Report No. 40344-SN Senegal Looking for Work -- The Road to Prosperity Country Economic Memorandum Volume I: Main Report September 2007 PREM 4 Africa Region Document of the World Bank The cover of this report has been realized by Mr. Diarra Diakathé ­winner of the competition organized by the World Bank office in Dakar around the theme : « working to escape from poverty ». This competition took place among individuals under 25 years old in a a selected number of schools and youth associations during August 2007. ii CURRENCY EQUIVALENTS Currency Unit = CFA Franc (CFAF) 1 US D = CFAF 483 FISCAL YEAR January 1 ­ December 31 ABBREVIATIONS AND ACRONYMS AFD Agence Française du Développement (French Development Agency) AGETIP Agence d'Exécution des Travaux d'Intérêt Public (Agency for the Execution of Works of Public Interest) AGS Accelerated Growth Strategy ANEJ Agence National pour l'Emploi des Jeunes (National Agency for Youth Employment) ANSD Agence Nationale de la Statistique et de la Démographie (National Statistics and Demographics Agency) APIX Agence de Promotion des Investissements et des Grands Travaux (Investment Promotion and Infrastructure Agency) ASACASE Association Sénégalaise pour l'Appui à la Création d'Activités Socio Économiques (Senegalese Association to Support the Creation of Socio-Economic Activities) BAARA Agence d'Exécution des Travaux d'Intérêts Publics pour l'Emploi (Burkina Faso) Agency for the Execution of Works of Public Interest For Employment) BD Board of Directors BEP Bureau des Examens Professionnels (Office of professional examinations) BFEM Brevet de Fin d'Etudes Moyennes (Certificate of General Education) BTP Public Works and Civil Engineering BTS Brevet de Technicien Supérieur (Advanced Vocational Diploma) CAP Certificat d'Aptitude Pédagogique (Vocational Training Qualification) CDCSP Cellules de Certification et de Suivi des Projets (Project Accreditation and Monitoring Unit) CDD Fixed-term Contract CDI Open-ended Contract CFAA Country Financial Accountability Assessment CFAF CFA Franc CFCE Contributions Forfaitaires à la Charge des Employeurs (Payroll Tax) CGI Code Général des Impôts (General Tax Code) CNEE Employeurs pour la promotion de l'emploi des jeunes diplômés (Employers for the Promotion of Employment of Young Graduates) CNES Confédération Nationale des Employeurs du Sénégal (National Confederation of Senegalese Employers) CNP Conseil National du Patronat (National Council of Employers) CNTS Confédération Nationale des Travailleurs du Sénégal (National Confederation of Senegalese Employers) CQP Certificats de Qualification Professionnelle (Certificate of Professional Qualifications) CSA Confédération des Syndicats Autonomes (Federation of Independent Trade Unions) CSS Caisse de Sécurité Sociale (Social Security Fund) CUCI Centre Unique de Collecte d'Information (Information Collection Center) EPIC Etablissement Public à Caractère Industriel et Commercial (State-funded Industrial and Commercial Establishment) ESAM Enquête Sénégalaise Auprès des Ménages (Senegalese Household Survey) ETFP Enseignement Technique et Formation Professionnelle (Technical Education and Vocational Training) ETR Effective Tax Rate FGPA Fonds de Garantie des Projets Artisanaux (Artisanal Projects Guarantee Fund) FIAS Foreign Investment Advisory Service FNAE Fonds national d'Actions pour l'Emploi (National Fund for Employment Actions) FNPJ Fonds National de Promotion de la Jeunesse (National Fund for Youth Promotion) FOM Federation of Mutual Aid Organizations FONDEF Fonds de Développement de L'enseignement Technique et de la Formation Professionnelle (Technical Education and Vocational Training Development Fund) iii GDP Gross Domestic Product GIPA Groupement Interprofessionnel des Artisans (Interprofessional Grouping of Artisans) GPHC General Population and Housing Census ICA Investment Climate Assessment ICS Industries Chimiques du Sénégal (Chemical industries of Senegal) IFAD International Fund for Agricultural Development ILO International Labor Office IPRES Institut de Prévoyance Retraite du Sénégal (Retirement Institute of Senegal) MEF Ministry of the Economy and Finance MIGA Multilateral Investment Guarantee Agency NDV Net Discounted Value NGO Non Governmental Organization NINEA Numéro d'Indentification Nationale des Entreprises Agrées (National identification number of approved businesses) NPV Net Present Value OECD Organization for Economic Co-operation and Development OHADA Organization for the Harmonization of Business Law in Africa OM Organisations Mutualistes (Mutual Aid organization) ONEQ Observatoire National de l'Emploi et des Qualifications (National Observatory of Employment and Qualifications) ONFP Office National de Formation Professionnelle (National Professional Training Office) PAIO Permanences d'Accueil et d'Orientation PDEF Programme Décennal pour l'Education et la Formation (Ten-Year Education and Training Programme) PROMER Projet de Promotion des Micro-Entreprises Rurales (Project for the Promotion of Rural Micro Enterprises) PRSP Poverty Reduction Strategy Paper REVA Retour des Emigrés vers l'Agriculture (Return to Agriculture project) RGPH Recensement Général de Population et de l'Habitat ROME Répertoire Opérationnel des Métiers (Directory of Trades) SENELEC Société Nationale d'Electricité (National Electricity Company) SIGFIP Système Intégré de Gestion des Finances Publiques (Integrated public finance management system) SMAG Salaire Minimum Agricole Garanti (Guaranteed Minimum Wage for Farm Labor) SME Small and Medium-sized Enterprises SMI Small and Medium-sized Industries SMIG Salaire Minimum Interprofessionnel Garanti (Guaranteed Minimum Interoccupational Wage) SONATEL Société Nationale de Télécommunication (National Telecommunications Company) ULC Unit Labor Cost ÚNACOIS Union Nationale des Commerçants et Industriels du Sénégal (National Union of Senegalese Merchants and Industrialists) UNSAS Union Nationale des Syndicats Autonomes du Sénégal (Union of Autonomous Labor Unions of Senegal) VAE Validation of Acquired Experience VAT Value-added Tax WAEMU West African Economic and Monetary Union Vice President: Obiageli Ezekwesili (AFRVP) Country Director: Madani M. Tall (AFCF1) Sector Director: Sudhir Shetty (AFTPM) Sector Manager: Antonella Bassani (AFTP4) Task Team Leader: Jacques Morisset (AFTP4) iv TABLE OF CONTENTS ACKNOWLEDGEMENTS ......................................................................................................................ix EXECUTIVE SUMMARY ........................................................................................................................x INTRODUCTION.......................................................................................................................................1 PART I: THE ROLE OF THE LABOR MARKET................................................................................6 1. THE ECONOMIC PERFORMANCE OF SENEGAL.....................................................................7 A. An initial evaluation that is encouraging... but fragile....................................................................7 2. GROWTH AND POVERTY IN LIGHT OF THE LABOR MARKET .......................................11 A. The dual causality between growth and poverty............................................................................11 B. Emergence of a virtuous circle through the labor market..............................................................12 3. CONCLUSION...................................................................................................................................15 PART II: THE LABOR MARKET FROM THE BUSINESS PERSPECTIVE.................................16 4. THE CURRENT EMPLOYMENT SITUATION...........................................................................17 A. Characteristics of labor in rural areas..............................................................................................17 B. characteristics of employment in urban areas..............................................................................20 5. LABOR MARKET ADJUSTMENT MECHANISMS DURING THE LAST DECADE............24 A. Development of total employment and by sector .........................................................................24 B. Job creation in the informal sector.................................................................................................27 C. Job creation in the formal sector....................................................................................................28 6. LABOR PRODUCTIVITY AND WAGES......................................................................................32 A. International comparison of labor productivity .............................................................................33 B. Sector-related changes in productivity...........................................................................................34 C. Analysis at the level of Senegalese businesses..............................................................................36 7. IN SEARCH OF LABOR COMPETITIVENESS ..........................................................................41 A. Increasing labor Productivity.........................................................................................................41 B. Streamlining Salary Adjustment Mechanisms...............................................................................59 8. CONCLUSION...................................................................................................................................62 PART III: THE LABOR MARKET FROM THE PERSPECTIVE OF WORKERS .......................64 9. THE WEAKNESSES OF THE LABOR MARKET.......................................................................65 A. The population in a Situation of Economic Independence: unemployment, underemployment and economically Non-active population .............................................................................................65 B. earned income and poverty............................................................................................................72 10. PROTECTION OF WORKERS.......................................................................................................76 A. The Legislative and Institutional Framework................................................................................76 B. The real facts..................................................................................................................................79 11. EMPLOYMENT PROMOTION PROGRAMS..............................................................................82 A. An overview of job promotion programs.......................................................................................82 v B. program evaluation .......................................................................................................................85 C. Difficulties related to lack of efficiency ........................................................................................87 12. CONCLUSION...................................................................................................................................89 PART IV. AN AGENDA FOR REFORM..............................................................................................90 Pillar 1: Promoting labor skills through the education system and training.........................................92 Pillar 2: Developing links with the diaspora to increase labor quality...............................................100 Pillar 3: Optimizing labor allocation between the private and public sectors ...................................102 Pillar 4: Boosting productivity and demand for labor through actions aimed at companies and the business environment...................................................................................................................103 Pillar 5: Developing networks and access to information..................................................................104 Pillar 6: Increasing the flexibility of labor regulations.......................................................................107 Pillar 7: Promoting employment programs ........................................................................................110 Figures Figure 1.1: Economic Growth (1995-2005).................................................................................................7 Figure 1.2: Volatility of Senegalese growth from a regional perspective....................................................8 Figure 1.3: Economic growth and exports, 1995-2004................................................................................9 Figure 1.4: Export-based growth...except in Senegal ...............................................................................10 Figure 4.1: Summary of the labor market..................................................................................................18 Figure 4.2: Distribution of employment according to the size of the economic unit, Dakar, 2002...........23 Figure 5.1: Elasticity of employment to changes in the value added........................................................29 Figure 6.1: Overcoming the productivity gap with emerging countries ....................................................33 Figure 6.2: Changes in the productivity of the formal and informal sectors .............................................34 Figure 6.3: Variations in wages and in average productivity, 1990-2004 .................................................35 Figure 6.4: Productivity and salary gap between the formal and informal sectors....................................36 Figure 6.5: Comparing average labor productivity (in US dollars) ..........................................................36 Figure 6.6: Comparison of average annual salary (in US dollars)...........................................................37 Figure 6.7: Distribution of salaries in the informal sector in Dakar ..........................................................39 Figure 6.8: International comparison of the unit cost of labor...................................................................39 Figure 7.1: The weight of deductions from wages in Senegal is rivaled only by that in France ...............58 Figure 9.1: Distribution function of expenditures per adult equivalent and per day according to the occupational status of the head of the household ....................................................................75 vi Tables Table 1.1: Sources of growth in Senegal, 1995-2003...................................................................................9 Table 2.1: Loss in competitiveness of Senegalese companies 1995-2004..................................................13 Table 4.1: Breakdown of informal sector jobs in Dakar (in % of employed population)...........................22 Table 5.2: Growth in the active population by sector of activity, from 1995 to 2004................................26 Table 5.3: Sources of growth in informal employment (1995-2004) .........................................................28 Table 6.1: Monthly salary per worker (median value in thousands of CFAF) ...........................................38 Table 7.1: Estimating average labor productivity (in log)..........................................................................44 Table 7.2: Characteristics of labor force qualifications in Dakar ...............................................................46 Table 7.3: Salary estimates (in log) ............................................................................................................48 Table 7.4: Rate of deduction from wages ...................................................................................................57 Table 9.1: International Comparison .......................................................................................................66 1/ Table 9.2: Distribution according to labor market status, by place of residence of persons aged 15 and over.......................................................................................................................67 Table 9.3: Unemployment by place of residence and by level of education for persons with formal education aged 12 and above....................................................................................................70 Table 9.4: Incidence of poverty according to place of residence, gender of household head and the occupational status of the household ........................................................................................73 Table 9.5: Incidence of extreme poverty according to place of residence, gender and the occupational status of the household head.....................................................................................................74 Table 10.1: Staff of the Directorate of Labor and Social Security..............................................................80 