Unemployment in Zambia - NAIRU, Trends and Solutions | Kampamba ...

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UNEMPLOYMENT IN ZAMBIA Trends and Solutions KAMPAMBA SHULA Quka Consulting 8/24/2015 UNEMPLOYMENT IN ZAMBIA The report p...

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UNEMPLOYMENT IN ZAMBIA Trends and Solutions KAMPAMBA SHULA

Quka Consulting 8/24/2015



 UNEMPLOYMENT IN ZAMBIA

The report puts into context

UNEMPLOYMENT IN ZAMBIA

the recent official estimates of

Trends and Solutions

highly among issues that the

unemployment and confirms our preconceived notions that unemployment still ranks public consider with the utmost regard. We introduce the first Zambian analysis of the Non Accelerating Inflation rate of

While every effort has been made to verify the information contained in this document, Quka Consulting cannot accept any responsibility for any errors that it may contain.

unemployment (NAIRU) which we estimate to be between 11.6% and 11.1%.

For more information on the report "Unemployment in Zambia: Trends and Solutions", please contact:

The NAIRU is an important

Kampamba Shula

cycle theory. Few economists

building block of business would deny that shifts in

Economist & Partner at Quka Consulting Plot 1862m 3

RD

Street Ibex hill Road, Lusaka

PO Box 50722, Ridgeway Tel: +260973833383 [email protected], [email protected] www.qukaconsulting.com

aggregate demand, such as those driven by monetary policy, push inflation and unemployment in opposite directions, at least in the short run. That is all one needs to believe to accept the NAIRU concept. Demography and government policy both play some role. In addition, changes in productivity growth appear to shift the inflationunemployment tradeoff

Kampamba Shula Economist

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 UNEMPLOYMENT IN ZAMBIA

Contents INTRODUCTION ....................................................................................................................................................................... 1 OFFICIAL DEFINITIONS AND MEASUREMENT OF UNEMPLOYMENT............................................................................... 1 OFFICIAL STATUS OF UNEMPLOYMENT IN ZAMBIA ........................................................................................................ 1 RANK OF UNEMPLOYMENT AMONG MAJOR PROBLEMS FACING ZAMBIANS ......................................................... 1 UNEMPLOYMENT AND UNDEREMPLOYMENT .............................................................................................................. 1 JOBS ....................................................................................................................................................................................... 2 NON ACCELERATING INFLATION RATE OF UNEMPLOYMENT (NAIRU) ......................................................................... 2 THE ROLE OF NAIRU......................................................................................................................................................... 2 EXPECTATIONS, THE NATURAL RATE AND SUPPLY SHOCKS ........................................................................................ 2 HYSTERESIS ...................................................................................................................................................................... 3 USE IN POLICY ..................................................................................................................................................................... 3 ZAMBIA. NAIRU, 1991 –2015 ......................................................................................................................................... 4 AN APPROACH .................................................................................................................................................................... 4 FORECAST .................................................................................................................................................................................. 5 SOLUTIONS ................................................................................................................................................................................ 5 BETTER JOB MATCHING...................................................................................................................................................... 5 THE BEVERIDGE CURVE ................................................................................................................................................. 5 CONCLUSION ........................................................................................................................................................................... 5 BIBLIOGRAPHY........................................................................................................................................................................... 6

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 UNEMPLOYMENT IN ZAMBIA

Introduction The unemployment rate in Zambia faces the insufferable irony of being a macroeconomic metric of the highest priority but the least effort in measurement for policy, analysis or implementation. Part of this problem is due to the apparent difficulty in measuring unemployment rate using either the infrequent labour force survey or the less reliable labour force report from the Ministry of Labor and Social Security (MoLSS). This report offers a potential explanation for the current paradox of sustained economic growth for slightly more than a decade without an appreciable reduction in poverty levels. At the core of this report is an analysis of National Economic policy and its econometric foundations. We show that the Unemployment rate as a macroeconomic target has been secondary for much of the recent economic policy whether it was fiscal or monetary. Most reports on unemployment in Zambia have been breakdowns of the labour force survey by disaggregating data by sex, occupation, sector, age or some other demographics. This report goes a step further in its analysis and introduces the concept of the Non Accelerating Inflation Rate of Unemployment (NAIRU) and its relevance for policy prescriptions. We find that no one has thus far dared to estimate the NAIRU in Zambia whether it is previous academics or Government Institutions possibly because of its difficulty or ambiguity. This report is thus a venture into unchartered waters as far as economic policy analysis for unemployment dynamics is concerned. Official Definitions and Measurement of Unemployment According to the latest Zambia Labor Force report commissioned by the Zambian Ministry of Labor and Social Security and implemented by the Central Statistical Office, a person is employed if in the period concerned they performed work for pay either in cash or kind, barter or family gain (CSO, 2013). It is

