.01* -0.02*** 0.00

log FDI rate 0.06* 0.05* 0.06* 0.06* 0.06 0.05
labour force growth 0.19*** 0.19*** 0.20*** 0.20*** 0.14*** 0.19***

log pop. density 0.05** 0.05** 0.06** 0.05* 0.08** 0.04*

log urban rate 0.04 0.05 0.03 0.00 0.09 0.02

R-squared 0.58 0.59 0.57 0.58 0.57 0.55
Adjusted R-squared 0.53 0.54 0.52 0.53 0.52 0.49
F-statistic 11.47 11.60 10.85 11.42 10.96 9.95
Determinants of Employment elasticity with Overall Economic Freedom Index (b)
Variable xtrpoor poor mdcls vempl nvempl
constant 1.47*** -0.29 -2.07*** 0.61* -1.25**
economic freedom index -0.11*** 0.12*** 0.30*** 0.02 0.15***
log govt size 0.31** 0.14 -0.01 0.19* 0.11
log share of industry -0.50*** -0.45*** -0.13 -0.52*** -0.19
log share of services -0.55*** -0.59*** -0.37 -0.72*** -0.34*
log investment rate -0.05 -0.07 -0.14 -0.04 -0.07
log rent -0.01 0.06* 0.11*** 0.01 0.06
log trade open 0.07 0.27* 0.44* 0.18 0.45***
growth volatitlity 0.01 -0.02** -0.04*** -0.01 -0.02***
log FDI rate 0.06 0.09** 0.11 0.07** 0.06
labour force growth 0.21*** 0.20*** 0.16*** 0.22** 0.15***
log pop. Density -0.03 0.08** 0.14** 0.05 0.08**
log urban rate -0.24 0.16 0.34* 0.04 0.10
R-squared 0.58 0.56 0.59 0.58 0.59
Adjusted R-squared 0.53 0.51 0.54 0.52 0.54
F-statistic 11.18 10.37 11.82 11.12 11.74
Determinants of Employment elasticities with interaction terms (a)
Variable templ maleempl femply yemply wage self
constant 0.43 0.38 0.48 0.48 0.12 0.52*
labour market flexibility 0.01 0.01 0.01 0.01 0.02 0.00
legal system -0.05** -0.05** -0.06*** -0.04** -0.08*** 0.01
Govt participation 0.00 0.00 0.00 0.01 -0.02 0.04**
log govt size 0.21** 0.19* 0.23** 0.23** 0.11 0.25**
log share of industry -0.73 -0.78 -0.69 -0.85 -0.36 -1.01*
log share of services -0.27 -0.21 -0.34 -0.42 0.15 -0.75
log investment rate -1.19** -1.23** -1.18** -1.17** -1.54** -0.85*
log trade open 1.07 1.09 1.15 1.30* 1.10 1.26
growth volatility -0.01 -0.01** -0.01* -0.01 -0.02** 0.00
log FDI rate 0.20 0.22 0.18 0.11 0.57** 0.00
labour force growth rate 0.19*** 0.19*** 0.20*** 0.19*** 0.15*** 0.17***
log population density 0.04 0.04 0.04 0.04 0.04 0.05*
log urban rate -0.32 -0.28 -0.43 -0.31 -0.66 0.16
industry X economic freedom 0.06 0.07 0.05 0.07 0.03 0.10
services X economic freedom -0.06 -0.07 -0.04 -0.03 -0.09 0.01
investment X economic freedom 0.23** 0.24** 0.23** 0.22** 0.30** 0.17*
trade openness X economic freedom -0.15 -0.15 -0.17 -0.20 -0.14 -0.22*
FDI rate X economic freedom -0.03 -0.04 -0.03 -0.01 -0.10** 0.01
urban rate X economic freedom 0.07 0.06 0.09 0.06 0.14 -0.02
R-squared 0.64 0.62 0.63 0.63 0.64 0.62
Adjusted R-squared 0.56 0.54 0.55 0.55 0.56 0.54
F-statistic 8.17 7.91 8.07 8.18 8.47 7.73
Determinants of Employment elasticities with interaction terms (a)
Variable xtrpoor poor mdcls vempl nvempl
constant 0.29 0.86** 0.77 0.61* 0.08
labour market flexibility 0.00 0.01 0.03 0.01 0.02
legal system 0.03 -0.10*** -0.20*** -0.03 -0.08***
Govt participation 0.07* -0.02 -0.07** 0.03 -0.02
log govt size 0.46*** 0.19 -0.02 0.30** 0.13
lon share of industry -1.27* -1.05 -0.27 -0.84 -0.40
log share of services -1.05 -0.05 0.57 -0.80 0.14
log investment rate -1.10* -1.60** -1.90* -1.04** -1.45**
log trade open 1.80* 1.26 1.03 1.27* 1.10
growth volatility 0.01 -0.01* -0.03** 0.00 -0.02**
log FDI rate 0.00 0.51* 0.84* 0.02 0.51*
labour force growth rate 0.17*** 0.20*** 0.19*** 0.21*** 0.16***
log population density -0.02 0.04 0.07 0.03 0.04
log urban rate 0.45 -0.52 -1.49 -0.09 -0.68
industry×economic freedom 0.13 0.11 0.03 0.05 0.03
services×economic freedom 0.08 -0.10 -0.16* 0.01 -0.09
investment×economic freedom 0.22* 0.31** 0.35 0.21* 0.28**
trade openness× economic freedom -0.32* -0.20 -0.13 -0.21 -0.13
FDI rate X economic freedom 0.01 -0.08 -0.14 0.01 -0.09*
urban rate X economic freedom -0.12 0.13 0.33* 0.03 0.14
R-squared 0.61 0.64 0.67 0.63 0.65
Adjusted R-squared 0.53 0.56 0.61 0.55 0.57
F-statistic 7.65 8.45 9.88 8.13 8.80
N 111 111 111 111 111
Key findings
 There is a strong distinction between active regulation and
institutional quality in terms of their effects on employment
elasticities, especially between formal sector-related and informal
sector-related employment
 labour market flexibility tends to worsen informal sector employment
 legal institutions appear to be pro-poor in terms of employment
effects, while government participation has strong disincentive
effects in improving employment elasticity of output growth in SSA
 intersectoral integration and adjustments plays little roles in ensuring
employment benefits from output growth when regulations are
minimal
Conclusion
 Though structural changes coupled with demographic transitions
are essential for employment-enhancing growth in an economy,
regulation based on institutional capacity of government could also
provide strong background for analyzing how growth affects
employment
 The nature of jobs being created in the growth process could be
effectively influenced using regulatory and institutional measures
 The major policy implications of the results are that the
establishment and sustenance of quality institutions in SSA, not
mere focus on direct regulations, is the major means of attaining
effective linkages between output growth and employment in the
region
Conclusion
 There is need for dexterity in balancing regulations
 to address structural bottlenecks that may prevent structural
changes to result in employment growth;
 to ensure that the formal sector evolves and expands in terms
of production and employment; and
 to ensure that growth resulting from structural
transformation favours the vulnerable in the society