Table 11.1: Employment promotion programs in Senegal .........................................................................83 Table 11.2: Impact of programs -- Lessons from international experience ................................................86 Table 11.3: An assessment of employment programs in Senegal...............................................................87 Table 1: Summary table of labor market reforms......................................................................................91 Boxes Box 4.1: Characteristics of employment in the public administration in Dakar.........................................21 Box 5.1 : Statistical sources on employment: a puzzle..............................................................................26 Box 5.2: Economic growth does not result in job creation.........................................................................30 Box 6.1: Average and marginal productivity of labor ................................................................................32 Box 7.1: Estimating average labor productivity .........................................................................................43 Box 7.2: FONDEF Operating procedures and initial results ......................................................................52 Box 7.3: Hiring and firing regulations........................................................................................................56 Box 9.1: Job instability in Senegal .............................................................................................................68 Box 10.1: Labor legislation in Senegal from an international perspective................................................76 Box 0.1: South Africa ­ The experience of professional modules in the school system............................94 Box 0.2: Tunisia ­ Sectoral training centers...............................................................................................95 Box 0.3: Benin - Certificates of Qualification (CQP)................................................................................96 Box 0.4: Germany, France, Cameroon ­ The role of consular chambers in education ..............................97 Box 0.5: Training in the workplace is a good way of increasing the productivity of workers ...................97 Box 0.6: Jua Kali Voucher Program in Kenya............................................................................................99 Box 0.7: Initiatives to promote the return of qualified students ­the example of Taiwan........................101 Box 0.8: The Global Scot Network...........................................................................................................101 Box 0.9: The national observatory of employment and qualifications in Tunisia....................................106 Box 0.10: Alternative social coverage for road transporters.....................................................................111 Box 0.11: Integrated programs .................................................................................................................113 Box 0.12: Targeting groups disadvantaged by micro-credits ...................................................................115 vii Annexes Annex 1: Definitions Annex 2: Statistical Sources Annex 3: Macroeconomic Results Annex 4: Employment Situation -- Total/Urban/Rural Annex 5: The Gender Issue in the Labor Market Annex 6: Growth in Employment Annex 7: Growth in Productivity, Salaries, and Unit Labor Cost by Sector Annex 8: Productivity, Salaries, Unit Labor Cost by Company Annexe 9 : Status of higher education and recommendations Annex 10: Status of the Inactive, the Unemployed and the Underemployed Annex 11: Public Institutions Responsible for Control and Regulation of Labor Relations Annex 12: Description of Active Labor Institutions and Programs viii ACKNOWLEDGEMENTS 1. This labor market review was jointly implemented by the World Bank and the Senegalese Government during the period January - July 2007. 2. The World Bank team consisted of Mamadou Ndione and Moukim Temourov, under the direction of Jacques Morisset. Judite Fernandes (AFTP4) provided valuable support. It was supported by a World Bank Institute team led by Jean-Eric Aubert and comprising André Kirchenberger, Justine White, and Bruno Poisson who, in parallel with this study, prepared a diagnosis of the knowledge-based economy in Senegal. The following experts contributed to the preparation of this report: Julien Bandiaky (Clark University), Moubarack Lo and Omar Diop (Emergence), Jean-Michel Marchat (World Bank), Damien Echevin (Université de Sherbrooke), Fabrice Murtin (London School of Economics), and Hawa Cissé-Wague (World Bank). Contributions by Jean Fares and Gaelle Pierre on the preparation of employment statistics in Senegal (chosen as a pilot country in the World Bank's project relating to the preparation of an employment statistics guide) as well as contributions by Elena Badarsi and Ola Granstrom on gender issues in the labor market were incorporated in the report. The team would also like to thank Louise Fox, Vincent Palmade, Stefano Scarpetta, Meskerem Mulatu, Atou Seck, Nathalie Lahire, Antonnella Bassani, and Madani Tall for their comments and encouragement. 3. The working group within the Senegalese Government was under the responsibility of Abdoulaye Diop (Chief of Staff of the Ministry of the Economy and of Finance) and included: Aliou Faye (Director of CEPOD), Aminata Touré Kane (Agence Nationale de la Statistique et de la Démographie), Souleymane Diallo (Direction de la Prévision Economique), Alpha Ousmane Aw (Direction de l'Emploi), Ababacar Diouf (Direction du Travail et de la Sécurité Sociale), Ibrahima Diouf (Direction des Petites et Moyennes Entreprises), Mamadou Syll Kebe (Direction de l'Industrie) et Mme Limamoulaye Seck (Direction de l'Apprentissage). 4. To strengthen the participatory spirit and capture the multidimensional nature of the labor market, the World Bank and Government teams drew on the support of an advisory group comprising representatives and experts from the Ministry of Education, the Ministry of Professional Training, AGETIP, the National Youth Employment Fund, APIX, FONDEF, workers' and employers' unions and development partners. ix EXECUTIVE SUMMARY 1. This study on the labor market aims at accompanying Senegal in its effort to reach economic emergence ­ a growth rate of 7-8 % and a reduction by half of its level of poverty. The Government has launched a series of initiatives that are detailed in its Poverty Reduction Strategy (PRSP-II) and its Accelerated Growth Strategy (AGS), which themselves rely on a number of studies identifying the main constraints to economic growth, including the Investment Climate Assessment realized by the Bank in 2005,1 the key sectors or activities with the largest economic and exporting potential, and the major factors that allow people to move out from poverty.2 2. The objective here is not to comment on these studies that are now well known by policymakers and development partners in Senegal. Our ambition is rather to emphasize that the above targets defined in terms of economic growth and poverty decline will be met only if there is a well functioning labor market. This market plays indeed a pivotal role in the promotion of economic growth and in the elimination of poverty. Not only wages account for about half of the value added of Senegalese enterprises, especially in the strategic sectors identified in the AGS (e.g., electronics, textile), but income from labor also represents more than 2/3 of the sources of income in Senegal. In other words, it is highly unlikely that Senegal will emerge economically and that its population will survive above the poverty threshold without being able to create jobs with descent salaries. This conclusion is fully shared by the authorities who have been supporting this study from the beginning. 3. An initial warning might be necessary. If the labor market is central to the analysis of the economic situation in Senegal, it cannot be understood without taking into account other economic factors. It is true that an increase in labor productivity will lead to the expansion of Senegalese firms that will become more competitive. Nevertheless, the demand for labor will remain dependant on the growth of the private sector that is determined by a number of factors outside of the labor market, such as identified by the AGS the access to credit and infrastructure as well as improved governance and a well performing justice system. For this reason, the reforms proposed in this study on the labor market should be viewed as complements to the ones defined in the PRSP-II and the AGS. We want to underscore that a growing economy is a necessary but not sufficient condition to create jobs, at least not in a quantity requested to absorb the labor supply in a country like Senegal. It is necessary to produce an economic growth of quality which, as it will defined in the study, needs to rely on growing small and medium enterprises (those are the main providers of jobs in a dynamic perspective) and strong complementarities between physical investment, technology and the level of skills among the active population. 1The World Bank established a diagnosis in 2005 in its study on the investment climate, which should be updated in 2007-2008. See Etude du Climat des Investissments au Sénégal, March 2005. 2A diagnostic study on poverty in Senegal was completed in 2004, and a new study is expected in 2008. For more details, see Senegal, Poverty Assessment, 2003. x Critical issues on the labor market in Senegal 4. This study is both a critical analysis and a message of hope. First of all, it describes the difficult situation of the vast majority of workers in Senegal, especially young people, who are, as President A. Wade emphasized on taking the oath of office on April 3, 2007: "the age group most affected by unemployment and by difficulties, to the point of seeking adventure by taking to the seas in fragile boats in order to find a job abroad". There are also those who live on the margins of the formal labor market, constantly seeking their next job, like the farm workers who only work at the whim of seasons, or the hordes of street sellers, including women, who harass people in the streets of Dakar and of other cities in the country. 5. This helplessness is unfortunately well-known because it is increasingly visible. Figures and analyses that are presented in this study simply confirm that the unemployment rate is close to 13 percent in Senegal, over 30 percent of the labor force is not satisfied because it is underemployed and would like to work more, and the median salary in the informal sector in Dakar does not exceed $68 a month. All in all, there is only one person out of five who works on a full-time basis in Senegal, which translates into a high rate of dependency; this contributes to the growing pressure on the poverty rate, which affects a little less than 50 percent of households. 6. It is often said that to escape poverty one must work, and that to work, one must be productive. Yet, the Senegalese worker is not among the best performers in the world in terms of productivity. In the formal sector, even though Senegal has one of the best productivity rates in Africa, it lags far behind emerging countries. Indeed, the productivity of Senegalese enterprises in the formal sector is on average 2.5 times lower than that of Chile and 2 times lower than that of China. Moreover, from a dynamic perspective, annual productivity gains are minimal, generally less than 2 percent per year, further increasing the gap with successful countries, and preventing the emergence of Senegalese businesses that are truly competitive at the international level. In the informal sector, the situation is even more worrisome: average productivity is three to ten times lower than that of the formal sector, while its share of total employment has increased sharply in the last decade (even accounting for 97 percent of new [net] jobs created between 1995 and 2004). 7. There are many reasons behind the weak productivity gains in Senegal. First, the level of qualifications remains low, with less than 5 percent of the working population having pursued education beyond high school. Half the labor force employed in the informal sector in Dakar claims that it has never been to school. Second, the situation is made worse by the inadequate functioning of the labor market, which suffers from multiple distortions and constraints. When workers are skilled, they are often recruited by the Government and its development partners, or they increasingly move abroad. Private companies must often use informal networks to find workers who meet their demand; this not only creates major delays, but also forces them to use criteria that are not always related to the degree of competence, thus encouraging discrimination. Finally, labor regulations are cumbersome and penalizing, with the marginal effective tax rate (METR) one of the highest in the world, at the same level as in France, with businesses and workers not being able to enjoy the same benefits in terms of social protection and training. xi 8. Faced with this situation, political authorities in Senegal have started to take action. Employment, especially youth employment, is at the core of their concerns. In reality, despite their efforts, employment policy is still timid: it offers neither job security to workers, nor the means to achieve greater productivity and generate new jobs of good quality. The Government's intervention is mainly focused on workers who already have an occupation, through an ambitious social protection regulation. Paradoxically, this regulation is hardly implemented, irrespective of the area of reference: indeed, less than 5 percent of workers in Senegal are registered with the social security system, only one third of workers based in Dakar hold a properly completed written contract, and over half of the working population claim to receive less than the legal minimum wage (US$120 a month). 9. At the same time, the programs put in place to assist job seekers have had a limited impact so far. All in all, they help create about 16,000 direct and indirect jobs each year, which represents less than 5 percent of the unemployed population and those claiming to be underemployed in Senegal. This finding is hardly surprising if one takes into account the fact that all existing programs mobilize less than 1 percent of the Government budget. Management and governance problems have been raised in the audit report prepared by the Audit Court [Cour des Comptes] on the National Fund for Youth Promotion [Fonds National de Promotion de la Jeunesse, FNPJ]. Towards a reform agenda 10. This study is both a diagnostic tool and a channel through which solutions can be proposed. This ambition justifies our approach, which has been to share, early on, our findings and analyses with a committee comprising the main stakeholders in the ministries involved. In addition, meetings have been held with an enlarged consultative group so as to share and fine- tune the diagnosis and to seek solutions. It has been quickly established that action will have to be ambitious and sufficiently wide-ranging to take into account the crosscutting aspects of the labor market, which covers not only business competitiveness, but also education and social protection policies, as well as the inclusion of young people and minority groups. Furthermore, it has been suggested that social balance should be sought and maintained around the sometimes diverging interests of labor market participants (Government, workers, unemployed, businesses, etc.), in line with the consensual approach adopted in recent Governmental strategies for poverty reduction and accelerated growth. 11. This dialogue has allowed us to outline a reform agenda built around seven pillars and 33 recommendations, summarized below (see also Table 1 in Part IV for a presentation of the key reforms). This agenda aims at supporting the following objectives: (i) the development of a skilled labor force for competitive firms with adequate salaries ; (ii) the implementation of a vibrate private sector leading to the creation of jobs ; (iii) the well functioning of the labor market without discrimination and with good access to information ; (iv) the access to social protection for the maximum of workers, especially the most vulnerable groups; and (v) the support to unemployed and underemployed workers in priority among the youth who are the most exposed to these problems. 