immediately noticeable that this definition is broader than most people’s concept of employment, which often focuses on participation in the labor force. Zambia’s official definition implies that a homemaker or a housewife who tends to household activities, such as making sure the house is clean and preparing meals, is employed. Therefore, the homemaker is, officially, not part of the unemployment statistic. Employment is also assumed for young people (e.g. a 15 year old) who work, often for free, in a family kantemba (micro-business), or who help weed the maize field. Also, employment is officially counted for a mine retiree and the peasant farmer who both work in their own vegetable gardens. These cases illustrate the Zambian state definition of working for family gain, in which employment does not mean garnering a wage or salary. The Zambian state defines unemployment as the condition of complete joblessness where the affected persons are also available for work or are actively looking for work (CSO, 2013). Notice that though unemployment is the opposite of employment, the Zambian definition of unemployment introduces the term “job”. The term job has the connotation of paid employment. Thus, unemployment as defined here denotes a lack of paid employment and in this regard, may not exactly be the opposite of employment. Related to the issue of measurement of unemployment is the term “unemployment rate”. This is defined as the ratio of the unemployed population to the labor force in given period of time (CSO, 2013). The labor force, also referred to as the economically active, is defined as all persons above a specified minimum age who are either employed or unemployed. In Zambia, the minimum age is 15 for the labor force survey Interestingly, the Zambian state has defined youth unemployment separately from general unemployment in the latest report of the labor force survey. In Zambia, a youth is any person aged 15 to 35. Gauging from public pronouncements, the government appears to be very concerned about youth unemployment and this, perhaps, is the reason

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 UNEMPLOYMENT IN ZAMBIA

for treating youth unemployment separately from adult unemployment in the Labor Force Survey report. Official Status Zambia

of

Unemployment

in

Given the official definition of unemployment, we now consider the official status of employment in Zambia. In 2012 the Labour force survey indicated that the unemployment rate was 7.8%. Chart 1

25

Unemployment was ranked as the most important problem facing Zambians in the latest Afro barometer survey. 19% of Zambians rated it the most important problem facing the nation, followed by infrastructure/ roads and farming/ agriculture. First, that unemployment is largely concentrated in urban areas. Secondly, that young people are particularly affected. What is interesting though is that poverty levels are lower in urban areas compared to rural areas, which probably suggests that potential policy prescriptions for poverty reduction may not necessarily be the same as policies for reducing unemployment - at least at the national level. But there's a huge caveat here: "rural employment" includes a high degree of seasonal "selfemployment". Unemployment and underemployment

20

The latest estimation from 2012 of unemployment rate was at 7.8% of the labour force. Unemployment was much more common in urban areas than in rural. There are slightly less men than women as unemployed.

15

The youth unemployment is quite high at 25%. On this age group men have a higher unemployment rate than women. Urban youth unemployment is a large problem. As with most other African countries, the formal sector in Zambia grows too slowly to absorb the estimated 300,000 young people entering the labour market each year. Therefore many end up in precarious and informal jobs.

10

5

0 1980

1990

2000

2010

2020

Unemployment, total (% of total labor force) (national estimate) As of 2015, most official unemployment estimates recycle this same figure from 2012. We find a problem with such analysis and this report aims to take a different approach as to how Unemployment can be better estimated for recent periods in the absence of a comprehensive labour report. Rank of Unemployment among Major Problems Facing Zambians

Underemployment is also very high. Much underemployment is due to seasonal changes in rural activity, but underemployment was also high in urban areas. The concept of underemployment does sometimes also include those who are employed below their skill-level, whereas the measure for Zambia is confined to time-related underemployment, indicating those who involuntarily worked less than 40 hours per week. The average weekly hours worked in Zambia was 31 hours per week, in rural areas 28 and 40 in urban, and 33 for men and 29 for women.

