Working Paper 330 - Labor Market Flexibility and Jobs in Selected African Countries

A flexible labor market is a precondition for fast and efficient structural transformation—the reallocation of labor from low-to high-productivity jobs. This paper uses individual-level data that spans more than 15 years to analyze labor market flexibility in four of Africa’s biggest or fastest-growing economies—Egypt, Ethiopia, Nigeria, and South Africa. The paper uses standard labor market mobility matrices and the Shorrocks mobility index. In addition, it estimates a dynamic random effects of participation rate and examines transitions between unemployment and employment, self-employment and wage-salary employment, and agricultural and nonagricultural sectors. While the two Sub-Saharan countries—Ethiopia and Nigeria—have relatively flexible labor markets—primarily due to the prevalence of the informal and agricultural sectors with low barriers to entry—Egypt and South Africa present relatively rigid mobility across labor market statuses. Roughly half the observed rigidity in entering the labor market in Egypt, Nigeria, and South Africa can be explained by worker characteristics such as age, gender, and education, whereas the other half is mainly due to institutional barriers and the lack of high-quality jobs. Although a normative assessment of the informal sector is difficult, its ability to absorb excess labor from an improperly functioning formal sector stands out. Thus, the informal sector is to be outgrown, not ignored. JEL Classification: J01; J21;J42; J46; J61