12. The proposed agenda must be apprehended in its whole. Each pillar is built not only to contribute individually to the above objectives but also to optimize their interactions. For xii example, the actions flexibizing labor regulations (pillar 6) should be implemented simultaneously with those aiming at strengthening the active employment programs (pillar 7) to provide a comprehensive social protection package to workers in Senegal. Similarly, the promotion of vocational training programs (pillar 1) should account for the needs of the private sector, notable SMEs which are the main source of demand for labor (pillar 4). This complementary also exists in the time horizon through which the proposed actions will become fully effective. Some actions will take time, such as the ones associated with the reforms of the education system (pillar 1), which need to be accompanied by short-term measures like the support to the Diaspora (pillar 2), the improvement of information flows on the financial and non-financial benefits received by public employees (pillar 3), and an improved coverage and efficiency of active employment programs for self-employed and unemployed (pillar 7). 13. The order of presentation of the pillars is not neutral. It first emphasizes the need to improve fundamentals such as access to education and training, information gathering and dissemination, and the establishment of a climate that is conducive to private-sector expansion (including small and medium-sized enterprises), and then presents the actions that the Government can take to address persistent shortcomings and failures in the labor market. 14. Lastly, it is worth underscoring that the proposed reforms agenda does not pretend to be exhaustive. It should be improved, notably in the areas linked to the precariousness of employment in rural areas and to the evaluation of vocational training programs recently launched in Senegal (e.g., FONDEF), justifying the series of new initiatives taken by the Government and the World Bank. The success of this report will be measured over time, and by the capacity of the main stakeholders to mobilize and implement the proposed actions in a concrete and decisive way. Pillar 1: Promoting labor skills through training 15. Improving the qualifications of workers is a promising policy not only for businesses (through increased productivity) but also for workers (through higher wages). Although the process is in motion, thanks to the efforts of the Senegalese authorities, especially with a view to achieving universal primary education, it is indispensable for the acceleration and improvement of general and technical training because the gap with industrialized and emerging countries is ever-increasing. 16. Our analysis shows that the Senegalese worker is still hesitating to invest in human capital because of the relatively low yield associated with secondary and technical education. This weakness explains why the majority of students drop out of school during adolescence, which prevents them from acquiring real training and from eventually reaching a higher level of education (perceived as being highly lucrative). 17. In these conditions, the objective then is to develop this missing link by emphasizing: (i) the strengthening of secondary and technical education; (ii) the reduction of school dropouts; and (iii) the reinforcement of continuous training through cooperation between the public sector and the private sector to account for the needs of the enterprises. Several concrete reform proposals are formulated in the main text, emphasizing notably the lessons from international experience. xiii Pillar 2: Developing links with the Diaspora to increase quality 18. The Senegalese Diaspora is both numerous and of good quality. There is no lack of examples of entrepreneurs and workers who have achieved exemplary careers, especially in major multinational companies and financial organizations. This Diaspora is already building relations with Senegal by sending money to their families back home and by financing part of the real estate boom in Dakar; but these relations need to be intensified. The brain drain, which is undeniable, must be transformed into a decisive advantage for the creation of quality jobs in Senegal. 19. Similar to countries like Taiwan, Scotland or Israel, Senegal must implement a proactive and dynamic policy. This dynamic approach must translate into the development of qualified worker networks such as the one put in place by Scotland, which plays an often decisive role in technology transfers by facilitating contacts with international corporations. It must also use incentive mechanisms such as subsidies to attract students into technical careers, which are sorely lacking in the country, as indicated by the companies that are already in place. Responding recently to a question on the scarcity of human resources in Africa, the President of Microsoft Africa declared that it is better to "mention the absence of places where a list of this type of human resources can be found. Yet, the establishment of such a database would not take more than six months and would not cost more than half a million dollars".3 Pillar 3: Optimizing labor allocation between the private and public sectors 20. With an equal size, the public sector uses ten times more skilled workers than the private sector in Dakar. This imbalance is further aggravated by the presence of the aid industry, which mobilizes some 4 000 to 5 000 additional people, as pointed out in the World Bank's latest Public Expenditure Review.4 21. Although this imbalance stems in part from market signals, such signals are likely to be distorted by many interferences that need to be eliminated in order to improve the allocation of workers on the labor market in Senegal. Indeed, public-sector salaries are not systematically higher than those of the private sector. In this sense, it becomes imperative to increase the transparency of the whole system of financial remuneration and non-financial benefits (stability, benefits, prestige, etc.). associated with a position in the public service. The recent financial audit of the payroll system has shown confusion in files as well as in the payment of salaries and (especially) other benefits within the Senegalese public sector. Because the challenge is two- fold--increasing public service productivity and reducing distortions in the allocation of workers to the private sector--it is recommended that the authorities carry out a detailed study of the public service (which would go further than the recruitment and remuneration policies recently adopted). 22. In order to reduce the crowding-out of private sector skilled workers by aid organizations, we recommend giving priority to budget supports, which are in line with the Government's administrative procedures and would reduce the number of overlapping projects management 3Interview of Cheick Modibo Diarra, President of Microsoft Africa, in Echos de la Banque mondiale, No. 7, March 2007. 4World Bank, Revue des dépenses publiques, Récent développementS et sources de financement, June 2006. xiv units. However, this measure presupposes faster improvement in the public administration's capacity to manage these funds with efficiency and transparency, especially in procurement. In this regard, several recommendations have been formulated in the latest public expenditure review conducted by the World Bank in June 2006. Pillar 4: Encouraging labor productivity through business development 23. Increasing the qualifications of Senegalese workers is indispensable, but not sufficient, if the environment in which they operate does not improve. Indeed, these workers will need businesses that expand and diversify, capable of developing or adapting new technologies and of investing in new machines. In this context, one must understand the complementarity between the employment action plan proposed here and the strategy for accelerated growth. The latter emphasizes private sector development through the improvement of the business environment, the execution of major infrastructure works that should be able to create jobs, and the development of clusters to encourage exports. 24. Several actions carried out within businesses would simultaneously have a significant and direct impact on labor productivity and, hence, on job creation. In this way, the opening of Senegalese businesses to the outside world should foster productivity gains as workers become more productive in the context of international competition, even if the sense of causality is not always easy to identify. Similarly, the complementarity between physical capital investment and labor productivity seems undeniable both for formal and informal businesses that have already reached a minimum productivity threshold. Over time, the increase in physical capital stocks, which seems to take place in several formal sectors of the Senegalese economy, should therefore create new jobs. 25. It is also important to foster the expansion of small and medium-sized enterprises, which are major engines of job creation in the formal sector through a mechanism of "destructive creation." Indeed, these businesses are the best place to create jobs but also to destroy jobs over time. This particularity is not specific to Senegal, but it is not fully exploited given the marginal weight of such businesses in formal employment, which does not exceed 20 percent in Dakar. Therefore, it is recommended to simplify the procedures regarding the creation and operation of these enterprises, and to facilitate their access to training mechanisms (proposed in the first pillar) and financial support (proposed in the last pillar). These recommendations are in line with those highlighted in the Accelerated Growth Strategy and in the 2005 Investment Climate Assessment produced by the World Bank. 26. Finally, Senegalese businesses have a decisive role to play in improving labor productivity through collaboration with the public sector in the areas of education and health. Their contribution to training is discussed under the first pillar, and their contribution to health is based on the finding that, on average, a Senegalese worker loses four working days each month because of illness (mainly malaria). Pillar 5: Developing networks and accessing information 27. Seamless operation of the labor market presupposes that information is accessible to all participants. Yet, this basic principle is far from being validated as it is virtually impossible to xv monitor salary developments for most workers or the adjustments that will occur on the labor market over time. These weaknesses are sources of information asymmetry, which is accentuated in the context of the decentralization of wage negotiations, initiated in 1998, allowing the emergence of rent-seeking situations benefiting certain categories of workers, such as expatriates in the formal sector or men in the informal sector. Such situations generate a loss of competitiveness in the Senegalese economy, through a non-proportional adjustment of salaries to productivity gains, as well as social inequities. 28. As a matter of fact, one of the objectives of this study is to improve the production of, and access to, information on the labor market through close collaboration with the National Statistics and Demographics Agency [Agence Nationale de la Statistique et de la Démographie] and the ministry responsible for employment. This momentum needs to be maintained, possibly by establishing an employment observatory and developing an information network with major stakeholders, including businesses and private employment agencies, which should spread out in the regions. The initiative to create a job directory [répertoire des métiers], which is based on collaboration between the Employment Directorate and employers' associations, is encouraging and needs to be accelerated. However, it should be noted that ultimate responsibility for this action on the production of, and seamless access to, information will rest with the Government, because this is a public good whose social benefits far exceed private interests. Pillar 6: Increasing the flexibility of labor regulations 29. The objective is to increase the protection of workers (which is inadequate) while improving the competitiveness of businesses. Companies' reluctance to pay the heavy social contributions is well-known, but it is obvious that many Senegalese workers also prefer to avoid them by conniving with their employers. This behavior is rational for people for whom each additional franc can help cross the poverty threshold, and when the benefits related to the existing social security systems seem uncertain and diffuse over time. 30. In order to maintain a consensus, our proposal is to implement gradual reforms using three main approaches. The first is to facilitate access to employment and the transition to formality, which remain the major concerns for the majority of Senegalese workers (and not the protection of those who already have a formal job), by completing the reforms slated in the Labor Code adopted in 1997. Concretely, it is imperative to adopt and implement laws and decisions fostering fixed-term and temporary employment, and to carry out the measures taken to simplify the use of overtime. Senegal must increase social mobility in the labor market by increasing the flexibility of alternative hiring procedures other than permanent contracts, similarly following the approach taken in many OECD countries. 31. The second approach, which complements the first, is that the Government must give itself the means to ensure workers' health and the safety in the workplace. The laws were adopted in December 2006, but now need to be implemented concretely. Unfortunately, the Employment Directorate (Direction du Travail) can only rely on 34 inspectors for the whole country; hence the urgent need for a recruitment and training effort. 32. The third approach is to ensure flexible access to social protection systems, which are currently too costly for most businesses and workers. The Government must continue to xvi implement social security reforms aimed at introducing a capitalization scheme. Simultaneously, based on the example of the simplification of micro- and small enterprise taxation, it is recommended that alternative approaches targeting workers operating in the informal sector be tested. The implementation of the pilot project on social insurance for truck drivers is strongly encouraged. In case of success, this project, which can count on the support of the International Labor Office and the World Bank, should be extended to agricultural sector workers, who can also benefit from insurance schemes (under study), thus protecting them against natural risks and disasters. Pillar 7: Streamlining and promoting employment programs 33. The major challenge for the Senegalese authorities is to assist workers seeking employment. In this regard, it is proposed that a network of coordinated and transparent support mechanisms be established with the Government's financial commitment. Prior to this, the Government must improve existing programs by establishing monitoring and evaluation systems, thus showing that it can help create jobs in an efficient manner. The success of AGETIP could serve as an example. 34. At a technical level, international experience has shown that integrated programs increase the chances of success; this is the case when financial aid to self-employment is buttressed by accompanying measures such as training and information. This lesson should motivate the authorities to harmonize several programs now pursuing the same objectives (for example, the national employment fund and the national youth fund--Fonds National de l'Emploi and Fonds National de la Jeunesse. Furthermore, such integration should foster economies of scale, which would entail the reduction of operating budgets and help the authorities in their effort to decentralize in favor of the regions. 35. International experience in developing countries has also shown that, to be efficient, these programs must focus on the most vulnerable categories of workers. This suggests that priority should be given to young people and women (especially in the informal sector) and to the populations established in rural areas, who are the most exposed to natural risks and the least prepared to find a job. However, Government programs providing job search services (as shown by the poor performance of the Employment Directorate's labor division) and the subsidization of skilled workers' salaries should be eliminated. 