Jobs and Firm Size in Africa: Productivity, wages and the size distribution of firms in Ghana

Transcription

1 Jobs and Firm Size in Africa: Productivity, wages and the size distribution of firms in Ghana Francis Teal Centre for the Study of African Economies University of Oxford October 214 Preliminary Draft Abstract The lack of jobs particularly for the young and the relatively unskilled is widely seen as one of the most pressing problems in both developed and developing countries. In this paper a new data set for Africa is introduced which allows the success of the Ghana economy in creating jobs in its manufacturing sector to be assessed. Two censuses, for 1987 and 23, are compared and it is shown that the rapid rate of job creation has been associated with a shift to low productivity and low wage jobs. The comparison also shows that there is no missing middle in the firm distribution although a sizable majority of workers are employed in either relatively very low or very high productivity firms. 1. Introduction In this paper a new data set for firms in Africa is introduced. With the cooperation of the Ghana Statistical Office two censuses of the Ghana manufacturing sector are being made available on the web. In this paper this data is used to ask what we can learn as to the relationship between firm size, labour demand and the underlying determinants of the productivity of those firms. In addition the data enables an investigation of the question as to the determinants on the changing firm size distribution and its implications for changes in labour demand; see Sandefur (21) for a study using some part of this data focusing on the contrast between patterns in Ghana and those in developed countries. The data provides new insights into a range of questions which have been the subject of a large literature in discussion of African development. One is the view that there is a missing middle of medium size firms in Africa with the industrial landscape dominated by small informal firms and then a few large ones. The question then posed is: what are the factors which prevent these small firms becoming large? When small firms are asked this question by far the most common answer is in terms of access to credit and a lack of demand two answers which are not necessarily consistent with each other. A second question frequently posed is the reason for the low productivity of these firms and, possibly relatively, their inability to enter the export market with any significant success. Both of these questions feed into the current policy focus on issues of labour demand in Africa and the perception that jobs, particularly for the young, are not being created. In reports on the job creation process by international organisations this issue is often posed as too many poor quality jobs and insufficient good quality ones; see, for example, African Economic Outlook (212) and ILO (214). It is clear that whatever dimension of job quality we consider it is highly correlated with firm size so changes in the firm distribution by size feed directly into the debate as to the type of jobs being created in the economy. In the next section the issues raised by modelling labour demand in poor countries are briefly considered and section 3 introduces the 1987 and 23 industrial censuses in Ghana. This data is then used in section 4 to show the changing distribution of firms by size and demonstrate that there is no missing middle of firms. In section 5 it is shown that most workers are employed either in the small

2 or large firms, workers are missing from the middle size range. In section 6 productivity and wages ae documented by firm size. The increasing dominance of small firms in the economy is shown to have been associated with falls in median wages and productivity. A final section concludes. 2. Labour demand in poor countries The analysis of labour demand in poor countries has been limited by the availability of firm data. The wider availability of labour and household data has meant that data on the supply side characteristics of the labour market are much better documented than the demand side at either the firm or farm level. The broad picture that has emerged from this data for sub-saharan Africa is of a labour market where forms of self- dominate, where the share of agriculture in is far higher than its share of GDP and a rapid growth of education in the labour force at all levels. Investment in education and its link to outcomes has been central to both policy and analysis of labour market outcomes. Here two stylised facts have emerged. Using OLS methods there is a strongly non-linear and convex relationship between earnings and education and that access to outside of agriculture is critically dependent on the levels of education reached with a hierarchy in which the public sector employs the most educed labour (at least on average) through firms of differing size with larger firms using more skilled labour and at the bottom of the -education pyramid being low skill work in both the urban and rural sectors. The implication of these stylised facts is that SSA now has a far more heterogeneous labour market than was the case before so to understand labour demand it is necessary to understand how this newly educated labour force fits with the demand side of the market. Policy appears to have been far more successful at increasing the supply of more skilled labour then demand and one possible reason for that outcome is the nature of the jobs being created in the economy. The model of labour demand which has dominated the analysis of labour markets in SSA dates from the Lewis (1954) dual economy model with a transfer of labour from the low productivity agricultural to the higher productive modern sector being seen as the process by which additional higher earning jobs are created. Despite its prevalence across textbooks data which supports the model is largely absent. The closest to testing the model is work seeking to compare earnings and productivity across rural and urban settings. Models which seek to allow for heterogeneity are inherently limited by the data available. Again where a distinction is made between skilled and unskilled labour the models that have been developed have investigated the extent of complementarity and substitution between types of labour and in a different vein the possibility that changing the supply of skilled labour will itself alter the demand. While the models and their application have been mostly applied to developed country where there applicability has been first recognised their possible relevance to the labour market of SSA is one implication of the findings of this paper. 3. The 1987 and 23 Industrial Censuses in Ghana In the appendix (not included) the limitation and problems with the data for 1987 and 23 are set out in detail. The most important are that only a very limited dimension of panel can be established and that for 1987 the coverage of firms with production and wage data is limited. The implications of those limitations are discussed in the appendix but, to anticipate, the broad facts established below are unlikely to be compromised by those limitations. The 1987 Industrial Census was the first since 1962 and differed in scope and coverage from the earlier census. In particular the 1962 census had a much broader definition of enterprises to be covered and recorded for the manufacturing sector a total of 95,158 enterprises with an average size of 3 employees. While a size distribution is not available it is clear that if there were any large firms 2