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 UNEMPLOYMENT IN ZAMBIA

Along with the high unemployment rate, the high underemployment rate indicates that Zambia has considerable job deficiencies. Interpretation of the open unemployment and employment rates as indicators of a well-functioning labour market is problematic in developing countries. When unemployment is not an option where a person can survive, work of some sort has to be found, often casual and informal work. Unemployment should therefore be understood in relation to the strength of social safety nets, the prevalence of informal employment and how much of informal employment is underemployment due to few formal employment possibilities. Sectoral Employment Agriculture is by far the single largest employment sector in Zambia. It absorbs around 73% of the employed, yet only contributing to around 18% of GDP. The sector has low productivity and is mostly pre-industrialised. The second largest employment sector is Trade, Restaurants and Hotels, where around 10% of the labour force is employed. Outside agriculture, women tend to find employment in trade and in public administration. Some sectors are male dominated, but otherwise there are not very apparent gender segmentations on the labour market. The construction sector has an unusually high contribution to GDP, which is certainly because of massive construction investments in the copper mining industry. The mining and quarrying industry has comparably few employed and contribution to GDP. Jobs The issue of jobs is important to all Zambians and discussions about how to create jobs and reduce unemployment pervade the media, policy documents, and debates. In the 2013 Afro barometer Survey “unemployment” topped the list of the most important problems facing Zambia that the government should address, with 19 percent respondents choosing unemployment (Afro barometer 2013). This situation has not changed much from 2009 when unemployment was ranked  Page 2

the second biggest problem, after “farming and agriculture.” It is common knowledge to most Zambians that, among other things, the Patriotic Front was voted into power on the promise of reducing unemployment. For many Zambians, their hope of earning an income leans heavily on being able to secure employment. While Zambians have the option of engaging in entrepreneurial activities, the uncertain income of entrepreneurship, the difficulties in raising start-up capital (especially for the youth), and the general lack of business management skills, makes the option either unattractive or an outright impractical choice (Mujenja, March 2014). The relationship between unemployment, economic growth and poverty is clear. High levels of unemployment mean the underutilization of the nation’s most valuable resource – labor. When labor resources are underutilized, the nation’s growth potential is not attained. When the nation’s growth potential is not achieved, whatever modest growth that is attained will not be enough to move many Zambians out of poverty. Non Accelerating Inflation Unemployment (NAIRU)

Rate

of

NAIRU stands for the nonaccelerating inflation rate of unemployment there are, however, two issues that fail to command consensus among economists, which we address in this essay. The first issue is whether the concept of the NAIRU is a useful piece of business cycle theory. We believe it is, and we explain why. In our view, the NAIRU is approximately a synonym for the natural rate of unemployment. This concept follows naturally from any theory that says that changes in monetary policy and aggregate demand more generally, push inflation and unemployment in opposite directions in the short run. Once this short-run tradeoff is admitted, there must be some level of unemployment consistent with stable inflation (Mankiw, 2002). The Role of NAIRU

 UNEMPLOYMENT IN ZAMBIA

The word “NAIRU” entered the language of macroeconomics in the 1970s, a period of rapid and rising in inflation. Yet, in a deeper sense, the concept has been there all along. According to conventional macroeconomic theory, the inflation-unemployment tradeoff is central to understanding not only the effects of monetary policy but also other policies and events that influence the aggregate demand for goods and services. But most of these other events and policies can potentially have effects through other channels as well. For example, tax policy influences both aggregate demand through disposable income and aggregate supply through work incentives. By contrast, belief that monetary policy has employment effects is inextricably tied to belief in the inflationunemployment tradeoff. Expectations, the Supply Shocks