36. In conclusion, the action plan proposed in this study underscores the sense of urgency with which labor market issues must be addressed. This urgency has been understood by the Senegalese Government, which has included it as one of its objectives in poverty reduction and accelerated growth strategies. However, to be successful, these strategies must be accompanied by reforms aimed specifically at addressing the current shortcomings of the labor market and generating a virtuous circle of economic growth and poverty reduction. Ultimately, Senegal's success in achieving self-sustaining and equitable growth will be measured by its capacity to create good quality jobs. xvii INTRODUCTION 1. There is no doubt that poverty is not the exclusive domain of developing countries. Not long ago, The Washington Post reported that there were about 37 million poor people in the United States, almost as many as the combined population of Senegal, Burkina Faso, and Mali-- particularly shocking in one of the richest countries in the world5. However, the article reported that only one out of twenty families remained poor over a ten-year period. The other families were able to escape poverty by joining the labor market, obtaining better salaries, or obtaining medical care. This positive trend was particularly noticeable among recent immigrants who, even if they were among the most impoverished when they arrived, succeeded fairly quickly in working their way up. 2. Poverty in Senegal is present almost everywhere and, according to official statistics, more than half of the population does not have adequate financial resources to meet its basic needs. This is a well-known fact and there is no dearth of initiatives aimed at reducing the number of poor people. Concretely, the objective of the Senegalese Government's new strategy is to reduce by half (2000 levels) the proportion of the population living in poverty by 2015. 3. The problem of poverty in Senegal, as is the case almost everywhere in Africa, is that it seems, to a very large extent, to be perpetual. One is born poor, one dies poor. For a long time, hope resided in emigrating to Dakar, where there were jobs, notably in the public sector. This escape route no longer exists; the young now think only of going abroad. The images of despair on Spanish and Italian beaches demonstrate this headlong rush, regardless of the danger. 4. It is essential to (re) create hope in Senegal. This can be done through multiple factors such as access to basic infrastructure and to better health care. The sustainability of this process, as indicated by the household survey, will depend on the capacity to work. To escape poverty, one must be able to count on an income. This challenge is well understood by the Senegalese authorities, since it constitutes the first pillar of the PRSP (and underpins the accelerated growth strategy). A unified labor market analysis framework 5. The role played by the labor market in the search for accelerated, sustainable, and equitable growth has been focused on by several researchers, including international institutions, which offer a useful reference framework for Senegal (Annex 1 proposes a list of the definitions of the terminology used in this review). The starting point is the simple breakdown of per capita income into employment and labor productivity. This breakdown is deduced from the following identity of national accounts (Y/P = Y/L L/P), which indicates that per capita income is determined by the ratio of the reverse of the population's dependency ratio (L/P) to their productivity (Y/L). 5Bradley R. Schiller: Poverty's Changing Faces, Washington Post, Tuesday September 19, 2006. Figure 1: The Links Between Economic Growth and the Labor Market Per capita GDP Employment Labor Productivity (hours worked per (wage rate) inhabitant) Hours worked Employment rate Quality of labor Discrimination/ Other factors of Market failure production Potentially occupied Non-working population Qualifications/ Gender/Age Information Physical capital population Human capital (health) Unemployment Technology Population employed Business climate (Taxation infrastructure, etc). Self-employed/Live-in Wage earners caregiver 6. The above diagram shows that economic growth (measured by per capita income) is affected as much by employment level as by labor productivity, both of which are, in turn, dependent on a number of factors that will be focused on throughout this study. This diagram underscores that the level of employment depends not only on the average number of hours worked, but also on the rate of participation of the active population that can work, which is itself affected by the unemployment rate and the status of workers. The distinction between wage earners and self-employed/family aid worker make it possible to quantitatively determine the number of workers likely to operate in the formal sector in Senegal, i.e., who enjoy social protection in the form of a written contract and/or adherence to a social security system. 7. In principle, labor productivity is the main determinant of labor compensation given that in a perfect competition market, it is rational for workers' wages to be equal to their productivity. The performance of workers is based on their qualifications, motivation, and level of health. Worker productivity is also affected by factors outside the labor market, such as the level of technology and the equipment available, which affect the capacity to produce better and faster. 2 The business climate also plays a key role to the extent that labor demand from firms will depend on the latter's capacity to expand or to develop new activities. The business climate is also essential in companies' choices between different production factors, i.e., between capital input and labor, which are also substitutable. Finally, labor productivity also depends on the assignment of workers to occupations that are appropriate for them, which presupposes information fluidity and absence of discrimination. 8. In this study, we will examine in greater detail the links described in the above diagram; however, two aspects are worth underscoring from the outset. First, there is close interdependence between quantity (jobs) and price (salary) on the labor market, with both having a mutual impact on each other. For example, there is no point in creating jobs in non-competitive activities in the private sector because they offer no security in the medium term and may even accelerate bankruptcy in these activities. In contrast, a wage increase, no matter how well- intentioned, may endanger job security if it does not translate into productivity gains, because it reduces the competitiveness of firms. 9. Second, the labor market issue is often seen in terms of the opposing concerns of firms and workers, which stem, in part, from diverging motives. On the one hand, firms are interested in maximizing labor input, i.e., pay the least amount for the optimum yield. On the other hand, employees want to maximize their wages for the shortest work time possible. These two perspectives are not necessarily conflicting and should be harmonized to achieve sustained and harmonious growth. They should be mutually supportive to create a virtuous circle of economic development. Thus, business development is indispensable for job creation and, therefore, a growing private sector is complementary to job security. Similarly, if wages do not enable workers to escape poverty, the impact on aggregate demand and on company sales will be limited, which may, in turn, curtail economic growth. Furthermore, we will see that the differentiation between employees and employers is unclear in a country like Senegal, which is characterized by a high level of self-employment and family farms. Outline of study 10. The study comprises four parts. Part one analyzes the economic performance of Senegal with a view to understanding how an efficient labor market is an essential (but not sufficient) condition for achieving sustained and shared growth. This section focuses on the role of the labor market in (i) promoting a virtuous circle between economic growth and poverty reduction through equitable distribution of earned income (which is the main source of income for the Senegalese population, accounting for up to ¾ of total resources, according to the results of the first household survey ESAM-I); and (ii) creating a competitive and dynamic private sector, as the wage bill accounts for a predominant share of the costs of Senegalese companies. 11. The second part of the study focuses on the perspective of companies motivated by the objective of maximizing labor productivity to become as competitive as possible. To better understand this issue, we must first seek to understand the main characteristics of the labor market in Senegal and the adjustment mechanisms implemented during the last decade, notably by identifying the industries that created jobs. Using this dual approach, we review labor productivity in Senegal, at the sector and company levels. We address a number of issues, including differences between the informal and formal sectors, and the distribution of 3 productivity gains between workers and companies over time. We also examine sources of changes in productivity, especially if these stem from different levels of qualifications, discrimination (women, age, ethnic groups, etc.), or market deficiencies that prevent efficient allocation of workers (over-regulation, lack of information, etc.). The answers to these questions will help us identify a series of concrete actions aimed at improving labor productivity and creating jobs in dynamic sectors that are likely to adopt technological innovations and become competitive in international markets. 12. The third part of the study presents the perspective of workers or that of the search for job security. The objective is to examine in detail whether the labor market is capable, not only of offering jobs to the majority of the population, but also whether this job provides sufficient income and conditions that allow workers to live free of poverty. This is an important question in a country where more than one person in two is poor, i.e., not able to buy the minimum basket of subsistence goods and services. We will focus on those who voluntarily remain outside the labor market (given the high number of inactive people) and on those who are involuntarily excluded (unemployed). A close attention will also be given to those who are employed only on a temporary basis (such as seasonal workers) or a part-time basis (who are underemployed or obliged to hold several jobs). Because those groups are numerous in Senegal, the Government intervenes through a legal framework, institutions, and a variety of active employment that will be reviewed and compared with international best practices. 13. The fourth and final part will summarize lessons learned from the previous parts. We will not limit ourselves to proposing a single solution, but rather, economic policy options, for the short and medium terms, which will vary according to the objectives sought by the authorities. These options are discussed in detail in light of international experience and of the characteristics of the Senegalese economy. Synergies with the Government and with other partners 14. It is important to underscore that the labor market problem is at the heart of the Government's concerns. This study is therefore perfectly in line with the objectives identified in the new PRSP-II prepared by the authorities for the 2006-10 period and the Accelerated Growth Strategy (AGS), which emphasizes job creation. For this reason, the authorities created a working group, which collaborated closely with the World Bank team. Through sustained consultations, a synergy also developed with other development partners and with key stakeholders such as employer and employee associations. 15. Given the central role that the labor market plays in the development of a country like Senegal, several World Bank units became involved, resulting in a multisector effort. This effort is reflected in the composition of the team, which includes members from the macro-economic, private sector development, and human resource development sectors. It was then enriched by contributions from several regional or global initiatives. This explains how the study was able to benefit from the project to improve labor market statistics, with Senegal as a pilot country; this helped harmonize the quantitative approach and strengthen our collaboration with the National Statistics and Demographic Agency. The study also benefited from the World Bank Institute's diagnosis on the development of the knowledge-driven economy in Senegal. Finally, thanks to 4 the participation of the IFC, and the FIAS in particular, it was possible to integrate the private sector dimension, especially foreign investors, in the analysis. 16. Finally, it is useful to note that information on the labor market in Senegal exists, but it is very incomplete. In collaboration with the National Statistics Agency, we used six primary sources of data: (i) national accounts; (ii) population censuses; (iii) ESAM-I and II household surveys; (iv) 1-2-3 Survey on employment and the informal sector in Dakar; (v) survey of formal sector companies, conducted in parallel with the study on the investment climate; and (vi) the Centre Unique de Collecte d'Information's (CUCI) database on over 3,000 companies. More information on these sources can be found in Annex 2 of this study. 5 PART I: THE ROLE OF THE LABOR MARKET 1. Beyond maintaining macroeconomic balance, the main challenge facing Senegal is to perpetuate its economic performance by diversifying its sources of growth and sharing its benefits. The labor market plays a key role given its capacity to create income and its impact on the competitiveness of companies. 2. Senegal's economic performance in recent years has been encouraging, with an average growth rate which stood at around 5 percent per year, even though the growth rate in 2006 was 2.1 percent. These results are attributable to the surge in foreign capital inflows, which increased fivefold between 1995 and 2005, and to the sharp increase in public investments. In contrast, the role of the private sector was rather limited as neither exports, nor private investments had fully recovered. In light of international experience, this shortcoming is likely to jeopardize the sustainability of economic growth in Senegal and to increase its vulnerability to external shocks. 3. Aware of this risk, the Senegalese authorities, with support from development partners, including the World Bank, put in place the new poverty reduction strategy (PRSP-II) which focuses on four strategic pillars: (i) creation of wealth; (ii) development of basic social services; (iii) protection of vulnerable groups and disaster management; and (iv) good governance and promotion of participatory processes. 4. The challenge in this first section is to demonstrate that the labor market should be the main concern of the Senegalese authorities. We opted to emphasize two channels. The first underscores the need to create jobs, notably for the most underprivileged populations. Without any earned income, we argue that a significant portion of the population will remain in a state of poverty, incapable of investing in physical or human capital, keeping the Senegalese economy on a sub-optimal growth path over time. In other words, the Senegalese economy will remain in the poverty trap. 5. The second channel focuses on the low labor productivity in Senegal. Often neglected by policy decision makers, we highlight that the unit labor cost is one of the key determinants for the lack of competitiveness and of export expansion of the Senegalese economy. Indeed, the wage bill represents a significant portion of the costs of Senegalese companies--which are 44 times more labor-intensive than in the United States. Furthermore, it seems that nominal wages have grown more rapidly than labor productivity, in particular in the formal sector of the economy. This initial evaluation will be deepened in the following chapters. 6 1. THE ECONOMIC PERFORMANCE OF SENEGAL 1.1 The objective of this chapter is to underscore that during the last decade the performance of the Senegalese economy was encouraging but remained fragile. Such an assessment will be demonstrated by analyzing aggregate demand and supply, which will allow us to highlight the role that the labor market can play in establishing self-sustaining and equitable growth over time. A. AN INITIAL EVALUATION THAT IS ENCOURAGING... BUT FRAGILE 1.2 Since the 1994 devaluation, Figure 1.1: Economic Growth (1995-2005) the performance of the Senegalese economy has been satisfactory, both 10.0 in comparison with other countries in the sub region and from a historical 8.0 perspective (see Figure 1.1). The real 6.0 growth rate almost reached 5 percent y = 0.0968x + 1.9615 4.0 on average and the fiscal and external balances were maintained 2.0 during the 1995-2006 period. This 0.0 macroeconomic performance is well 81 85 91 93 95 97 99 03 19 1983 19 1987 1989 19 19 19 19 19 2001 20 2005 -2.0 known and there is no need to dwell on it (Annex 3 presents a summary -4.0 of the key macroeconomic results -6.0 during the 2000-2006 period). 