DFID commissioned this Business Environment Reform Facility (BERF) research in Kenya, Nigeria and Sierra Leone to understand better the barriers to creating formal employment opportunities and the barriers to young people’s access to formal employment opportunities. The aim is to inform interventions that could benefit young people and others who may be disadvantaged in the formal labour market. The study focused on formal and informal labour market rigidities and policies that help or hinder formal job creation and access to formal employment opportunities by young people and others.
The research was undertaken through a review of research and policy literature; interviews with key stakeholders; a face-to-face survey of young people in Nairobi, Lagos and Freetown; and a social media survey of young people to reach a wider demographic of young people in the three countries.
There are limitations and constraints to the study methodology. The survey respondents are self-selecting. They are not therefore representative of either the cities or countries as a whole. A higher proportion of respondents are in salaried jobs as compared with the population as a whole, with half or more of the social media survey respondents being in salaried employment, and more than 30% of the face-to-face survey respondents in all three countries. The study does not attempt a comparative assessment of how barriers to employment differ between youth and other groups.
The major findings from the literature review include the following:
- Sub-Saharan Africa faces a large increase in the number of young job seekers. Sixty percent of the population is under 35, and the population of youth is expected to double by 2050;
- Youth employment is disproportionately informal, and even if formal, relatively insecure. There are high levels of inactivity, more-so for females;
- There is a growing focus on the demand side in debates about employment relative to the long-standing focus on supply-side constraints such as a mismatch in skills (and education);
- Education remains an important area of focus for labour market studies. Returns to education are generally positive for those in employment, but in some cases higher levels of education can be associated with higher levels of unemployment;
- There is little evidence in the literature that specifically links youth and gender issues to disadvantage in the formal labour market;
- There is strong evidence that informal networks are important in accessing the labour market in developing countries. Lack of access to such networks is therefore an important “informal barrier” as far as young job seekers are concerned;
- There is little strong or consistent evidence that labour related business environment reform in low-income countries leads to sustained job creation or improved access to jobs by young job seekers (though there are examples of studies in middle income countries which suggest that regulations can disadvantage the creation of formal sector jobs);
- The relationship between Business Environment Reform and employment is complex. Business Environment Reform should be viewed within a broad context of the overall impact on economic growth. There is strong evidence that labour-related Business Environment Reform has an impact on business owners and workers in different ways, but the impact is context specific.
Definition of formal employment: The study focuses on barriers to “the creation of productive employment opportunities and decent jobs in the formal sector”. It is important to appreciate that the formality of relationships between employer and employee will vary across the spectrum from highly informal to highly formal. In theory, labour laws govern the formal sector jobs, but government may not enforce them. Contracts may include access to benefits that employers do not provide. We used the term “salaried job” as a working definition of formal employment.
Rigidities and the labour market: The focus of the terms of reference on labour market rigidities contrasts with the reality that labour markets, which function in the context of a massive over-supply of labour, have particular characteristics. The markets function through particular mechanisms, such as the use of labour market intermediaries and informal networking to identify workers to a much greater degree than in more balanced labour markets. Such mechanisms, which we describe as “work-arounds” proved far more significant in the study findings than formal rigidities such as labour legislation.
Labour market issues: The study found it helpful to distinguish between factors that influence whether a young worker has access to the labour market (being considered for a job), from factors which influence their success within the labour market (being offered a job).
Job creation gaps: The study is located in countries with a very large demand-supply gap. Annual entrants to the labour market with more than a primary education number 632,000 in Kenya, 2.1 million in Nigeria, and 96,000 in Sierra Leone. Actual formal job creation is at a fraction of this level.
Salaried Jobs: A model involving a linear transition from education to employment, and a polar distinction between formal and informal employment, is incorrect. A significant proportion of young people with salaried jobs do not have written contracts and many do not enjoy basic benefits. Workers frequently experience intermittent employment, and reasonably frequent movements out of employment back into education or unemployment. A majority of educated youth responding in the social media survey, however, do aspire to achieve permanent employment, with nearly half seeking a job with a monthly salary.
Formal and informal barriers to formal job creation: There is no strong evidence to suggest that over regulation is responsible for rigidities in the labour market. This reflects the fact that factors that are more important influence business expansion, related to factors such as macro-economic, political and social stability, and supply side factors such as infrastructure and security. Labour laws and regulations are frequently not enforced so do not in practice have much impact on business expansion and job creation.
Access to the formal labour market: There is evidence that the market for salaried jobs is highly segmented, with access being mediated in many cases by access to media (internet, social media), and through personal networks. There is little evidence of significant formal labour market barriers, but there are examples of interventions to formalise the informal mechanisms used to make them more open. Interview evidence suggests that lack of information about job opportunities is an important concern. There are important channels for formal recruitment processes with open advertising. Accessing a salaried job, however, is much more likely to be ascribed to the influence of a friend or relative than other factors.
Success in the formal labour market: There is no strong evidence that formal barriers play a major role or systematically influence which young people succeed in the formal labour market. Work experience is required by the majority of employers, leaving young people in an ‘experience trap’. Success in the labour market tends to be ascribed to informal mechanisms such as connections. A significant proportion of young people identify a problem of unfair recruitment and discrimination where they were not successful. A significant minority strongly agreed or agreed with the statement “I feel discriminated when I apply for a job”. Other factors which can influence success in the labour market include political affiliation; access to labour market intermediaries, and domestic relations within households. Education also influences success in the labour market. A majority of survey respondents (over 80% of respondents with jobs in all countries) considered formal education to prepare them for a formal job; but a majority (over 60% in all countries) also consider that education should be made more practical.
1. The most important factors constraining job creation in the formal sector are not related to formal barriers commonly addressed through Business Environment Reform.
2. Informal barriers and market mechanisms are the most important factors influencing the access of young people to the formal labour market.
3. Many nominally formal sector jobs have limited entitlement or access to basic benefits associated with formal sector employment.
The study findings in relation to the six research questions in relation to the study are summarised as follows:
- There is little evidence that labour market rigidities constrain the creation of formal employment opportunities;
- There is strong evidence that informal constraints such as use of personal networks in recruitment, limit the access of young people to the labour market;
- Such constraints are unlikely to be a binding constraint on job creation, but will have an impact on equity;
- There is insufficient evidence on successful labour market policies and reforms supporting employment opportunities and access to the labour market, and the dearth of job creation suggests that few such examples exist;
- Disadvantages faced by young people entering the formal labour market include generic ‘experience traps’, (which restrict jobs to those with experience but constrain those without experience from getting jobs). There is limited sectoral evidence, but certain employers do target youth because of their potential productivity and cost advantages over older workers;
- Policies and practices which can help young people to access formal sector jobs need to address the overall imbalance between supply of labour and demand for labour. In terms of practices, the use of informal networks to fill many jobs is a symptom of the acute over-supply of job seekers.
- Engage with the agenda of supporting youth in a way that enables them to obtain skills and experience to improve their employment and livelihood prospects within the informal sector and the formal sector.
- Work with employers and governments to promote recruitment processes that are open, transparent and non-discriminatory.
- Support processes that strengthen labour market laws and governance to provide the right balance of incentives in terms of encouraging employers to work within the formal sector, and to provide fair working conditions to employees.