Natural

Rate

and

Since Friedman (1968) and Phelps’s (1967, 1968) seminal contributions, one variable has played center stage in explaining shifts in the inflationunemployment tradeoff: expected inflation. Other things equal, an increase in expected inflation is associated with an equal increase in actual inflation. The reason why expected inflation plays such a role depends on the theory of short-run non neutrality. The natural rate can be viewed as the unemployment rate that the economy reaches in the long run. This interpretation arises from imposing a modicum of rationality to expectations. Over any long interval of time, the average of expected inflation should equal the average of actual inflation; otherwise, forecasts are systematically biased. Thus, over the same long interval, average unemployment should equal the average natural rate. In his classic paper introducing the natural rate hypothesis, Friedman (1968) described the situation as follows: “There is always a temporary tradeoff between inflation and unemployment; there is no permanent tradeoff. The temporary tradeoff comes not from inflation per se, but from unanticipated inflation, which generally means, from a rising rate of inflation.” Friedman didn’t use the term “NAIRU,” but the concept is implicit in his analysis.

Hysteresis Some economists have suggested that the labor market exhibits a form of “hysteresis” (Blanchard, 1986). In physics, hysteresis refers to the failure of an object to return to its original value after being changed by an external force, even after the force is removed. Several theories have been proposed to explain why this might be the case. The most popular emphasize long-lasting damage suffered by workers who experience unemployment. These workers lose human capital, become less attractive to employers and reduce their job search as they become accustomed to being unemployed (Layard, Nickell and Jackman, 1991). All these effects make workers less likely to be employed in the future. The validity of hysteresis theories is a subject of some controversy, and we will not take up that debate here. Regardless of how this debate is resolved, the concept of NAIRU remains valid. At any point in time, there will be an unemployment rate consistent with stable inflation, which can be called the NAIRU. Hysteresis theories merely give one reason to expect the NAIRU to change over time. As we discuss below, there are many other reasons to expect that the NAIRU will not be a constant. Use in Policy How should monetary policymakers use the NAIRU? Most obviously, it is a forecasting tool. When unemployment is below the NAIRU, inflation can be expected to rise, and when it is above the NAIRU, inflation can be expected to fall. Thus, even if the policy regime were one of inflation targeting, monetary policy makers should keep an eye on unemployment and the NAIRU. Stock and Watson (1999) report, “Inflation forecasts produced by the Phillips curve generally have been more accurate than forecasts based on other macroeconomic variables, including interest rates, money, and commodity prices.” Nonetheless, it also makes sense for monetary policymakers to give some weight to other forecasting tools. When looking ahead to future inflation, they should also look at, for example, the consensus of private forecasters and the spread  Page 3

 UNEMPLOYMENT IN ZAMBIA

between real and nominal bond yields. Of course, these tools themselves reflect the NAIRU concept, because private forecasts of inflation are often based on it. Using such private forecasts of inflation for policy making can be viewed as a way to decentralize the decision making over how the NAIRU is changing over time.

estimation of 11.1%. We approximate the NAIRU lies somewhere in between these two limits. Chart 3

Linear 200

Zambia. NAIRU, 1991 –2015

Chart 2

Inflation vs Unemployment

50

-50

140 120

10

20

30

Unemployment Rate %

An Approach

y = 1.5095x2 - 35.308x + 209.05 R² = 0.4988

100

y = 8.2148x - 91.49 R² = 0.3235

0

160

Inflation Rate %

100

0

180

To see how one might estimate the NAIRU, rewrite the Phillips curve equation as

80

I = AU* -AU + V

60 40 20 0 0

10 20 Unemployment Rate %

30

Chart 2 plots the Inflation rate against Unemployment since 1991.It seems consistent with Friedman’s assertions that Inflation and unemployment are negatively correlated only in the short run. This is shown by the small negative slope on the left of the curve. Unemployment and inflation are positively if not uncorrelated in the long run which is shown by a positive slope on the right. We use the polynomial turning point to estimate a NAIRU of 11.6% which contrasts with a linear  Page 4

150

Inflation Rate %

Let’s now turn to the practical question: what is the level of the NAIRU for the Zambian economy?