6 Senegal Afrique subsaharienne Linear (Senegal) Source: World Bank and ANSD 1.3 Our objective in this section is rather to underscore that the economic performance of Senegal has remained fragile over time. This is illustrated by the dramatic and sudden declines in economic growth that occurred in 2002 and 2006--as a result of external shocks to the economy--worsened during the last year by the crisis in the biggest local industry (ICS). From a regional perspective, the Senegalese economy seems more volatile than that of countries like Ghana or Tanzania (Figure 1.2). 1.4 Of course, the volatility of economic growth in Senegal does not match the one observed in several African countries, but the latter have experienced the agonies of much greater political instability and greater dependence on natural resources. The vulnerability of the Senegalese economy stems primarily from its dependence on fiscal policy and on the foreign capital inflows as well as on its strong concentration in a limited number of economic sectors, as we will demonstrate through the analysis of overall demand and supply below. 6See in particular, the latest IMF reports (notably Article IV report of January 2007) and the Public Expenditure Review prepared by the World Bank in September 2006. 7 B. ANALYSIS OF ECONOMIC GROWTH 1.5 The accounting breakdown of economic growth confirms that the latter occurred on a relatively narrow base (Table 1.1). First, Figure 1.2: Volatility of Senegalese growth from a it seems highly dependent on the regional perspective significant inflow of foreign capital, which rose from an annual amount of 16 about CFAF 200 billion over the 1995- 99 period to more than CFAF 500 billion 14 between 2003 and 2005. 12 en 10 1.6 Second, fiscal policy seems to yeno have played a key role, since the m 8 e/c Government's budget almost tripled anira 6 V during the last decade. This expansion is 4 mostly obvious in the investment budget, which grew 2.7 times faster than 2 the GDP in constant value over the 0 ia ai bi ali bia ep. 1995-2003 period. hana eroon Benin ana uinea erde Faso M igeria bique iger oire N abon G am V ganda am aziland Africa Kenya a N G d'vI n auritius w Africa N G Tanzania Senegal auritan ni U bia,The Zam C Sw M ahara Bots South ape M am ozam ongo,R ote C Burk G M C C 1.7 Finally, this accounting profile Sub-S underlines the relatively limited role Source: World Bank and ANSD played by the private sector. On the one hand, personal consumption expenditures grew at a slower pace than the economy, indicating a limited impact on overall demand and, indirectly, on company sales in Senegal. On the other hand, neither exports, nor private investments really took off during this period. With respect to private investments, this observation will be partially qualified in the second part of this study by noting a differential behavior between the formal sector, where companies rate of investment has been on a rising trend during the past decade, and the informal sector, which continues to be characterized by a physical capital investment rate that is practically negligible. 7 7 Although private investment grew faster than the GDP until 2000, it slowed down sharply during the last 5 years, growing only 3.9% per year, a rate that is lower than the economic growth rate. 8 Table 1.1: Sources of growth in Senegal, 1995-2003 Contribution to Annual growth rate growth (in %) (in %) GDP 100.0 4.0 Taxes 15.9 5.3 Personal consumption 74.1 3.9 expenditures Public consumption 8.8 2.7 Public investment (gross) 14.4 11.2 Private investment (gross) 21.7 5.7 Change in inventory 14.1 -22.9 Exports 6.6 0.9 Imports -39.6 4.5 Memorandum: Change in reserves -13.0 Capital inflow 50.2 Source: National Accounts and World Bank calculations 1.8 The breakdown of overall supply also illustrates the fragility of the economic growth in Senegal. This exercise highlights that about five sectors (of forty) accounted for almost half of economic growth over the 1995- Figure 1.3: Economic growth and exports, 20048 period. In descending order 1995-2004 of importance, these sectors were trade (which accounted for 18 percent of GDP growth, excluding 16% Produits chimiques Government), post and 14% Petrole telecommunications (9 percent), 12% agriculture (8 percent), snoti Tourisme 10% construction (7 percent), and real estate activities (6 percent). taropxel 8% ta to 6% Communications 1.9 These results underscore 4% the role played by construction, snadtra P 2% fueled in part by major public Agriculture Commerce Construction works and construction of 0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% residences by Senegalese living Contribution a la croissance abroad, and by informal sector expansion through trade. The Source: World Bank and ANSD contribution of the telecommunications sector reflects, above all, the performance of SONATEL and the recent establishment of call centers, while that of agriculture is attributable primarily to the weight of this sector in the Senegalese economy rather than to its strong performance. It is interesting to note that all these sectors, with the notable exception of telecommunications, are labor intensive. This dependency reflects the lack of natural resources and confirms that the future of the Senegalese economy will be largely driven by its capacity to create high value 8More than 2/3 of economic growth is attributable to growth in ten sectors. 9 added jobs that will improve the competitiveness of the economy, in particular on international markets. 1.10 Not only was growth in Senegal relatively undiversified around a limited number of economic sectors; it was supported by sectors that are not or are marginally export-oriented sectors. The five sectors that contributed the most to economic growth during the past ten years accounted for less than 1 percent of the export growth observed during the period. The low contribution of export sectors to economic growth in Senegal is confirmed in Figure 1.4 below, which shows a strong negative correlation between sector contribution to GDP growth and the share of these sectors in total exports. 1.11 International experience shows that, sooner or later, the limited size of the local market in Senegal--because of the small number of inhabitants and, above all, their weak purchasing power--will become a constraint Figure 1.4: Export-based growth...except in Senegal to sustained development. The lack of expansion in Senegalese 3.5 exports contrasts with the experience of developing 3.0 countries which have successfully ) 2.5 (% transitioned towards economic BI P)/ 2.0 emergence. That is how the tigers (% and dragons of Asia, Tunisia, snoit 1.5 Mauritius, and Chile all saw their rtaopxe1.0 exports grow faster than their national incomes in recent 0.5 decades (for example, up to three 0.0 times faster for South Korea, as Senegal Maurice Malaisie Chili Ouganda Coree indicated in Figure 1.4). Source: World Bank and ANSD 1.12 The main diagnosis that emerges from our succinct analysis of overall demand and supply is the fragile nature of economic growth in Senegal, which is attributable to two simultaneous phenomena: (i) the marginal role of domestic consumption and private investment growth in the expansion of overall demand, and (ii) the strong concentration of growth around a limited number of economic sectors which, moreover, are low export sectors. 10 2. GROWTH AND POVERTY IN LIGHT OF THE LABOR MARKET 2.1 The recent expansion of the Senegalese economy is characterized by its dependency on public investments and its concentration on a limited number of activities. Yet, recent economic literature shows that economic growth should be participatory to ensure high rates over time. If it is well understood that economic growth is indispensable for poverty reduction, it is more and more accepted that poverty reduction is, in turn, necessary to create a sustained increase in overall growth.9 We will first examine the magnitude of this dual causality relationship in Senegal before concluding on the central role played by the labor market in the link between poverty and growth. A. THE DUAL CAUSALITY BETWEEN GROWTH AND POVERTY 2.2 In spite of progress achieved during the last decade, Senegal remains one of the least developed countries, with an average per capita income of about US$710 in 200510 and more than half of the population without sufficient financial resources to buy a minimum subsistence basket. 2.3 There are at least three types of arguments justifying the prevalence of poverty as a constraint to economic growth in a country like Senegal. The first focuses on weak demand in the case of generalized poverty. Indeed, the poor spend less than their potential demand because of cash constraints, thus limiting the impact on final consumption and on overall demand. This effect partially explains the relatively weak rate of growth in personal consumption expenditures, which was lower than that of GDP growth in Senegal. This impact is the most visible among the poorest segments of the population--those classified as being in a condition of extreme poverty, about 10 percent of the total population. 2.4 The second argument focuses on supply, notably factors of production: capital and labor. Indeed, the capacity of the poor to save and, thus, to make productive investments (see Sachs and al. [2004]) 11 is weak and is not compensated for by access to financial credit since they are the first ones to be excluded from financial markets for obvious reasons related to risk and lack of guarantees (moral hazard). Similarly, the poor generally have fewer opportunities to invest in human capital (considered by many economists as the main explanatory factor for long-term economic growth), limiting their capacity to adapt and to use new technologies Kremer [1993])12. In addition to the cash constraints, the poor are more vulnerable to risks that oblige them to abandon their studies (see Perry et al. [2006]). These factors explain why qualified workers in Senegal make up less than 5 percent of the total labor force and why the economy remains on a sub-optimal growth path over time.13 9For an overview, see Perry et al. Poverty Reduction and Growth: Virtuous and Vicious Circles, 2006. 10As measured by the World Bank's Atlas methodology. 11J. Sachs et al, Ending Africa's Poverty Trap, Brooking Papers on Economic Activity, I, 2004. 12M. Kremer, The O-Ring Theory of Economic Development, Quarterly Journal of Economics, 1993. 13For a macro-economic model that takes into account the effects of poverty on the savings rate and on investments in physical and human capital, see Galor et Zeira, Income Distribution and Macroeconomics, Review of Economic Studies, 1993. 2.5 Finally, a third argument focuses on the political economy of poverty. If a substantial part of the population remains in a permanent situation of poverty, without enjoying the benefits of economic growth, it is likely that they will stop supporting the economic reforms that generated growth. 14 2.6 These explanations help understand why the extent and permanence of poverty in Senegal prevent the economy from taking off and attaining growth rates that would propel it towards emergence. To illustrate the magnitude of this phenomenon, estimates obtained by Lopez and Serven [2005]15 on a large sample of countries over the 1960-2000 period suggest that the annual economic growth rate in Senegal could have been two points higher (as a trend) than that observed in 2003-2005 if its level of poverty had been that of Ghana or Uganda. With a poverty rate equal to that of Vietnam, it would have been possible to attain 10 percent. Of course, these simulations should be interpreted with caution, but they illustrate the enormity of the harmful effects of poverty on economic growth in Senegal. B. EMERGENCE OF A VIRTUOUS CIRCLE THROUGH THE LABOR MARKET 2.7 To break the circle of poor growth and poverty, it is possible to advance in two simultaneous directions within which the labor market plays a key role. 2.8 The first direction would consist in stimulating faster economic growth in order to accelerate poverty reduction, which, in turn, would have a positive impact on economic growth. Since, at the current rate of 5 percent, it would take practically 30 years to reduce the poverty level by half; the Senegalese authorities have focused on how to significantly raise the economic growth rate. In this perspective, they aim at using an effective fiscal policy. This interest justified the last Public Expenditure Review prepared by the World Bank, which focused on optimizing the contribution of external financial flows to the effectiveness of fiscal policy in Senegal. 16 2.9 At the same time, private sector expansion is seen as indispensable for sustainable growth, as demonstrated in the accelerated growth strategy, which is also the first pillar of the new poverty reduction strategy prepared by the Senegalese Government. The mixed behavior of private investment and of exports during the last decade, notably over the period after 2000, stems in part from the lack of competitiveness of Senegalese companies. Although this lack of competitiveness is caused by multiple factors, the role of the labor market cannot be overlooked. 2.10 The central role of the labor factor is reflected in the weight of the wage bill within the production function of most Senegalese companies, representing up to one quarter of total costs or half of the added value of companies operating in strategic sectors such as textiles as well as computer and communication services. This weight is confirmed by the recent MIGA study on a 14See World Development Report, Equity and Development, 2006, for an eloquent reminder of the relation between inequality and growth. 15H. Lopez and L. Serven, Too Poor to grow, World Bank 2005. Their simulations underestimate the total effect of poverty on growth as they do not take into account the indirect effect of poverty on education and on access to infrastructure. 16Public Expenditures Review, Sénégal: Développements récents et les sources de financement du Budget de l'Etat, World Bank, June 2006. 12 sample of foreign businesses established in Senegal, which concludes that labor cost and quality have been five times more decisive than access to infrastructure in their decision to invest in the country.17 2.11 Although we will revisit this concept in greater detail in Part II of this study, it is useful to demonstrate here that the loss of competitiveness of Senegalese companies is closely linked to the increase in their unit labor cost (ULC). To recap, the ULC measures the total cost of labor per physical unit of output and helps bring out the respective significance of labor productivity gains (Qi/Li) and wages (wi/pi) on business competitiveness. For activity sector i, it is measured by the ratio of labor remunerations to the value added, i.e.: (1) ULCi= (wiLi/piQi) = (wi/pi)/(Qi/Li) with w the nominal labor wages, L the quantity of labor, Q a physical measure of production, and p the deflator of the value added. 2.12 Not only do the results indicate that the ULC increased by 2.5 percent per year for the entire Senegalese economy during the 1995-2004 period, but this increase was more pronounced in the five strategic sectors that are the focus of the accelerated growth strategy (Table 2.1). It seems that productivity gains were marginal, except for a few sectors such as telecommunications and new technologies. In addition, the adjustment of real wages seems to have systematically surpassed productivity gains. These overall results mask time- and business- related variations that will be examined in greater detail later in this study, but they suffice to justify the pivotal role of labor in the search for competitiveness and accelerated economic growth in Senegal. Table 2.1: Loss in competitiveness of Senegalese companies 1995-2004 Sector Annual change in Annual growth Annual growth rate unit labor cost rate of wages of labor productivity Agriculture/Agribusiness 0.6 0.6 0.0 Fisheries 7.5 6.7 -0.8 Textiles 3.8 4.1 0.2 Tourism 6.9 9.1 12.1 Electronics/ communications 5.6 18.4 13.3 Total 8.2 9.6 1.4 Other 1.3 1.5 0.2 TOTAL 2.5 3.9 1.4 Source: National accounting. 17 Source: MIGA Benchmarking exercise, 2005. For example, a static analysis of the cost structure of a typical firm operating in the textile or the electronics/communications sectors shows that a 10% salary increase should be compensated by a decrease in their utilities (water and energy) expenditures by 36% or 79% in each of these sectors to keep their total costs constant. These results run counter to the perception stemming from surveys conducted recently among Senegalese firms, which have shown that labor market-related constraints were not part of their major concerns, even though the lack of labor force qualifications and the rigidity of labor regulations were serious issues for about 20% of them (the rate was higher for big, foreign, and export-oriented firms). Nevertheless, we believe that these results stemming from surveys, though indicative, should be interpreted with caution because business people tend to focus their concerns on the short term and on factors beyond their control, such as taxes and interest rates on credit. 