Labor Market Regulation in Africa

Stephen Golub, Swarthmore CollegeAly Mbaye, University of Dakar

Hanyu Chwe ‘16, Swarthmore College

Formal vs informal employment (from household surveys)

Why so few formal sector jobs?

• Demand of supply of labor failing to match• Demography and labor supply• Adverse Business Climate and labor demand• The specific role of Labor Market Regulations– Why are labor regulations ranked at the bottom of

the ladder among business climate constraints?– Are labor regulations a problem?– How restrictive are they in Africa: Case study of

Senegal and comparator countries

Outline

• Quantitative Analysis using Doing Business Indicators

• Case Study of Senegal• Other Case Studies (comparators)– Ethiopia– Ghana– China– Bangladesh

The Doing Business Indicators of Labor MarketsMinimum Wage

Ratio of minimum wage to value added per workerMinimum wage for a full-time worker (US$/month)

Difficulty of hiringFixed-term contracts prohibited for permanent tasksMaximum length of fixed-term contracts, including renewals (months)

Rigidty of hoursStandard workdayMaximum working days per weekPremium for night work (% of hourly pay)Premium for weekly holiday work (% of hourly pay)Major restrictions on night workMajo rrestrictions on weekly holiday workPaid annual leave (average for workers with 1, 5 and 10 years of tenure, in working days)

Difficulty of RedundancyMaximum length of probationary periodDismissal due to redundancy allowed? Third party notification if 1 worker dismissed?Third party approval if 1 worker dismissed?Third party notification if 9 workers dismissed?Third party approval if 9 workers dismissed?Retraining or reassignment obligation before redundancy?Priority rules for redundancies?Priority rules for reemployment?Notice period for redundancy dismissal (average for workers with 1, 5 and 10 years of tenure)Severance pay for redundancy dismissal (average for workers with 1, 5 and 10 years of tenure)

Weights of Labor Market Regulation Index

  Index Rank     Index Rank

  Developed Countries   Asia

France 0.58 185 Pakistan 0.53 177

USA 0.18 24 Indonesia 0.51 175

United Kingdom 0.16 12 India 0.28 71

China 0.27 68

  Africa Bangladesh 0.24 55

Central Afric. Rep. 0.60 188 Malaysia 0.18 21

Senegal 0.60 187 Myanmar 0.11 5

Angola 0.54 180

Zimbabwe 0.51 173   Latin America

Kenya 0.37 130 Panama 0.51 174

Cameroon 0.36 123 Argentina 0.48 160

Ethiopia 0.34 114 Brazil 0.46 155

South Africa 0.33 108 Mexico 0.34 116

Ghana 0.25 59 Chile 0.26 65

Uganda 0.14 7   Colombia 0.19 28

Labor Market Restrictiveness Index(0-1 range, 1 = most restrictive)

Selected Countries

Labor Market Regulations in Africa

• Francophone countries tend to have more restrictive labor regulation index

• Considerable variation within Africa• Labor market regulations generally not ranked

as one of the most significant problems

Labor Regulation

Index

Labor Regulation

Rank

Firms Identifying

Labor Regulations as a Major Constraint (Percent)

Labor Regulation

Index

Labor Regulation

Rank

Firms Identifying

Labor Regulations as a Major Constraint (Percent)

Anglophone Francophone

Botswana 0.21 41 14 Benin 0.35 121 15.6Gambia 0.24 58 3.5 Burkina Faso 0.28 74 26Ghana 0.25 59 3.6 Burundi 0.20 39 2Kenya 0.37 130 20.8 Cameroon 0.36 123 21.5Lesotho 0.22 46 11.3 Central Afr. Rep. 0.60 188 8.5Liberia 0.30 91 2.6 Chad 0.42 146 28.4Malawi 0.33 105 4.6 Congo, Dem. Rep. 0.55 181 10.4Mauritius 0.30 92 8.8 Congo, Rep. 0.57 184 24.5Namibia 0.16 15 4.3 Côte d'Ivoire 0.37 128 6.1Nigeria 0.21 43 3.4 Djibouti 0.43 149 14.5Rwanda 0.29 82 8.9 Equatorial Guinea 0.55 182 NASierra Leone 0.29 84 11.4 Gabon 0.34 112 16.4South Africa 0.33 108 5.9 Guinea 0.31 94 2.5South Sudan 0.28 72 10.9 Madagascar 0.53 178 4.6Sudan 0.33 111 13.5 Mali 0.44 151 6.4Swaziland 0.19 29 9.9 Niger 0.54 179 5.3Tanzania 0.37 127 31.7 Senegal 0.60 187 4.5Uganda 0.14 7 18.5 Togo 0.48 164 3.1Zambia 0.33 107 6.2Zimbabwe 0.51 173 9.6 Average 0.44 143 11.8

