Worker turnover and job flows in the formal private sector of Ethiopia

Creating a sufficient number of stable and well-paying jobs remains a major challenge for African economies. Urban labour markets in the region are marked by high informality and unemployment rates, and most jobs offer minimum job security and typically very low wages. Indeed in Ethiopia, the informal economy is estimated to account for over 38% of GDP with data from the Ethiopian Central Statistical Agency showing that formal employment accounted for below 70% of total employment in 2012.

Providing a clearer picture of labour market dynamics

While a number of existing studies offer snapshots of African labour markets, our study is among the first to provide a more complete picture of labour market dynamics (Söderbom et al. forthcoming). We do this by jointly examining worker turnover and the processes of job creation and job destruction. By using a unique administrative dataset from Ethiopia that matches formal private sector employers and employees, we are able to estimate rates of hiring, separation, worker turnover, job creation, job destruction, and net employment growth at the firm-level. We can also examine the probability of separation and wage determination.

High worker turnover and weak employment growth

Over a period of six months, we find a very high (41%) worker turnover rate i.e. the summation of hiring and separation rates. On top of this, we find a relative weak (1.2%) net employment growth rate i.e. the difference between hiring and separation rates in the formal private sector of Ethiopia.

A little over half of the worker turnover is due to the creation and destruction of jobs by employers. The remaining half is therefore in excess of job creation and job destruction, and is driven by the conclusion of mismatched job contracts that lead to replacement hiring. We refer to this excess turnover as the churning rate.

We find that churning is largely associated with low wages and employer provided benefits. This is consistent with the expectation that worker mobility is driven by the desire to maximise the present value of wage and non-wage benefits. However, churning appears to be costly to firms as our study shows that an increase in lagged churning subsequently reduces net employment growth. On the other hand, firms that grow faster subsequently record higher churning rates, suggesting that faster employment expansion increases the probability of poor quality job matches.

Key differences between small and large firms

Furthermore, we observe that larger firms have significantly lower net employment growth relative to small firms. Still, the overwhelming majority of small firms are less likely to graduate into medium and large firms. Net employment growth is higher among high-wage firms. On the other hand, firms with higher benefits (e.g. employer pension contribution rates) experience significantly lower net employment growth, suggesting that the cost of such benefits is not fully passed on to workers in terms of lower wages.

Interestingly, the probability of separation is lower among female workers relative to their male counterparts, and the likelihood of separation higher among low-wage and younger workers. Employees are also less likely to be separated from firms that are larger, pay higher wages, and pension benefits. Regarding wages, there is a significant female disadvantage in wages across all sectors. Wages also increase with worker age and firm size.

Policy implications: Improved private sector performance the key to job stability

Our findings show that half of the 41% worker turnover rate in the Ethiopian private sector is due to churning and that churning undermines firm-level employment growth. Churning and the probability of separation are negatively correlated with wages. Policy measures facilitating improved private sector performance, a necessary condition for growth in employment and wages, may therefore also generate greater job stability. A recent experimental study by Abebe et al. (2016) shows that transport subsidies and training for job seekers in Ethiopia increase the probability of employment in the formal sector, as well as boosting the quality of job matches. This suggests that interventions that reduce the cost of job searches may contribute to a reduction of churning and expansion of employment in the formal sector.

References

Abebe, G, S Caria, M Fafchamps, P Falco, S Franklin and S Quinn (2016), “Curse of anonymity or tyranny of distance? The impacts of job-search support in urban Ethiopia”, International Growth Centre.

Söderbom, M, A Shiferaw, G Alemu, “Job flows and labour mobility in sub-Saharan Africa: The case of Ethiopia”, International Growth Centre, forthcoming.