13 2.13 The second direction on which the Senegalese authorities should focus to engender a virtuous circle between economic growth and poverty reduction is to act in a proactive and affirmative way on income distribution in favor of the poorest. As we argued above, the prevalence of poverty forces the Senegalese economy to remain on a sub-optimal growth path. In addition, inequalities in the distribution of income contribute to the weakening of the link between economic growth and poverty reduction, which is weaker in Senegal than in Burkina Faso and in Vietnam. 18 Today, a reduction of inequalities (measured by a 1 percent drop in the Gini index) could entail a 0.9 percent poverty reduction, which itself could be positively reflected on the economic growth rate in Senegal. 2.14 The labor market plays a major role in the implementation of this virtuous circle between economic growth, poverty, and reduction of inequalities.19 Poverty reduction supposes access to income, which, for the majority of the population, especially the poorest, is equivalent to labor compensation. Moreover, Senegalese households confirm in the ESAM-II survey that labor income is the primary factor that will help lift them out of poverty (and not aid or access to a social security system). Unequal distribution of wealth is often perpetuated by wage gaps, which can reach a factor of three between the median wage in the formal and informal sectors or a factor of two between men and women in the informal sector. These gaps should be addressed by decision makers, as we will discuss in the next sections of this study. 2.15 The role of the labor market as described above should even be strengthened in coming years as a result of the demographic pressure in Senegal. At present, almost half of the Senegalese population is under 20; this means that each year about 100,000 job seekers will enter the labor market, causing tensions that will have to be managed by the authorities. These tensions are already evident in the high level of unemployment and underemployment among the young--we will examine this in greater detail in Chapter 9 of this study--and by migration towards industrialized countries. Access to a good quality and well paid job is essential to maintain social and political stability in Senegal and thus propel the country towards emergence. 18Poverty elasticity with regard to a change in per capita income seems relatively low in Senegal (-0.9), lower than reported in Vietnam (-1.4), in Burkina Faso (-2.0), but about the same as in Uganda. This result is largely explained by the relatively high degree of inequity in the distribution of income in Senegal (0.37), which has even increased in the last decade. These comparisons are based on data from the World Bank Report entitled Pro-Poor Growth in 1990s, 2005. 19For a similar view on the fundamental role of the labor market, see G. Fields, Labor Markets in Pro-Poor- Growth: An Analysis of Fourteen Country Paper, background note for OPPG Labor market paper, 2005. 14 3. CONCLUSION 3.1 This first part indicated that sustained and equitable growth will depend on the capacity of the Senegalese authorities to improve the effectiveness of fiscal policy and to encourage private sector development through the creation of conditions conducive to its expansion (transparent business climate, infrastructure, etc). These two challenges had already been highlighted by the authorities in their Poverty Reduction and Accelerated Growth strategies. There is a convergence of opinions which justifies the alignment of the World Bank's country program for the coming years with these two Government strategies. 3.2 However, it is difficult to argue that the Government's ambitious agenda, in terms of economic growth and poverty reduction, can be achieved without an efficient labor market. First, we have demonstrated that private sector-led economic growth will depend on the competitiveness of Senegalese businesses, which, in turn, will be closely linked to the reduction of unit labor costs by the emergence of productivity gains. Most of the strategic sectors within the Senegalese economy are highly labor intensive, such as the communications and high technology, textile, and agricultural sectors. Second, a significant reduction of poverty will require the creation of a sufficient number of quality jobs to absorb the growing supply of young workers on the labor market and to allow them to live decently. Without a decent job, young workers will be tempted to take more radical measures to escape poverty at the risk of creating social divisions and thus preventing the emergence of a virtuous circle of development, which should propel the Senegalese economy towards accelerated economic growth in the coming years. 3.3 This dual lesson has not gone unnoticed by the Senegalese authorities. It should now be deepened and efforts made to understand the motivations of businesses and workers on the labor market to subsequently identify a reform agenda for the short and long terms, which would allow this market to play its role as an instrument of economic growth and poverty reduction in Senegal. PART II: THE LABOR MARKET FROM THE BUSINESS PERSPECTIVE 1. In an economy such as Senegal's, where, in principle, there is a surplus of labor owing to the high demographic levels (it is estimated that more than 100,000 young people enter the labor market each year), it is reasonable to argue that jobs are mostly constrained by demand from employers and from the public administration. The absorption of the labor force will therefore be mostly determined by the possibilities for private and public sector expansion over time, and this, in turn, is highly dependent on the competitiveness of companies and, thus, on labor productivity and quality. 2. This deliberately simplistic logic justifies our approach in this second part that will seek to determine the economic factors and reforms for maximizing the contribution of the labor factor and thus allowing private companies to become the real engine of job creation and economic growth in Senegal. We will follow a three-phase process, that can be summarized by the following set of questions: · What are the characteristics of the labor market in Senegal? Who works ? In what sector; in what type of company; and under what conditions ? Are there major differences related to workers (gender, age, qualifications, etc.)? What is the degree of formality in employment? · What are the adjustment mechanisms for the labor market over time? What sectors and businesses have created jobs ? What factors influenced the decision of companies to hire workers? · What is labor productivity within businesses (formal and informal) and its evolution over time? What is the relationship between productivity and wages? How has the unit labor cost evolved and what has been its impact on the competitiveness of Senegalese businesses? 3. This sequential approach will allow us to understand the labor market, both in a static and a dynamic mode. We will show that labor supply has been mostly absorbed by the informal sector, including in urban areas, while formal employment has practically stagnated during the last ten years. This trend is problematic because we will see that informal companies are three to ten times less productive than those that operate in the formal sector, underscoring their incapacity to propel the Senegalese economy into accelerated growth. The weak growth in employment in the formal sector stems from two simultaneous phenomena: (i) the moderate gains in labor productivity; and (ii) the generous adjustments in wages, which exceed productivity gains. These two phenomena have penalized the competitiveness of Senegalese companies and thus reduced their demand for labor. The challenge will be to identify the constraints underpinning these phenomena in order to derive recommendations. The objectives will be to increase labor productivity, which remains largely insufficient both in the informal and formal sectors of the Senegalese economy, and to rationalize wage adjustment mechanisms. 16 4. THE CURRENT EMPLOYMENT SITUATION 4.1 The objective of this chapter is to describe the current employment situation in Senegal.20 According to the Third General Population and Household Census [Recensement Général de Population et de l'Habitat--RGPH III] conducted in 2002, the labor force (population of potential working age, aged 15 to 64 years) stands at about 5.3 million inhabitants and those that declare they are labor force participants is around 3.1 million, or 53.4 percent and 32 percent of the total population, respectively. While the first percentage is close to those observed in the sub- region21, the second suggests that an unusual number of people are not in the labor force. We will revisit this issue in the third part of this study when we examine the reasons behind this inactivity rate by focusing on the sources of statistics (which are in part controversial with respect to housewives) and on segments of the population that report they were not in the labor force, notably by trying to distinguish between those who are deliberately inactive (such as students) and those who are so unwillingly (those who are discouraged with searching for work). 4.2 Meanwhile, it is useful to identify the activities of people in the 15-64 age group now working in Senegal. From the outset, it appears that labor characteristics vary widely according to place of residence (rural or urban), as shown in Figure 4.1 (Annex 4 presents a detailed description of labor characteristics). The next section focuses on their major features while the next chapter will address the issue of whether these two markets tend to converge or diverge over time. A. CHARACTERISTICS OF LABOR IN RURAL AREAS 4.3 Employment in rural areas accounts for about 59 percent of the employed in Senegal according to the general population census conducted in 2002. Although this proportion seems high, a priori, it needs to be qualified by indicating that it has declined over time because of the high level of rural exodus and that, at present, it is (consequently) significantly lower than the rate observed in other African countries, such as in Mali, Burkina Faso, Ethiopia, or Tanzania. The World Bank estimates that labor in rural areas accounts for close to 70 percent of employment in Sub-Saharan Africa. 20In agreement with the National Statistical Agency, the description is based on the results of population censuses that offer the largest and most stable coverage over time. This source has been complemented, as necessary, by household surveys (ESAM-I et II) and by the 1-2-3 Survey in Dakar, which provide more specific information on employment. For more details, see Box 2.1 and Annex 2. 21For a definition of these concepts, see Annex 1. 17 Figure 4.1: Summary of the labor market Arbres declassificationdescendantehiérarchiquedelaforcedetravail Population Population Population totale urbaine rurale (RGPH2002) (RGPH2002) (RGPH2002) Effectif: Effectif: Effectif: 9.855 5.847 4.008 (100%) (100%) (100%) Enâge de Pas enâge de Enâge de Pas enâge de Enâge de Pas enâge de travailler travailler travailler travailler travailler travailler (RGPH2002, Même source (RGPH2002, même source (RGPH2002, même source 10 ans ou +) 46.6% 10 ans ou +) 40.3% 10 ans ou +) 50.9% 53.4% 59.7% 49.1% Actifs Inactifs Actifs Inactifs Actifs Inactifs (RGPH RGPH2002) (RGPH2002) (RGPH2002) (ESAMII (ESAMII 2002) 39.6% 58.8% 41.2% 2002) 2002) 60.4% 61.8% 38.2% Chômeurs Occupés Chômeurs Occupés Chômeurs Occupés (RGPH) (RGPH) (RGPH) (RGPH) (RGPH) (RGPH) 13% 87% 17.1% 82.9% 9.8% 80.2% Indépendants Dépendants Indépendants Dépendants Indépendants Dépendants (RGPH) (RGPH) (RGPH) (RGPH) (RGPH) (RGPH) 56% 44% 50.1% 49.9% 60.3% 39.7% Nonsalariés Salariés Nonsalariés Salariés Nonsalariés Salariés (RGPH) (RGPH) (RGPH) (RGPH) (RGPH) (RGPH) 62.4% 37.6% 40% 60% 83.3% 16.7% Non Permanents Non Permanents Non Permanents permanents (ESAMII) permanents (ESAMII) permanents (ESAMII) (ESAMII) 72.9% (ESAMII) 84% (ESAMII) 36.2% 27.1% 16% 63.8% Permanents Permanents Permanents Permanents Permanents Permanents temps plein temps partiel temps plein temps partiel temps plein temps partiel (ESAMII) (ESAMII) (ESAMII) (ESAMII) (ESAMII) (ESAMII) 79.3% 20.7% 80.3% 19.7.4% 71.3% 28.7% Ensemble Urbain Rural 18 4.4 The main characteristics of employment in rural areas in Senegal, which emerge in the household survey (ESAM-II), are as follows: · People work to a later age than in cities. This is mostly apparent among the young and the elderly, who start working at a younger age and continue working much longer, whereas the participation rates are about equal in the other age groups. About one child out of two has already joined the labor market before age fifteen and about nine out of ten elderly people above age sixty-four continue to work. Inactivity is a luxury that rural inhabitants cannot afford. · There is little diversification in employment, which is concentrated in the primary sector. In 2002, about eight out of ten workers reported that their main occupation was in agriculture, livestock farming, or forestry operations. In addition, almost the entire labor force is concentrated in family type operations or sole proprietorships, namely in very small businesses. · Employment conditions are extremely insecure. Although labor force participation rates are on average higher in rural areas, the majority of workers are employed on a seasonal basis (six out of ten) and only one quarter of them report holding a permanent full-time job. Finally, informality is almost universal since practically all workers do not have formal social security coverage. The level of education of those employed is very low since more than seven persons out of ten (aged 15 and above) in rural areas, of which nine women out of ten22 do not yet know how to read. 4.5 Furthermore, the results of the household survey highlight that the labor market in rural areas appears relatively homogenous. Almost everybody is in the same situation; whether it is men or women, there is hardly any visible difference with respect to the activity (related to the primary sector), insecurity (a large majority have no permanent job in a sole proprietorship or family business), and lack of qualifications (they are uneducated laborers). There are also no differences across age groups. 4.6 The precarious nature of rural employment in Senegal is hardly different from that prevailing in other countries in the sub-region. It underscores the difficult conditions facing rural populations in Africa, who must engage in activities with an uncertain future to feed themselves. This also explains why the labor force participation rates are higher than in urban areas, since people simply do not have the choice and must count on earned income to survive (quite often and, more and more, supplemented by remittances, notably from emigrants). 4.7 However, the majority of workers in rural areas are only partially active since they are employed only on a temporary or seasonal basis. This explains why, depending on the date the survey is conducted, significant variations can be observed in the labor force participation rates in rural areas. There were close to one million additional non-labor force participants between the first and the third segments of the household survey, a 1.6 to 2.5 million increase in only eight months, which was primarily attributable to a rise in the number of people that stay at home (for men as well as for women). The vulnerability of this labor force, partially unemployed and without much future prospects, is exacerbated by their poor qualifications which contribute to 22For example, barely one out of ten women in Dakar state that they can read. 19 increase their exposure to the weather shocks and natural disasters that are recurrent in Sahelian countries. 