If one assumes that U* is constant and that U is uncorrelated with v, then the value of U* can be estimated by regressing the change in inflation (I) on a constant and unemployment U. The ratio of the constant term( AU*) to the absolute value of the unemployment coefficient (A) is an estimate of U*.When we perform this exercise for annual U.S. data from 1960 to 2000, measuring inflation with the consumer price index, we obtain a constant term of 91.49 and an unemployment coefficient of 8.2148. This yields a NAIRU estimate of 11.1 percent. We performed a linear regression of Inflation and unemployment to derive the NAIRU. The regression line identifies a NAIRU of 11.1% (point at which line crosses the unemployment axis).This, again, is the rate of unemployment at or near which, according to this regression; the inflation rate has no tendency to either rise or fall.

 UNEMPLOYMENT IN ZAMBIA

Forecast There is an incredible shortage of up to date on unemployment figures in Zambia. The last labour force survey was in 2012. In 2015, such a shortage of data or even accurate estimations based on theoretically sound analysis leave policy makers and the general public in the dark. This report illuminates this chasm of information by providing unemployment estimates based on the Phillips curve by using the polynomial version of the regression line which has a higher multiple R square or in other words greater forecast accuracy. y = 8.2148x - 91.49 R² = 0.3235 The above formula shows the linear equation used for forecasting Unemployment in the absence of an updated Labour force survey. This method of approximation far outweighs the regular repetition of 2012 unemployment figures in later years due to the lack of data. Our method is precise and comprehensively in line with macro econometric foundations and principles of short run non neutrality and long run relationships. By reverse calculating inflation numbers we are able to exploit the relationship between inflation and unemployment an approximate the unemployment rate Year 2013 2014 2015

Quka Unemployment Rate

ILO Estimate/ World Bank

11.99 13.3 12.09 13.1 12.03 13.2

Solutions In light of recent calculations we are better poised to inform policy decisions with better precision. In order to reduce unemployment in Zambia policy makers must look to reduce the natural unemployment rate. The best way to do this is by increasing productivity and removing information

asymmetry which plagues the Zambia labour market in the form of unequal access to Job information.

Better Job Matching One reason for unemployment is job turnover. When workers move from jobs that disappear to those that open up, the process creates unemployment because it takes workers time to find new jobs. The Beveridge Curve In analyzing the labor market, a complement to the Phillips curve is the Beveridge curve, which has recently been emphasized by Blanchard and Diamond (1989).The Beveridge curve shows the relationship between unemployment (workers without jobs) and vacancies (jobs without workers).The Beveridge curve slopes downward in unemployment-vacancy space because an economic expansion that reduces unemployment also raises vacancies, as firms have trouble finding workers in a tighter labor market. Conclusion The aim of this report was to simply estimate the NAIRU in Zambia right now. Trends of the NAIRU and their causes require a separate body of work. The NAIRU is an important building block of business cycle theory. Few economists would deny that shifts in aggregate demand, such as those driven by monetary policy, push inflation and unemployment in opposite directions, at least in the short run. That is all one needs to believe to accept the NAIRU concept. The practical application of this concept, however, is less straightforward. The value of NAIRU is hard to measure, largely because it changes over time. The economy experiences many kinds of shocks that influence inflation and unemployment. In light of this fact, it would be remarkable if the level of unemployment consistent with stable inflation were easy to measure. The available evidence is too weak to establish decisively which hypothesis is right, but the literature on the NAIRU has made progress. Demography and government policy both play some role. In addition, changes in productivity growth appear to shift the inflation-unemployment tradeoff.  Page 5

 UNEMPLOYMENT IN ZAMBIA

Bibliography Blanchard, O. J. ( 1986). “Hysteresis and the European Unemployment Problem,” . NBER Macroeconomics Annual, pp. 15 –78. . CSO. (2013). Labour Force Report. Friedman, M. (1968). The Role of Monetary Policy. American Economic Review, pp. 1–17.

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Mankiw, L. B. (2002). The NAIRU in Theory and Practice. Journal of Economic Perspectives, Volume 16, Number 4—Fall Pages 115–136. Mujenja, F. (2013). Afrobarometer Survey. Mujenja, F. (March 2014). Afrobarometer The Employment Status of Zambians: Official Definitions versus Citizen Perceptions .

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