3 there were few and far between. 1 In contrast there was a close similarity between the designs of the 1987 and 23 censuses 4. The changing size distribution of firms In this section the censuses are used to show there is no missing middle in either year. The results for Ghana are similar to those for India, Indonesia and Mexico shown in Hsieh and Olken (214). Figure 1 provides a histogram of the size distribution of firms from the 1987 census and Table 1 a breakdown by firm size. As the sample is dominated by small firms Figure 1 shows four distributions, those for firms between 1 and 2 employees (this comprises nearly 99 per cent of the sample), those having between 1 and 2 employees, those having between 5 and 2 and finally those between 2 and 3 employees. For none of these distributions is there any indication of the kind of bimodal distribution suggested by the term missing middle. It is true the most firms are very small but as Table 1 shows there is a monotonic decrease in the number of firms as the firm size increases. In Figure 2 and Table 2 a similar exercise is carried out for the 23 census. Figure 1 The Distribution of Manufacturing Firms in the 1987 Census.1 Distribution of Firm Size in 1987 for firms between 1 and 2 employees.8 Distribution of Firm Size in 1987 for firms between 1 and 2 employees Distribution of Firm Size in 1987 for firms between 5 and 2 employees.3 Distribution of Firm Size in 1987 for firms between 2 and 3 employees These figures are drawn from Ghana Statistical Service (1989) Ghana National industrial Census 1987: Phase 1 Report Background and Results Published by the Statistical Service Accra. 3

4 Table 1 The Distribution of Manufacturing Firms in1987 by Employment Size Freq. Percent Cum , , Total 7, It will be noted that while there has been a dramatic threefold increase in the number of firms, from 7,843 to 23,12 the distribution is very similar. What has happened is that the bulk of the distribution has shifted to the smaller firms in that while the number of firms employing less than 2 employees has increased more than threefold the numbers employing more than 5 has decreased. This change in the number of small firms means that the average size of firm in Ghana over this period has halved from 17 to 9 employees. Figure 2 The Distribution of Manufacturing Firms in the 23 Census.15 Distribution of Firm Size in 23 for firms between 1 and 2 employees.1 Distribution of Firm Size in 23 for firms between 1 and 2 employees Distribution of Firm Size in 23 for firms between 5 and 2 employees.25 Distribution of Firm Size in 23 for firms between 2 and 3 employees e

5 Table 2 The Distribution of Manufacturing Firms in 23 by Employment Size Freq. Percent Cum , , , Total 23, Where are workers employed? While there is no missing middle in the size distribution of firms there is one when we look at how is concentrated across the size distribution. In Figure 3 the numbers employed in each size category is shown for both census years. In both years there is evidence of a bimodal distribution in that the size categories that have the most employees are firms with from 5-9 and with more than 5 employees. The figure shows the importance of large firms in the picture. In 1987 whereas only just over 1 per cent of firms employed more than 2 these firms employed 44 per cent of those working in all firms. In 23 less than.5 per cent of firms employed more than 2 but they contributed to 3 per cent of. In both censuses some 75 per cent of workers are employed either by firms employing less than 2 or more than 2 employees. Figure 3 The Distribution of Employment in Manufacturing Firms in the 1987 and 23 Censuses Total Employment by Firm Size in 1987 Census Total Employment by Firm Size in 23 Census 4, 5, 3, 4, 3, 2, 2, 1, 1, Table 3 The Distribution of Employment by Firm Size Size Category Size Category Total Total