4.8 For all these reasons, as we will examine in greater detail in the next chapter, the rural population remains attracted by the prospect of jobs, in particular, better jobs, by moving to cities, in particular Dakar. One of the ways of reducing vulnerability and increasing the employment rate is to diversify employment in rural areas. Beyond primary sector activities, which may include products other than groundnuts (as is already being experimented in the SCA); the idea is to develop jobs that are not associated with the primary sector, such as trade, transportation, and other service activities. The World Bank has launched a parallel study to this CEM which seeks to better understand the role played by these jobs, which are still marginal as a source of income for the rural population in Senegal.23 The household survey estimates that in the groundnut basin, income derived from handicrafts, transportation, and trade activities do not account for more than 20 percent of the total income of households, whose primary source of revenues remains activities related to the primary sector (60 percent) and remittances from Dakar and from overseas (20 percent).24 The challenge is considerable, for it involves providing better protection of vulnerable groups in rural areas to reduce migratory flows which are creating imbalances in territorial administration in Senegal that are more and more difficult to manage. In fact, today, close to one quarter of the population is concentrated in the Dakar agglomeration which makes up less than 0.3 percent of the territory. B. CHARACTERISTICS OF EMPLOYMENT IN URBAN AREAS 4.9 The characteristics of employment in urban areas are different from those in rural areas. The differences are even more pronounced between Dakar and other towns. In rural areas, employment is homogenous in the sense that it is characterized by almost universal informality and is concentrated around the primary sector. In urban areas, notably in Dakar, there is greater diversification, including services and trade, partial formality, and lower labor market participation rates. The special feature of Senegal in comparison with other countries in the sub- region does not lie in the existence of these two markets but rather in their relatively equal size. 4.10 As opposed to rural areas where almost all jobs are in the primary sector, the main occupation in urban areas is trade, which accounts for about one third of jobs (up to two thirds for women). This is followed by other trade-related services, agriculture (and livestock farming), transportation and communications, and public works and civil engineering, in descending order of importance. All these sectors account for about two thirds of jobs in urban areas. It is interesting to note that there does not seem to be any known difference between the structure of jobs in Dakar and in other towns in Senegal, with the exception of the weight of the public administration, which accounts for about 8 percent of total jobs in the capital, whereas it is negligible in other towns in Senegal (see Box 4.1). 23The findings of this study should be available during the second half of 2007. 24The weight of incomes derived from activities outside the primary sector and transfers seems more significant in households led by women. For these households, such incomes represent 38% of total income, compared with 16% for households led by men. 20 Box 4.1: Characteristics of employment in the public administration in Dakar The public sector, composed of the public administration and public businesses, employs about 8% of workers in Dakar, slightly lower than the 8.4% average for all towns in WAEMU countries. Public sector employees are moderately older than other labor force participants employed in Dakar. Their average age is more than forty-one years, compared with thirty-three years for all workers in Dakar, suggesting that it is difficult for the young to enter the public service because of the hiring freeze and the stability of civil servants in their positions. Women are underrepresented in the public sector, accounting for about one fifth of public civil servants. 4.11 Not only do the sources of employment seem more diversified in urban than in rural areas, but the status of workers varies significantly, with a non-negligible share of wage earners (30 percent), apprentices and trainees (10 percent), even if family aid workers and self-employed workers continue to represent 40 percent of the labor market. Because of the level of education, which is on average higher than in rural areas, the qualifications reported are, in general, higher, especially in the industry and public administration sectors, which employ a large proportion of workers with secondary level or higher education. This greater diversity and qualifications translate into greater job security since permanent full-time jobs represent around 60 percent of positions, almost three times more than in rural areas. 4.12 It is useful to note that the situation of women in the labor market, compared with that of men, is more differentiated in towns than in rural areas. The main differences are outlined below: · Women are mostly employed in trade and domestic services (2/3 of jobs in Dakar compared with only 1/5 for men), which are characterized, on the one hand, by a high level of informality in self-employment and household work and, on the other hand, by moderate activity in mobile production areas (as traveling salespersons on public roads, at improvised stations in a market, or in an entrepreneur's house). Men are proportionately more present in industry, transportation and communication, and construction; · Women represent only a tiny share of the number of apprentices and trainees (one out of eight apprentices is a woman). This imbalance suggests a bias against them in the Government's employment programs and in training programs; · Women are underrepresented in professions requiring qualifications since ¾ of them are employed in jobs requiring no qualifications, while only 1/3 of men are in this situation. 4.13 In recent years, child labor in Senegal has captured the attention of many observers, including the World Bank. Part of the interest stems from the visibility of this phenomenon in towns, notably "street children" found at all street corners or employed in unsafe jobs in makeshift workshops.25 Yet, detailed analyses of the results of household surveys show that the 25A recent study estimated that a total of about 8,000 children are beggars in the streets of Dakar, concentrated in the Pikine and Rufisque neighborhoods. Although this is a large number, it represents only 1.5% of the urban population under the age of ten in Senegal. 21 phenomenon of child labor is not new and that it is much more widespread in rural areas. Almost half the children between ages ten and fourteen are engaged in a labor activity in rural areas, compared with less than 10 percent in Dakar or 12 percent in the other towns in Senegal. It should be noted that in Dakar, more than half the children involved in the labor force report that they have gone to school or continue to go to school while working. 4.14 The results of the 1-2-3 Survey shed more light on the informal labor market in Dakar (Table 4.1). This issue is important because workers confined to the informal sector are generally perceived as less productive than those in the modern sector, because of their chronic lack of qualifications and of complementarity with other production factors, and are thus less well paid. They are also (by definition) excluded from the official social protection system. Table 4.1: Breakdown of informal sector jobs in Dakar (in % of employed population) Total Private Public Associations, sector administration businesses, and businesses and households % of workers affiliated with the CSS, 4.7 2.8 29.4 0.9 IPRES and pension fund % of workers with written contracts 29.6 23.7 91.6 8.5 % of workers who belong to a company 30.4 26.1 100.0 4.8 enrolled in the company register Source: Survey 1-2-3 4.15 The first observation that can be made is that the majority of jobs in urban areas are still carried out in an informal manner since practically 95 percent of workers do not benefit from formal social security coverage. This low percentage of formal jobs is partially due to the relatively reduced number of employees in formal companies, since close to 2/3 of workers are confined to self-employment and family activities that are not obliged to adhere to the social security system. 4.16 However, it is worth noting that workers employed by a registered company have a high probability (close to 90 percent) of receiving a duly completed written contract, and thus of benefiting from a certain degree of social protection.26 In contrast, they have a probability of only one out of five of being registered in the social security system. This low ratio suggests that the "trap of informality" in Dakar is due, to a large extent, to the lack of incentives for the companies and employees to enroll in the CSS, notably because of high social contributions. We will re-examine this issue in greater detail later on in this study. 4.17 The probability of holding a formal sector job is influenced by a set of characteristics both at the level of the company as well as of the worker. To identify them, we used a simple econometric exercise that allowed us to define the following factors as having a significant and positive impact on the probability of holding a formal job: 27(i) the age of the employee; (ii) the number of years of schooling of the employee; (iii) the level of qualification of the employee; and (iv) the size of the company. 26The Labor Code authorizes verbal contracts. 27The regression results are available upon request. 22 Figure 4.2: Distribution of employment according to the size of the economic unit, Dakar, 2002 Formal employment Informal employment 0.1 20.9 55 Self employment Self employment 33.7 Micro enterprises (2-10 Micro enterprises (2-10 14 employees) employees) Small Entreprises (11-100 Small enterprises (11- employees) 100 employees) Large enterprises (>100 4 Large enterprises employees) (>100 employees) 45.3 27 Source: 1-2-3 Surveys. Note: a/ Formal employment is defined in its broadest sense, namely, as one which takes place within production units registered in the company register. 4.18 In general, formal employment is found within relatively large companies, while more than 80 percent of informal employment in Dakar is concentrated in companies with fewer than ten employees (see Table 4.1). The typical formal sector employee (who has a written contract) is about 39 years old, spent 11 years in school, is relatively skilled, and works in a large company. The worker affiliated with the CSS has the same characteristics, except that he/she is about 42 years old and has spent 13 years in school. The typical informal sector worker (who has no written contract) is 28 years old, has an average number of years of schooling that is less than 6 years (which is the level of the primary school certificate) and is employed in a micro- enterprise (from two to ten employees) or sole-proprietorship.28 4.19 Fewer women than men report formal employment because of their lack of access to education and their tendency to work in small enterprises. Practically 40 percent of women in Dakar declare having never been to school, compared with ¼ men, and the probability of obtaining formal employment in the private sector is highly correlated with the level of education, since it doubles between uneducated workers and those who are university educated. However, for the same level of education, women are less likely to be employed in the formal sector than men. As shown in Annex 5, the probability of working in the formal private sector for a 25-year old man with a primary school level of education is higher than 20 percent, while the chances for a woman with the same profile is only 5 percent. This finding suggests some discrimination against women with respect to their access to a position in the modern sector of the Senegalese economy. 29 Finally, it was not possible for us to determine any difference across sectors or branches of activities on the probability of obtaining formal or informal employment.30 28It also appears that close to half of informal workers in Dakar are street vendors selling on public roads or providing their services in the homes of their clients. 29The only exception seems to be the public sector since men and women with university education have approximately the same probability of obtaining jobs in the public administration (around 40%). 30It should, however, be pointed out that 53% of formal sector employees work in services and 35% in the industrial sector. Primary sector and trade subsector activities are not well developed at the private formal level in Dakar. 23 5. LABOR MARKET ADJUSTMENT MECHANISMS DURING THE LAST DECADE 5.1 So far, we have sought to determine the main features of the labor market in Senegal by focusing on the current situation. To complete this static analysis, we need to identify the adjustment processes that took place during the last decade because job creation has to take place within dynamic sectors where productivity gains lead to sustainable economic growth. It is therefore important to examine whether the adjustment processes have allowed for an efficient allocation of the labor force over time. 5.2 The objective of this chapter is to examine (i) job growth over the 1995-2004 period, both at the general and sectoral levels; and (ii) changes in employment in the formal and informal sectors and their adjustment processes. 5.3 This approach will highlight three main outcomes of labor adjustment in Senegal over the last ten years: · The Senegalese economy was able to absorb excess labor supply since employment growth was almost equal to that of the active population in urban and rural areas. · This absorption rate was mostly reflected in rapid employment growth in the informal sector, including in urban areas, through the expansion of the trade sector. Furthermore, informal employment growth was counter-cyclical in the sense that it tended to increase more rapidly in periods of economic slowdown, suggesting that it was a residue of formal employment. · Finally, the virtual stagnation of employment in the formal sector does not stem from lack of economic expansion, which, on average, exceeded 4 percent for the whole sector, but rather from the preference of companies to invest in physical capital to the detriment of hiring additional workers. Furthermore, we will see that the formal labor market was relatively active through the entry and exit of workers, notably in the SMEs where annual variations in employment are far from negligible. Similar to what is happening in other countries, such as in France and in the United States, these companies are both the primary sources of new jobs and of the loss of jobs, thereby proving that the labor market has been relatively flexible over time. The problem in Senegal lies more in the marginal weight of SMEs in the formal economy, which represents less than 20 percent of total formal employment. A. DEVELOPMENT OF TOTAL EMPLOYMENT AND BY SECTOR 5.4 In recent years, labor supply in Senegal has increased at a sustained rate, since the active population aged between 15 and 64 grew at a rate of 4 percent per year between 1988 and 2002 (see Box 5.1), or 1.6 times faster than the overall population. This rate was faster in cities (5.1 percent in Dakar and 5.9 percent in the other towns) than in villages (3 percent) because of migration flows. The household survey (ESAM-II) confirms that the search for a job is one of the main reasons for emigration from villages to towns in Senegal. Yet, in spite of these 24 relatively high growth rates, the Senegalese economy was able to absorb a large part of this excess labor force, particularly in Dakar where the number of employed workers more than doubled during the last decade. Thus, between 1988 and 2002, more than one million labor market participants were able to find employment, which translated into the creation of more than 75,000 jobs per year. However, the employment rates declined over time, falling from 91.5 percent in 1988 to 87 percent in 2002. Similarly, the unemployment rate rose, from 8.5 percent in 1988 to 13 percent in 2002, owing to weak performance in job creation in the other towns as well as in rural areas during the last decade. 5.5 These overall positive results mask well-known differences across sectors (Table 5.2 and, for more details, Annex 6). Job creation occurred mostly in the primary sector (agriculture, livestock and forestry) and in commercial activities, with both accounting for 37.3 percent and 34.5 percent, respectively, of the employed labor force growth in Senegal over the 1995-2004 period. With respect to annual growth, the analysis is different since trade (5.9 percent), followed by services (3.7 percent), and construction (3.5 percent) were the most dynamic sectors. The contribution of the primary sector is thus attributable to its weight in total employment (more than one out of two Senegalese in 2004), rather than to its growth over time. 5.6 It is worth noting that the lack of detailed information, especially surveys of worker cohorts monitored over time, makes it difficult for us to better understand job mobility within each sector. This weakness is detrimental to the analysis, as Teal and his co-authors recently demonstrated that these movements are far from negligible in Ghana and in Tanzania. 31 In Ethiopia, the analysis of worker flows over time showed some degree of mobility between public and private sectors with about ¼ of employees with public administration experience moving to the private sector, while the reverse was marginal.32 31J. Sandefur, P. Serneels et F. Teals, African Poverty through the lens of labor and mobility in three countries, GPRP-WPS-060, December 2006. 