High labor costs appear to be a factor that undermines the creation of low-skill jobs in formal manufacturing firms at a large scale in several African countries. First, there exists a small number of formal manufacturing firms in Africa. These firms face higher labor costs than similar firms in numerous comparator countries, even after controlling for firm size, productivity, average workforce education, exporter status, and other firm characteristics. Second, the limited evidence suggests a steep upward-sloping labor cost curve that sees larger, more productive, exporting firms pay significantly higher wages.
We, the CGD research team, propose to return to these questions and focus on the determinants of labor supply in Africa’s formal manufacturing sector. In particular, we plan to motivate the analysis by re-analyzing the first set of stylized facts using existing World Bank Enterprise Survey (ES) panel data for a broad range of countries. We then anticipate focusing on the mechanisms behind the second set of stylized facts using a qualitative survey of workers in a garment assembly facility in Ethiopia. We believe that a focus on labor supply is the most promising angle to analyze constraints that limit firm expansion, particularly with a view to channeling evidence into policy dialogue.