Working toward Better Pay - World Bank labour, behavioral, and experimental economics, with a focus

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  • Paolo Falco, Andrew Kerr, Pierella Paci,

    and Bob Rijkers

    Working toward Better Pay E A R N I N G D Y N A M I C S I N G H A N A

    A N D TA N Z A N I A

    A W O R L D B A N K S T U D Y

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    WB456286 Typewritten Text 88483

  • Working toward Better Pay

  • A W O R L D B A N K S T U D Y

    Working toward Better Pay Earning Dynamics in Ghana and Tanzania

    Paolo Falco, Andrew Kerr, Pierella Paci, and Bob Rijkers

    Washington, D.C.

  • © 2014 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org

    Some rights reserved

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    This work is a product of the staff of The World Bank with external contributions. The findings, interpreta- tions, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

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    Attribution—Please cite the work as follows: Falco, Paolo, Andrew Kerr, Pierella Paci, and Bob Rijkers. 2014. Working toward Better Pay: Earning Dynamics in Ghana and Tanzania. World Bank Studies. Washington, DC: World Bank. doi:10.1596/978-1-4648-0207-2. License: Creative Commons Attribution CC BY 3.0 IGO

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    All queries on rights and licenses should be addressed to the Publishing and Knowledge Division, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org.

    ISBN (paper): 978-1-4648-0207-2 ISBN (electronic): 978-1-4648-0209-6 DOI: 10.1596/978-1-4648-0207-2

    Cover design: Debra Naylor, Naylor Design

    Library of Congress Cataloging-in-Publication Data has been requested.

    Working toward Better Pay • http://dx.doi.org/10.1596/978-1-4648-0207-2

    http://www.worldbank.org http://www.creativecommons.org/licenses/by/3.0/igo http://www.pubrights@worldbank.org http://dx.doi.org/10.1596/978-1-4648-0207-2

  • Working toward Better Pay • http://dx.doi.org/10.1596/978-1-4648-0207-2

    Contents

    v

    Acknowledgments ix About the Authors xi Abbreviations xiii

    Executive Summary 1

    Chapter 1 Introduction 3

    Chapter 2 What Did We Know about the Determinants of Earnings and Earnings Growth in Ghana and Tanzania? 7 The Determinants of Earnings Levels 7 The Determinants of Earnings Growth 8 Evidence on Low-Pay Persistence and Scarring 9 Notes 9

    Chapter 3 Data and Descriptive Statistics 11 Ghana and Tanzania Urban Panel Surveys 11 Construction of Key Explanatory Variables 12 Descriptive Statistics 14 Notes 21

    Chapter 4 The Determinants of Earnings Levels 23 Framework and Baseline Specification 23 Education Pays, and Pays More and More 24 Special Challenges for Youth and Women 27 Differences across Sectors 29 Notes 31

    Chapter 5 The Determinants of Earnings Growth 33 Framework 34 A Bird’s Eye View of Earnings Growth in

    Ghana and Tanzania 35 Differences across Sectors 36 Notes 39

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  • vi Contents

    Working toward Better Pay • http://dx.doi.org/10.1596/978-1-4648-0207-2

    vi Contents

    Chapter 6 Low-Pay/High-Pay Transitions 41 Descriptive Statistics 42 Econometric Framework 43 Results 44 Notes 47

    Chapter 7 Main Findings and Key Policy Implications 49 Message 1: Job Characteristics Are an Important

    Determinant of Both Earnings Levels and Earnings Growth 49

    Message 2: Women and Youth Face Special Challenges 50 Message 3: Skills Acquisition Is a Stepping Stone

    Toward Better Paying Jobs, at Least in Wage Employment, Especially for Women 50

    Message 4: Self-Employment Can Be Desirable 50 Message 5: The Public Sector Wage Premium Is

    a Potential Barrier to the Efficient Working of the Labor Market 50

    Note 51

    Appendix A Summary Statistics and Variable Definitions 53 Summary Statistics 53 Variable Definitions 56

    Appendix B A Framework for Analyzing Earnings Panel Data 57 Tackling the Endogeneity of Schooling 57 Controlling for Unobserved Fixed Effects 58 Sorting Matters, But Is Not the Entire Story 60 What Do These Regressions Tell Us About Growth?

    Asymmetric Sectoral Switching Premia 62

    Appendix C A Framework for Analyzing Earnings Growth 65 Econometric Framework 65 Tackling Measurement Error: The Determinants

    of Earnings Growth over a Two-Year Period 66 Controlling for Fixed Effects 68

    Appendix D A Framework for Analyzing Transitions between Low- and High-Paid Employment 71

    Econometric Framework 71 Results 75 Notes 78

    Bibliography 79

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  • Contents vii

    Working toward Better Pay • http://dx.doi.org/10.1596/978-1-4648-0207-2

    Boxes 4.1 Key Hypotheses and Main Findings 24 5.1 Key Hypotheses and Main Findings 33 6.1 Key Hypotheses and Main Findings 41

    Figures 3.1 Occupational Categories 14 3.2 Average Education by Occupation 15 3.3a Mean Earnings by Occupation (Ghana) 15 3.3b Average Education by Occupation (Tanzania) 15 3.4a Mean Earnings by Occupation and Gender (Ghana) 16 3.4b Mean Earnings by Occupation and Gender (Tanzania) 16 3.5a Mean Earnings by Occupation and Age (Ghana) 17 3.5b Mean Earnings by Occupation and Age (Tanzania) 17 3.6a Average Earning Changes (%) by Type of Transition (Ghana) 20 3.6b Average Earning Changes (%) by Type of Transition (Tanzania) 20 3.7 One-Year Earnings Growth 20

    Tables 3.1 Panel Retention Rates 12 3.2 Correlation Coefficients between Skills Proxies 13 3.3 One-Year Transitions between Occupations 18 3.4 Two-Year Transitions between Occupations 18 3.5 Four-Year Transitions between Occupations (Ghana) 19 3.6 One-Year Transitions from Low to High Pay 21 4.1 Earnings Functions (OLS) 25 4.2 Earnings Functions—Controlling for Ability (OLS) 27 4.3 Earnings Functions by Age and Gender 28 4.4 Earnings Functions by Occupation 29 5.1 Determinants of One-Year Growth in Log Earnings 34 5.2 Determinants of One-Year Growth in Log Earnings

    by Occupation 37 6.1a Raw Persistence in Ghana 42 6.1b Raw Persistence in Tanzania 42 6.2a Predicted Entry and Persistence Rates, and Mean and Median

    Predicted Time in High and Low Pay for Ghana, Bivariate 45 6.2b Predicted Entry and Persistence Rates, and Mean and Median

    Predicted Time in High and Low Pay for Tanzania, Bivariate 45 A.1 Summary Statistics (Ghana) 53 A.2 Summary Statistics (Tanzania) 53 A.3 Mean (1-Year) Changes in Log Earnings by Transition

    Type (Ghana) 54

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    Working toward Better Pay • http://dx.doi.org/10.1596/978-1-4648-0207-2

    A.4 Mean (1-Year) Changes in Log Earnings by Transition Type (Tanzania) 55

    B.1 Control Function Approach to Instrument Education and Apprenticeships (First Stage) 59

    B.2 Earnings Functions (FE and FD) 61 C.1 Determinants of Two-Year Growth in Log Earnings 67

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