Figure of the Week: Job growth in Kenya’s formal economy slows

In June, the Africa Research Institute published a report, titled “How Kenya is failing to create decent jobs,” using taxation data to analyze individuals working in the formal economy in Kenya. The report found that jobs in the informal economy have grown much faster than the formal economy and that most of the wage employed hold low-income jobs.

The analysis utilizes pay as you earn taxation data from the Kenyan Revenue Authority to define and evaluate middle-income earners. Figure 1 shows that informal sector jobs such as those in hospitality, retail trade, and small scale manufacturing grew from 8.7 million in 2009 to 12.6 million in 2015, a 44 percent increase, whereas the formal sector saw a growth of 28 percent from 2.0 million in 2009 to 2.6 million in 2015. As a result, the share of jobs in the formal sector fell from 19 percent in 2009 to 17 percent in 2007.

The report defines middle-income earners as those with incomes between 1 and 2 standard deviations above the mean. Figure 4 below shows the mean and estimated monthly earning for those classified as middle income in this report from 2009 to 2015. The definition of middle income used by the authors differs from that used by the Kenyan National Statistics Bureau, which classifies middle income as those earning between 24,000 ($240) and 120,000 Kenyan shillings ($1200) a month. The authors contend that the definition used by the bureau is too broad and includes almost all wage earners in the Kenyan formal economy.

According to the report’s classification, the number of Kenyans in middle-income jobs increased by 64 percent from 2009 to 2015, raising their share from 8.5 to 11 percent, while jobs paying below middle income rose by 36 percent, its share increasing from 79.5 to 86 percent. The report finds a strong correlation between GDP growth and the number of middle-income earners.

The authors found that the proportion of women in middle-income jobs stayed broadly static at 30 percent, while as seen in Figure 9, the number of women in formal employment grew from 0.6 million to 0.9 million from 2009 to 2015, raising their share from 30 to 37 percent.

The authors suggested that “as most jobs are of necessity being created in the informal sector, Kenya’s labor productivity is low and static, indicating that while there is GDP growth the quality of the labor force is worsening. This situation presents a conundrum: labor productivity has to rise for incomes to rise.” Overall, the report concluded that the slower growth in formal sector employment is a concern given that working age population is expected to increase by nearly 9 million between 2015 and 2025.