Average 0.28 79 10.2 Other

Angola 0.54 180 26.1Ethiopia 0.34 114 1.6Guinea 0.31 94 2.5Guinea-Bissau 0.48 163 3.5Mauritania 0.41 145 29.4Mozambique 0.56 183 6Rwanda 0.29 82 8.9

Average 0.42 137 11.1

Labor Regulation Effects

• Does the severity of labor regulation impact manufacturing exports, particularly labor-intensive products such as clothing?

• We used the quantitative index to perform regression analysis

Total manufacturing exports divided by working age population, in 2013 dollars, in logs

Clothing manufacturing exports divided by working age population, in 2013 dollars, in logs

Labor regulation index (in logs) 0.08(0.22)

0.30(0.34)

Per capita GDP (in logs) 

1.24***(6.93)

0.95*(0.23)

Doing Business rank (in logs) -0.73***(3.60)

-1.21***(2.70)

Real exchange rate overvaluationb -2.66**(3.14)

-8.15***(4.28)

Africa dummy(=1 if country is in SSA)

-0.34(0.96)

-2.69***(3.30)

Constant 

1.27(0.66)

6.10(1.41)

R-squared value 0.74 0.54

N 84 82

T statistics in parentheses: * = p<0.05, ** = p<0.01 *** = p<0.001

aNon-OECD countries and countries with working age populations greater than 1,000,000

Regression Results

• Labor regulation index does not have a significant effect

• Measures of the overall business climate and exchange rate overvaluation are correctly signed and significant

• African exports of clothing low even after controlling for business climate and per capita income

Senegal Case Study

• On site data collection, June 2015• About 30 interviews with business HR staff,

government officials, labor unions

Senegal Formal and Informal Employment, 2011(millions)

Senegal Monthly earnings, by sector (in Euros)

Government 228

Public Enterprise 205Formal Private Sector 169

Informal Sector 59Source: Adapted from Roubaud and Torelli (2013, Table 1.14).

Senegal: New Employment Contracts and Labor Force Growth

Senegal Labor Regulation Severity Rank (189 countries)

Overall Minimum Wage

Hiring Difficulty

Working Conditions

Layoffs

187 181 170 140 136

These are rankings out of our sample of 189 countries—Senegal has the third most restrictive labor regulations out of all the countries in our sample.

Source: Our calculations based on the Doing Business indicators.

Senegal’s Labor Market Regulation1) Contracts– Indefinite term—very difficult to fire workers– Fixed term–max 2 years, renewable once

2) Labor Unions– Politically powerful and politicized– Union reps have special protections

3) Many cases go to labor tribunal– Workers almost always win– Expensive and time consuming

Indicators of Labor Market Conflict

Source: Directorate of Labor Inspections and Social Security

Senegal’s Labor Market Regulation

4) particularly high mandatory payroll social insurance contribution from employers

Senegal Social Insurance Mandatory Payroll Contributions (% of Gross Wages)

  Overall Rate Employer Share Employee Share

Retirement (IPRESS)Public Pension

Plan 14 8.4 5.6Supplementary

Plan 6 3.6 2.4

Social SecurityFamily

Allowances 7 7Occupational

Injury 1 to 5 1 to 5

Health Insurance 6 3

Vocational Training Tax 3 3

Total 37 to 41 26 to 30 11

Source: World Bank (2007), Interviews

Senegal’s Labor Market Regulation

Few workers actually enjoy the benefits of social insurance programs (IPRES)

-less than 5%

•Most informal workers do not have access to social insurance

Number of Workers Enrolled in the IPRES Retirement Program, Level and as a Ratio of the Working Age Population

Senegal Labor Regulation: Effects

• Only enforced for the formal sector• Firms say regulations inhibit hiring and lower

productivity• One of many reasons for the lack of formal

employment– Especially for young people

Senegal Labor Regulation: Effects

• Labor regulations do not protect most workers since most workers are unable to break into the formal sector

• Senegal needs to lower regulations to promote growth and equality

Ethiopian Case Study

• Agriculture still accounts for 85% of total employment

• Only 10% of the labor force is employed in the formal sector

Ethiopian Labor Regulation

• Ranked 114th out of 189 countries– Above average labor restrictiveness

• No minimum wage exists for the private sector

• Minimal working conditions regulations

Ethiopia Labor Regulation Rank (189 countries)

