Over the past decade, Ethiopia has been one of the fastest growing economies in the world with growth averaging 10.9%. Despite recently facing the worst drought in fifty years, Ethiopia has remarkably been able to maintain positive growth.

“Economic growth remained at a respectable 8% in 2015/16, which is impressive especially compared to previous drought situations which often resulted in economic contraction,” said Carolyn Turk, World Bank Country Director for Ethiopia, Sudan and South Sudan.

According to the World Bank Group’s 5th Ethiopia Economic Update launched today, growth momentum will still remain and since 2016 rains arrived as expected, the recent drought will not likely affect Ethiopia’s medium-term economic growth. In addition, the newly completed Addis Ababa-Djibouti railway line, significantly eases trade logistics related constraints. The government’s increased focus on new industrial parks (Hawassa and Bole-Lemi Phase II) and the increasing capacity in power generation along with the completion of transmission lines to neighboring countries (Sudan and Kenya) are also expected to improve export performance and stimulate growth in the short to medium-term.

Furthermore, the report, which provides an in-depth view of Ethiopia’s’ labor market and identifies challenges and opportunities for making it more efficient, reveals that Ethiopia also managed to keep inflation under control. This in turn helps to avoid the erosion of the purchasing power of wages for workers of all levels of education, keep real wages stable and ensures that returns on education in urban labor markets are positive.

However, the report warns that if the performance of the industry and service sectors do not live up to expectations, it could negatively affect the growth. Additionally, the report notes the current unrest in the country could also pose potential risks to the country’s economic outlook.

The report reveals that the performance of the export sector and the current account balance have been weak. The chronic current account deficit (including official transfers) continued to deteriorate in 2014/15 reaching 12.2% of GDP due to the large imbalance in import and export of goods and services. The report identifies low volume, price effects and an appreciating real exchange rate, as the main reasons for the 3.7% export performance in 2015/16 which is the lowest in a decade.  

“Export of goods contracted significantly over the past two years owing to a weak external environment and a supply shock from the drought that meant foregone agriculture production to exports,” said Paloma Casero, Africa Director of the Global Practice for Macroeconomic and Fiscal Management of the World Bank. “Moreover the overvalued currency limits Ethiopia’s export competitiveness and is a concern for the economy, especially with exports falling for three consecutive years.”

The report also predicts further poverty reduction; based on data on the impact of growth on poverty reduction in the country in the past decade, the report estimates that the proportion of households living below the international poverty line of $1.90 per day will decline from 27.2% in 2015 to 24.6% in 2018.

The Nature of Ethiopia’s Labor Market

As Ethiopia is rapidly urbanizing, the report points out that understanding the nature of urban labor markets provides valuable insights for further poverty reduction and for a successful transition to a manufacturing and service-oriented economy.

While labor market trends are moving in the right direction, there has been little change in Ethiopia’s structure of urban labor markets. Real wage trends have not reflected the increasing educational quality of the workforce although there have been some improvements. While wages were more than double for those with a degree compared to those without, returns on education have fallen in the last decade. Additionally, while jobs are being created, there are not enough jobs available for those with primary and secondary education. The report also points out that the high cost of job search is a factor in the high urban unemployment rate.

Addressing major obstacles in the labor market would enable Ethiopia to accelerate structural transformation, ensure inclusive growth and lead to further poverty reduction, according to the report. The report also identifies urban areas as key players in advancing structural change in Ethiopia, as centers of innovation and industrial development.

“Well-functioning and efficient urban labor markets are a key ingredient for this transformation to take place, and to ensure that its benefits reach all segments of the population,” said Michael Geiger, World Bank senior economist and main author of the update. “As unemployment in Ethiopia is by and large an urban phenomenon, increasing the efficiency of urban labor markets is not only key for structural transformation but also for overall economic development.”

The report, which analyzes the nature of urban labor markets in Ethiopia and identifies the various factors that contribute to curb their efficiency, provides five policy recommendations which could help make Ethiopia’s structural change more inclusive and contribute much more to poverty reduction. According to the report, Ethiopia should:

1.  encourage firm creation and growth that create jobs for non-graduates with a special focus on service and manufacturing sector growth,

2. increase labor productivity in the low-skill segment by addressing constraints faced by firms in accessing capital (financial and physical) to ensure that the labor productivity increases and wages can rise,

3. invest further in job and technical training programs to build the skills of those in the job market, both for low skilled workers and at higher levels of education in order to increase their productivity,

4. introduce targeted urban safety nets and labor market programs to invest in skills of low-skilled employees and the unemployed and provide financial support to enable their job search, and

5. enhance the use of ICT to provide information on job vacancies throughout Addis Ababa and reduce the cost of job search.

The 5th Ethiopia Economic Update, Why so idle? Wages and Employment in a Crowded Labor Market, is the latest programmatic knowledge product prepared by the World Bank Group as a part of its economic policy dialogue with the Government of Ethiopia.