This project aimed at evaluating the labour market implications of a major social insurance reform program in Ethiopia introduced in June 2011. Employment based and mandatory pension schemes for workers in the formal private sector of Ethiopia were introduced by this reform. Given the high urban unemployment rate in Ethiopia, which at the time of the project stood above 50% among the youth, it is crucial to understand the impact of the pension reform on the private sector’s ability to create better quality jobs as well as its implications on productivity and wages. This should be examined in the context of the rapid economic growth in Ethiopia in the past two decades and the government’s massive infrastructural investment programme to facilitate private sector participation.
Because the reforms is expected to affect the behavior of both employers and employees, we study the implications of the reform at three different levels: at the firm level, at the worker level and at the industry level.
We found that the reform has brought about a sharp increase in non-wage labour costs, which was particularly higher among firms without pre-reform provident funds, which were offered on voluntary basis. The analysis shows no evidence of employers switching the cost of pension benefits to workers in the form of lower wages. The reform appears to have reduced firm-level employment, which was stronger among firms without provident funds. The reduction in employment has come almost entirely from among low-wage workers changing the skill composition of the workforce. Consistent with this observation we also find a significant increase in investment per worker, capital intensity and productivity with higher rates of increase obtained among firms without pre-existing provident funds.