Overall Minimum Wage

Hiring Difficulty

Working Conditions

Layoffs

114 1 123 50 160

Ethiopian Layoff Difficulty

• Workers can appeal layoff decisions to labor tribunal

• Labor tribunals are notoriously long and complicated– an average judge hears forty cases a day and takes

between two months and two years to decide a case

• 68.7% of companies say that firing labor is expensive or very expensive

Ethiopian Labor Regulation: Conclusion

• As in Senegal, labor regulations are a problem but not the main one (Less than 2 % of firms cite labor regulations as a major problem):

• These include:– Lack of Electricity and Infrastructure– Access to Finance

Ghana Case Study

• Almost 90% of Ghanaian employment is in the informal sector

• Ghana has the 59th least restrictive level of labor regulations– better than average

Ghanaian Labor Regulations

• Few obstacles to hiring new workers

• Employers are required to inform unions when laying off workers and provide adequate redundancy pay– Unclear if this is enforced

Ghana Labor Regulation Severity Rank (189 countries)

Overall Minimum Wage

Hiring Difficulty

Working Conditions

Layoffs

59 70 1 124 122

Unionization

• Strong union presence in Ghana• Strikes occur frequently

• Protests against general economic conditions as well as the National Tripartite Committee, the determiner of minimum wages by industry.

Ghana Labor Regulations: Conclusion

• Labor laws are less restrictive than in Senegal• However, strikes are frequent

• Again, electricity and infrastructure concerns trump labor regulations– 61.2% of firms in Ghana identify electricity

shortages as a major constraint, 3.6% of firms identify labor regulations as a major constraint

China Case Study

• Rising wages in the formal sector

• New 2008 Labor Law designed to address worker abuse

• China is ranked 68th in labor restrictiveness, somewhat better than average

China Labor Regulation SeverityOverall Minimum

WageHiring Difficulty

Working Conditions

Layoffs

68 107 1 27 181

Minimum Wage

• Minimum wages are set regionally – Determined by local governments– Supposed to factor living costs, supply and

demand for labor

• Much higher in urban areas, – ex. Shanghai, Beijing

• Than rural areas– Ex. Guizhou

Hiring Difficulty & Working Conditions

• Little hiring difficulty– No prohibition on the use or duration of fixed-

term contracts

• Working conditions– employers can require certain staff to work

overtime without extra pay

Layoffs

• China has extremely strict layoff regulations– May only fire employees if they violate rules or

commit a crime– Cannot layoff workers with fifteen years of

continuous service– For collective dismissals, employers must prove

bankruptcy or “serious difficulties in terms of production or operation”

Enforcement?

• Unclear how regulations are enforced• Workers are supposed to have pensions, but

in 2013, only 242 million workers of 770 million had pensions.

• No active Union presence—union is controlled by the Communist Party– Almost all workers strikes’ are nonunion.

China Labor Regulation: Conclusion

• China’s case illustrates a key point: Labor regulations and wage increases should follow economic growth, not precede it

• Cheap labor was necessary for Chinese growth

• Now China can afford to give more benefits to workers

Bangladesh Case Study

• Several high-profile factory disasters stemming from dangerous working conditions

• However, garment industry has created 3.6 million formal sector jobs– 80% are women

• Still, 87.5% of workers in informal sector

Regulations

• Ranked 83rd, average labor regulations• Minimum wage set by sector – Minimum wage doubled in 2013– As of 2014, only 5% of factories in Chittagong

enacted increase

• No restrictions on hiring

Bangladesh Labor Regulation Severity Ranking (189 countries)

Overall Minimum Wage

Hiring Difficulty

Working Conditions

Layoffs

83 171 1 42 138

Working Conditions

• In theory, workers are guaranteed overtime if working more than 48 hours a week.– In practice, workers almost never get overtime

pay

• Before 2013, workers needed the permission of factory owners to create unions.– Unremarkably, few unions were formed.

Bangladesh Labor Regulation: Conclusion

• Few labor regulations are actually enforced, notably in the garment sector

• Garment sector jobs are significant improvements, especially for women

• The garment sector promotes gender equality as well as national economic growth

Conclusions

• Generally, African countries have higher levels of regulation compared to Asian developing countries.

• Francophone African countries are generally more regulated than Anglophone African countries

Conclusions

• Labor market regulations are not the most important impediment to growth and employment creation in Africa– Ex. Electricity, infrastructure

• However, the case studies show that labor regulations have a negative impact

• Cooperative rather than adversarial labor relations are conducive to competitiveness and employment creation.

THANKS FOR ATTENTION