Comparing the Impacts of Industrial Jobs and Self-Employment in Ethiopia
Industrial sector development to boost mass hiring is seen as important to poverty alleviation at the macroeconomic level. But how those jobs, particularly in early stages of industrial sector development, affect the workers themselves and what the workers prefer are less well-understood. In Ethiopia, Innovations for Poverty Action worked with researchers to measure the effects of being offered an industrial job or an entrepreneurship promotion program. A year later, the workers offered industrial jobs earned no higher wages than a comparison group, and the industrial jobs carried health risks. Workers frequently quit the industrial jobs, suggesting few preferred them over their existing opportunities in the informal sector. In contrast, wages of participants in the entrepreneurship program were a third higher than the comparison group, and fewer participants went on to take an industrial job.
Growth in industrial sector jobs to boost hiring and build labor markets in poor countries is often seen as a crucial step in broad-scale economic development and poverty reduction. While highly developed industrial sectors may result in competition and wage growth, factory jobs can also involve low wages and hazardous working conditions. Moreover, the growth of formal employment opportunities may lead people to make decisions that favor short term gains over their long term best interests. For example, youth may leave school to take factory jobs. To date, little research has examined the effects of early-stage industrialization jobs on worker well-being, economic or labor market outcomes, or the preferences of the workers themselves.
At the same time, recent research suggests that encouraging self-employment with cash grants and promoting entrepreneurship can lead to better wages for the poor. This study evaluates the effects of both formal and informal approaches to job development in the same context.
Manufacturers have been looking to Ethiopia as a potential new hub for export-oriented industry. While the country has a long history of manufacturing, with some firms dating back to the 1930s, only since the turn of the millennium has the state encouraged the entry of private firms with relatively little control. Between 2000 and 2008 national income and industrial output both grew by about ten percent per year, and the number of medium and large manufacturers doubled. Foreign investment has been concentrated in labor-intensive manufacturing, with three quarters accounted for by garments and textiles and leather and footwear, followed by commercial agriculture. With the entry of more private industrial firms, urban unemployment has dropped. Despite this growth, 78 percent of the population lives on less than US$2 per day in purchasing power parity terms (PPP), with 85 percent of the workforce employed in agriculture.
For this evaluation, researches partnered with five firms across four regions: a beverage producer, a horticulture farm, a flower farm, a shoe factory, and a garment factory. These firms tended to hire for these low-skilled, entry-level jobs with minimal screening. Applicants were primarily young adult women who lived near the factories—most of whom had been unemployed for at least a month. Their alternative employment options tended to be informal, such as casual labor, home enterprises such as shops or wholesale trading, or agricultural work.
Researchers partnered with Innovations for Poverty Action and five industrial firms to evaluate and compare the impacts of employment offers and entrepreneurship training. Researchers randomly assigned 947 job applicants to a formal employment treatment group, self-employment treatment group, or a comparison group that received no assistance.
Applicants randomly assigned to the formal employment treatment group received a job offer at one of the five firms. The positions involved working on production lines—bottling water, picking and packing produce and flowers, cutting fabric, or sewing shoes—and could involve heavy machinery or simple tools. The jobs required 45 to 50 hours of work over 5 or 6 days per week and typically paid a daily wage of US$1 to US$1.50. While the workplaces were professional and well-maintained, health risks were common, including: air quality due to dust particles or chemical fumes, discomfort and fatigue; and occasional safety hazards.
Applicants randomly assigned to the self-employment treatment group received offers to participate in business training and a cash grant. The entrepreneurship program aimed to stimulate self-employment and shared similarities to those commonly offered by NGOs. For five days, participants attended classes delivered by professional skills trainers with roughly 20 other individuals and received individual mentoring. At the conclusion of the training, participants also received a US$300 grant. Although researchers framed the grant as designed for business investment, they clearly communicated that it was unconditional and could be spent as participants wished.
Researchers surveyed households after the initial offers of employment as well as both 11 and 13 months later to determine the impact of the two employment options. Researchers also visited the factories and farms to conduct qualitative interviews with workers and managers and conducted additional qualitative interviews in-person and by phone with participants.
While a competitive industrial sector may be an important step to development, the results suggest that offers of business training and cash grants improved job applicants economic outcomes while offers of industrial positions did not. When constraints to self-employment were removed, employment seekers preferred entrepreneurship and self-employment to industrial opportunities.
Industrial jobs: Offers of an industrial job did not lead applicants to experience better economic outcomes relative to the comparison group who were not offered a job. The group offered an industrial job did not have higher weekly earnings than the comparison group; their wages were also lower and hours longer than those who found informal employment. Most quit the industrial jobs; within the first month nearly a third and within the year 77 percent left their positions. Those that quit generally did not take up other industrial jobs but tended to leave the industrial sector entirely. By the end of the year, only 32 percent worked in any industrial job. Moreover, many quit without having alternative employment.
Industrial jobs came with health risks as well, workers reported exposures to hazards such as chemical fumes and repetitive stress injuries, and the probability of a serious health problem rose one percentage point for every month of industrial work. Some qualitative evidence suggests that while workers understood health risks, they still pursued industrial employment as a means to temporarily earn additional income or to explore their fit with the position.
Entrepreneurship program: Offers of business training and cash grants resulted in better economic outcomes for employment seekers. Weekly earnings exceed that of the comparison group by US$1 (US$3.40 PPP), a one third increase in earnings driven mostly by business income. Individuals in the entrepreneurship group worked more hours in business (5.4 hours per week), smallholder farming (1.5 hours per week), and skilled, salaried jobs (1.6 hours per week), with fewer hours in industrial (3.5 fewer hours per week) or farm wage labor (1.5 fewer hours per week) than the comparison group.
The workers themselves seem to prefer entrepreneurship – being offered the business training reduced the chances of taking an industrial job by the end of the year (nine percent compared to 20 percent in the comparison group). While most industrial workers quit, the ones who remained in their jobs tended to be those who would be expected to have fewer alternatives. They tended to be older and have less work experience, lower cognitive ability, and be less conscientious based on testing. In contrast, entrepreneur success did not seem related to any measured personal characteristics, suggesting that relaxing constraints may be more important than personal qualities for spurring self-employment.
Blattman, Christopher, and Stefan Dercon. 2018. "The Impacts of Industrial and Entrepreneurial Work on Income and Health: Experimental Evidence from Ethiopia." American Economic Journal: Applied Economics, 10(3): 1-38.