Employment, Labor Markets, and Poverty in Ghana: A Study of Changes During Economic Decline and Recovery

Abstract

An awareness on the part of policymakers that the formal sector is only a small part of Ghana's labor market is a necessary precondition of appropriate employment policy. If the government is unwilling to reduce public employment or to alter public spending to invest more in agriculture, and infrastructure employment conditions will worsen, high public-wage policy will fuel inflationary pressures, reducing such investment even further. An active labor policy and employment creation is necessary for sustainable poverty reduction. The slowdown and possible reversal in the rural-to-urban flow of labor in Ghana is symptomatic of a basic shortcoming in the country`s economic recovery: the inadequate growth of the productive sector in the nonagricultural economy. The rate of growth of GDP has been adequate but much of the growth has been fueled and led by the services sector, which (at more than 46 percent) has surpassed agriculture as the main contributor to GDP. In some way growth in the services sector has been positive, but arguably it is a once-for-all adjustment to recover that cannot be sustained at this growth rate without commensurate growth in both agricultural and nonagricultural production. Evidently, stabilization and liberalization measures have not been sufficient to put the industrial sector on a path of sustained growth. There is too little skilled labor in Ghana, and demand for industrial goods has been weak, in part because the cost of credit is high and savings are too low for inefficient, state-run enterprises to buy the equipment they need. Returns to higher (especially university) education are high in Ghana, largely because of high wages for government services. Because of inadequate technical and vocational education, returns to secondary education are low. Employment trends have mirrored the deficiency in output growth. Every year since 1987, industrial employment has fallen. The growing labor force, which agriculture could not absorb productively, has spilled over into service activities and the informal sector. Ghana's large informal sector is symptomatic of an economy with low growth potential. In the medium term, the surest way to absorb labor would be to increase investment in the agriculture sector. And the only way to increase investment in that sector is to change the composition in public spending. As long as the public sector wage bill remains a sizable part of government expenditure, an increase in wage levels not compensated by reduction in employment will create strains in the budgetary balance and will defeat the most important instrument of increasing the growth rate of employment-higher levels of public investment in agriculture. It is possible that a vicious circle is complete. Higher wages in the public sector might be necessary to increase efficiency, without which productive public investment is not possible. But if the government is not willing or able to reduce public employment, and is further unable to alter the composition of expenditure to provide more finance for agriculture-related public investment, a high wage public policy will merely fuel inflationary pressures reducing the real investment ratio even further. The only way out of this vicious circle, if it exists, is a larger infusion of foreign and private investment than has been seen so far, supplemented by corrective monetary policy. This paper - a product of the Human Development Technical Family, Africa Region - is a background paper for World Bank Economic Sector Work on Ghana: Labor Markets and Poverty.