How does productivity affect manufacturing employment in Sub-Saharan Africa?

Abstract

This thesis studies how productivity and productivity growth affect employment in the Sub-Saharan African manufacturing sector, focusing on the short run effects. Answers are sought by analyzing macroeconomic theory, existing literature and research and by conducting a data-analysis.

For developing countries, manufacturing sector is generally a very important sector for GDP and productivity growth, as well as for the creation of so called "good jobs." However, in Sub-Saharan Africa the sector is lagging behind other countries and industries on all measures. It seems that in long term, productivity growth holds a key role in the development of the sector, but unfortunately it might have negative short run effects on employment. Uncovering the effect is thus essential for conducting optimal industrial and macroeconomic policy.

According to the examined theory, the short run impacts of productivity shocks should be positive. However, some of the underlying assumptions, like price being elastic in relation to demand, are found to be problematic in the specific context of Sub-Saharan Africa. The existing research, conducted mostly in developed countries, finds both positive and negative relationships, depending on host of factors (e.g. productivity measure). The few studies conducted in Sub-Saharan Africa have found a negative short run effect.

Because not much research on the productivity-employment relationship in the context of Sub-Saharan African manufacturing sector exists, a data-analysis with fixed effects OLS methodology is also conducted. It finds a negative relationship of labor productivity and employment that is robust to all tested specifications, but on the other hand subject to some credibility issues.

No definite answers are found, but in conclusion the evidence seems to support a view, that the short run relation of productivity and employment is typically negative in Sub-Saharan African manufacturing sector. Further research is needed to verify the results and for specific policy recommendations. For example, more evidence on country specific results is necessary. According to results, policy design should account for the short run effects of productivity growth to employment and mitigate them.