6 6. Productivity and wages In the previous sections it has been shown that while there is no missing middle in the size distribution of firms it is true that a substantial majority of employees work either in very small firms or ones which are, by the standards of firms in Ghana, large ones. In this section the distribution of wages and productivity is presented, In Figure3 the median annual wage in US$ is shown for both census across the size distribution. As is well known from survey data there is a strong positive relationship between wages and firms size the source of which remains a matter of contention. For 1987 the data for firms with less than 1 employees is not available so we have confined the comparison in Figure 3 across the two censuses to those firms who have more than 1 employees. In Table 4 the data on which the figure is based is given and in that Table the labour productivity for firms less than 1 for 23 is given. Figure 3 The Distribution of Wages in Manufacturing Firms in the 1987 and 23 Censuses 1, Median Wages in US$ per Year in 1987 Census by Firm Size 2, Median Wages in US$ per Year in 23 Census by Firm Size 8 1,5 6 1, Table 4 The Distribution of Median Annual Wages in US$ by Firm Size size Median Total size Median Total Figure 3 confirms the strong association of wages with firm size which has been observed in survey data, Söderbom and Teal (24), Söderbom et al (25). What the data from the census shows in addition is that this association is much greater in 23 than In 1987 those working in firms with more than 5 employees earned just over twice those working in firms employing from1 to 19, by 23 that gap had increased to four times. The consequence of the changing firm distribution is that while those working in firms employing more than 5 saw a doubling of their wages, median wages fell over the period by 15 per cent. 6

7 In Figure 4 and Table 4 the data for labour productivity measured as value-added per employee, again in US$, is presented. The pattern here mirrors in part that shown for wages. Median labour productivity fell by 2 per cent while for firms employing over 5 it more than doubled. However the pattern across the size distribution is very different. While in 23 wages in firms with more than 5 employees were just over four times those in firms with 1-19 the differences in labour productivity were a factor of 23 times! Figure 4 The Distribution of Labour Productivity in Manufacturing Firms in the 1987 and 23 Censuses 2,5 Median Labour Productivity in US$ per Year in 1987 Census by Firm Size 6, Median Labour Productivity in US$ per Year in 23 Census by Firm Size 2, 1,5 4, 1, 2, Labour productivty is measured as value-added per employee Labour productivty is measured as value-added per employee. Table 4 The Distribution of Labour Productivity (Value-added per employee) in US$ Size Median Total Size Median Total Overview and conclusions The contribution of this paper has been in part to document changes in the manufacturing firm population in Ghana over the period between its second and third industrial censuses, from 1987 to 23. This is a period over which the macro data indicate a sustained and relatively rapid rise in GDP. In the light of those macro data the findings in this paper are rather surprising. One would anticiate that rises in GDP would be associated with more larger firms in the economy and wage growth which made small low productivity firms increasingly uncompetitive. In fact we observe the opposite with an economy in which small firms increase their dominace of the industial landscape, firm growth is entirely confined to small firms and median wages and labour productivy fall. 7

8 The paper also makes a contributon to the wider literature on firms and development. The census data for Ghana shows, as Hsieh and Olken (214) have shown for other developing countries, that there is no missing middle in the size distribution of firms. The focus on policy of promoting small firms has been rather dramatically successful although the implied low levels of productivity and wages has not been so widely recognised. As the data for wages and productivity imply the concern of policy should not be with a non-existent missing middle, it should be with the failure to provide an environment in which large firms can flourish. Appendix Changes in the Size Distribution of firms in Ghana: 1987 to 23 from the Official Reports Firms (%) Employment (%) Firms (%) Employment (%) Small 6, , , , Medium 1, , , , Large , ,73 34 Total 8, , , ,516 1 A small firm is defined as one employing less that 11, a medium size is defined as one employing from 11 to 99 and a large firm as one employing 1 or more. The counter-factual figures for 23 assume that the size distribution of firms remains the same in 23 as in 1987 and that the average size of firm in each of the categories does not change. Source: Ghana Statistical Service, National Industrial Census, 1987, Phase 1 Report, and 25 National Industrial Census Bulletin No. 1. References African Economic Outlook (212), Special theme: Promoting Youth Employment, African Development Bank and OECD Development Centre for Economic Commission for Africa. Hsieh, Chang-Tai and Olken, Benjamin A. (214) The missing missing middle, NBER Working paper, 19966, ILO (214) World of Work Report - Developing with Jobs 214 Lewis, W.A. (1954) Economic development with unlimited supplies of labour, Manchester School 22 (1954), pp Lucas, R. E. (1978): On the Size Distribution of Business Firms, Bell Journal of Economics, 9(2), Sandefur, J. (21) On the Evolution of the Firm Size Distribution in an African Economy CSAE WPS/21-5 Söderbom, M., and F. Teal (24): Size and Efficiency in African Manufacturing Firms: Evidence from Firm-Level Panel Data, Journal of Development Economics, 73(1), Söderbom, M., F. Teal, and A. Wambugu (25): Unobserved Heterogeneity and the Relation between Earnings and Firm Size: Evidence from Two Developing Countries, Economics Letters, 87(2),