32World Bank, Ethiopia: Urban Labor Markets: Challenges and Prospects, March 2007. 25 Box 5.1 : Statistical sources on employment: a puzzle The analysis of job growth over time is somewhat difficult owing to the problem of comparability and harmonization of the main statistical sources in existence in Senegal, in particular, the population surveys (1976, 1988, and 2002) and the household surveys (ESAM, 1995, and 2002). In collaboration with the Agence Nationale de la Statistique et de la Démographie, it was agreed that censuses represent the most reliable sources of statistical information for a temporal comparison of population developments in Senegal. The coverage and the definitions used in successive surveys are the most stable and thus lend a certain robustness to the results obtained. Table 5.1: Development of the population aged 15 to 64 according to labor force status (in thousands of persons) RGPH 2002 / RGPH 1988 RGPH 1988 RGPH 2002 (Variation in%) Dakar Other Dakar Other Dakar Other Rural Total Rural Total Rural Total urban urban urban urbains urban urban Employed 307 228 1,110 1,645 650 495 1,557 2,702 5.5 5.7 2.4 3.6 Unemployed 88 35 29 152 146 89 168 404 3.7 7.0 13.3 7.2 Unemployment rate 22.3 13.1 2.6 8.5 18.4 15.2 9.8 13.0 Active population 395 263 1,139 1,797 796 584 1,725 3,105 5.1 5.9 3.0 4.0 Labor force participation rate 50.6 43.7 57.2 53.3 61.1 55.8 61.8 60.4 Education/training 93 68 57 219 171 150 133 454 4.4 5.8 6.3 5.4 Homemakers 254 232 727 1,213 308 288 869 1,465 1.4 1.6 1.3 1.4 Other non-working population 38 39 68 146 27 24 66 117 -2.4 -3.4 -0.2 -1.5 Non-working population 386 339 852 1,577 506 462 1,068 2,036 2.0 2.2 1.6 1.8 ND 4 6 9 18 23 23 80 126 Table 5.2: Growth in the active population by sector of activity, from 1995 to 2004 Share in Annual average Contribution to Activity sector employment growth growth 2004 (%) 1995-2004 (%) 1995-2004 (%) Agro-sylvo-pastoral 51.1 1.9 36.1 Fisheries 2.3 1.4 1.2 Industry 13.1 2.6 12.4 Construction 2.1 3.5 2.6 Trade 19.1 5.9 34.5 Services 8.2 3.7 10.6 Public administration (including education and health) 4.2 1.7 2.6 Total 100.0% 2.8% 100% Formal sector 1/ 6.2% 1.1% 2.7% Informal sector 93.8% 2.9% 97.3% Source: National accounts and World Bank. Note: 1/ the formal sector is defined as: (a) all units of production that have NINEA or a taxpayer number, or (b) in the case of employers and of self-employed workers, who keep their accounts. 26 B. JOB CREATION IN THE INFORMAL SECTOR 5.7 The absorption of labor supply in the Senegalese economy was confined to the informal sector (defined as companies that do not have a NINEA or taxpayer number) during the last 10 years, accounting for 97 percent of employment growth. This result was expected in rural areas where informality is virtually universal. In urban areas, it stems from employment growth in the trade sector, where more than one quarter of jobs were created during the 1995-2004 period. 5.8 The headlong rush of workers into informal employment is not a new phenomenon that is peculiar to Senegal as it has also occurred in the majority of Sub-Saharan African countries.33 It reflects, in part, the counter-cyclic nature of this form of employment which tends to increase when economic growth slows down and curbs hiring by formal sector companies. This substitutability between formal and informal employment is highlighted by the negative correlation between these two variables during the 1980-2004 period when we found that for each 10 percent decline in formal employment, informal employment increased by 16 percent. In other words, when workers are unable to find jobs in formal sector companies they find refuge in the informal sector (in addition to unemployment), as suggested by theoretical approaches of "two-tier labor market" in developing countries.34 This general interpretation is not far from that of Tael [2005] in Ghana, even though we will note in the next chapter that a small fraction of the informal sector decides to remain deliberately on the periphery of the formal sector. 5.9 The approach recently developed by M. Bosch and W. Maloney helps us to demonstrate that the growth of informal employment in Senegal is the combination of two phenomena (Table 5.3).35 On the one hand, the share of informal employment seems to have increased in traditional informal sectors such as agriculture (growing by 0.03 percent per year). On the other hand, there seems to be a passage of workers employed in the formal sector towards the informal sector. This latter movement is illustrated by the explosion in urban jobs in trade and domestic services, which has been, in part, a response to the crisis that occurred in formal labor-intensive activities such as textiles, agribusiness (SONACOS), and the privatization processes in electricity and water as well as the adjustment in public administration over the past decade. 33Cf. Francis Teal, Micro-Perspectives on Labor Demand in Ghana, Center for the Study of African Economies, University of Oxford, June 2005. 34This role of refugees in the informal sector can be more pronounced when economic crises force the inactive to look for a job because they can no longer receive as much financial support from members of their households. 35 M. Bosh and W. Maloney, Gross Worker Flows in the Presence of Informal Labor Markets. The Mexican Experience 1987-2002; World Bank Policy Research Working Paper N. 3883, April 2006. 27 Table 5.3: Sources of growth in informal employment (1995-2004) Annual growth rate (%) Change in informal employment 0.11 including change in the degree of informality 0.04 in the sector Primary 0.03 Secondary -0.01 Public works and civil engineering -0.02 Trade 0.02 Other services 0.02 including change in employment from weakly 0.07 to highly informal sectors Primary -0.51 Secondary -0.02 Public works and civil engineering 0.01 Trade 0.48 Other services 0.10 Source: National accounts 1980-2004 and author's calculations Note: The results are presented in terms of net flows. The lack of data at the individual level over time makes it difficult to analyze the inflow and outflow of workers between the formal and informal sectors. 5.10 The growing passage of Senegalese workers with formal jobs to the informal sector is a finding that should be examined in greater detail in the future (when additional information is available) because it contradicts the findings in several Latin American countries (Brazil and Columbia) where the reverse was observed.36 However, it seems to highlight the immutable nature of informal employment in Senegal and, more generally, in Africa, which represents rarely the transition towards formal and better paid employment. In Ethiopia, it was found that only two workers out of ten employed in the informal sector reported passage to a job in the formal sector between 1994 and 2004 (and only one out of ten towards the private sector).37 C. JOB CREATION IN THE FORMAL SECTOR 5.11 The main challenge here is to understand why labor demand in the formal sector increased only slightly over the last decade, in contrast to the explosion in informal sector jobs. Indeed, the net creation of jobs in the formal sector stood at around 1.1 percent per year between 1995 and 2004, stimulated only by expansion in the education and health sectors. 38 5.12 Contrary to the argument that is sometimes put forth, the poor level of job creation in the modern sector is not explained by the moderate expansion of this sector, which reported an annual growth rate superior to 4 percent, equivalent to the performance of the informal sector, between 1995 and 2004. It rather seems that this sector is characterized by relative inelasticity of 36Cf. Teal, (Ghana), Bosh and Maloney (Mexique) and Golberg and Pavcnick (2003) (Colombia and Brazil). 37World Bank, Ethiopia: Urban Labor Markets: Challenges and Prospects, March 2007. 38Contrary to other African countries (for example, Ethiopia), employment with the central Government increased only slightly over the last decades, although a recruitment plan was put in place as of 2005 (5,000 new employees per year for 3 years). 28 employment, which did not exceed 0.06 on average over the 1995-2004 period (see Figure 5.1 and Annex 6 for details). Not only is this rate about ten times lower than that of the informal sector, it has also declined considerably over time. 5.13 The weak elasticity of employment in the modern sector is due in part to the behavior of Senegalese companies, which preferred to invest in physical capital Figure 5.1: Elasticity of employment to changes in the in response to their expansion. The value added investment to value added ratio within 0.60 0.56 the modern sector indeed increased 0.53 from 24 percent to 41 percent between 0.50 the 1980-1994 period and the 1995- 0.40 0.36 2004 period (this behavior did not take 0.29 place within the informal sector, which 0.30 explains the relative stagnation of Moderne 0.20 0.17 0.18 Informel private investments at the macroeconomic level). This 0.10 0.06 substitution of labor by physical 0.00 capital will retain our attention later in Primare Secondaire Tertaire TOTAL -0.10 this study, notably its links with labor -0.14 productivity, which can be positively -0.20 influenced by the acquisition of new machines and equipment, generating a positive impact on job creation in the longer term. 5.14 The second factor, related to the first, which helps explain the relatively low elasticity of formal employment following a change in economic activity arises from the behavior of salaries, which increased significantly in the modern sector over the last decade, as we will show in the next chapter. It is possible that the growth of the relative prices of labor and capital boosted demand for the latter factor in Senegal.39 5.15 The third potential factor for explaining the relatively low employment elasticity, is that most Senegalese firms were performing below their capacity, and that the subsequent increase in business activities was absorbed through a rise in their productivity (which would explain the salary increase). Unfortunately, this relatively positive explanation is contradicted by the observation that the average productivity of Senegalese workers increased only slightly, slower than the salary increase, as we will see in greater detail in the next chapter. 5.16 Meanwhile, the low elasticity of formal employment to an increase in economic activity in Senegal should not be viewed as a surprise, because it corresponds to the result found at the international level by several recent studies conducted by the World Bank and the International Labor Office (see Box 5.2). This generalized phenomenon reflects a structural and functional change in the production function of companies, which must face more and more sophisticated techniques through massive investments in physical capital. 39Unfortunately, due to the lack of data on the relative prices of capital and labor over a sufficiently long period, we are unable to perform a regression that may produce sufficiently robust results. 29 Box 5.2: Economic growth does not result in job creation The link between economic growth and employment growth weakened recently at the global level, indicating that economic growth does not necessarily translate into the creation of new jobs. Recent estimates show that for each additional percentage point of GDP growth between 1999 and 2003, global employment only progressed 0.30 percentage points, a decline of 0.38 percentage points in relation to the 1995-1999 period. For example, the number of workers living on less than a dollar a day increased by 28 million in sub-Saharan Africa between 1994 and 2004. With an employment level that increases by 0.5 to 0.9 percent for each additional point of growth, it is in the Middle East, North Africa and sub- Saharan Africa that growth is the most labor-intensive. However, there are several informal sector jobs that have low rates of productivity and do not pay workers well enough to allow them and their families to escape poverty. For example, between 1994 and 2004, the number of workers living on less than one dollar a day increased by 28 million in sub-Saharan Africa. Source: ILO, 2004 5.17 The conclusion that the formal private sector did not create jobs despite its expansion during the last decade needs to be qualified in the case of Senegal. First, the overall weak elasticity of employment masks pronounced variations across sectors. Thus, elasticity in the secondary sector reached 0.37, suggesting that the crisis experienced by some industrial companies (such as SONACOS, ICS and the textiles industry) played a decisive role in the stagnation (or the decline in some industrial activities) of formal employment in recent years. The resolution of the crisis in these sectors would certainly revitalize formal employment. 5.18 Second, the detailed analysis of changes in employment in a sample comprising more than 3,000 formal sector companies shows that the virtual stagnation of employment in the modern sector (which, for this sample, grew 3.2 percent per year on average over the 1998-2005 period, or 2,500 new jobs per year) masks two simultaneous movements (see Annex 6 for details).40 On one hand, it seems that about 12,800 jobs were created each year by the companies in the sample, an increase in the workforce of more than 12 percent, of which 2.4 percent is a consequence of the creation of new companies. On the other hand, the loss of jobs within the companies in the sample is evaluated at about 9,500 jobs per year on average, resulting in a 9.1 percent reduction in the work force, of which 0.2 percent as a result of companies going out of business. 5.19 This high level of job creation and loss stems primarily from the strong variation in seasonal jobs, which, on average, account for 30 percent of the workforce. Indeed, positive changes in the workforce are estimated at 8.8 percent and 20.9 percent on average per year, for permanent and seasonal jobs, respectively, compared with negative flows of 4.4 percent and 20.4 percent on average per year for permanent and seasonal jobs, respectively. However, the net 40 The CUCI database maintained by the National Statistics and Demographic Agency. It includes more than 3,000 companies, of which 2,625 provided information for the tables on the workforce. This directory served as the basis for the business climate survey (ICA) and represents 90% of the modern private sector workforce (excluding the public sector). 30 positive flow of job creation is composed primarily of permanent employees, since the surplus of creation over loss is on the order of 4.4 percent of the workforce on average. 5.20 The flexibility of jobs in the formal sector is closely linked to the size of the companies (Table 5.4) 41 The smaller the company, the more flexible it is in relation to the creation and loss of jobs. Each year sole proprietorships and small companies see 20 percent of their employees join and leave their workforce. This flexibility is reduced by half in large companies.42 5.21 The greater job flexibility in small companies is similar to the finding in industrialized and emerging countries (for example, Scarpetta et al., 2007 and Haltiwinger, 2006).43 The difference with Senegal lies at the level of the weight of employment in micro- and small enterprises, which represent only a small part of total employment in the formal sector (less than 20 percent en 2002 in Dakar). Table 5.4: Changes in the creation of permanent employment by type of business (in percentage of labor force of year N-1) 1999 2000 2001 2002 2003 2004 2005 Average Sole proprietorship (1 employee) Creation 10.0 21.5 9.1 15.6 14.2 10.7 4.2 12.2 Loss -10.5 -6.1 -9.5 -13.4 -6.0 -21.0 -9.2 -10.8 Micro-enterprises (between 2 and 10 employees) Creation 13.7 13.9 16.7 8.2 13.4 10.9 6.8 12.0 Loss -3.1 -3.8 -6.0 -10.8 -6.3 -6.6 -7.0 -6.2 Small enterprises (between 11 and 50 employees) Creation 13.4 15.0 15.6 11.4 8.2 9.0 8.6 11.6 Loss -6.5 -6.5 -5.0 -5.2 -5.0 -5.4 -3.9 -5.4 Medium-sized enterprises (between 51 and 100 employees) Creation 7.5 15.8 8.2 10.3 6.8 6.0 9.0 9.1 Loss -4.8 -8.4 -10.7 -2.9 -4.7 -4.8 -3.9 -5.7 Large organizations (More than 100 employees) Creation 4.6 5.7 7.7 12.0 7.2 7.5 8.8 7.6 Loss -3.2 -3.6 -3.0 -2.5 -3.2 -3.9 -4.0 -3.4 Source: CUCI 5.22 Finally, it is worth underscoring that the propensity to hire is negatively correlated with the level of job loss. In other words, the more difficult it is for a company to fire its employees, the less likely it is to create jobs. We will revisit this finding later on in this report when we examine the impact of labor regulations on labor demand from businesses. 41To a lesser extent, job flexibility in the modern sector depends on the sector of activity. Companies in the primary and industrial sectors are less flexible than commercial businesses and those in the construction sector. 42For a more comprehensive analysis, see, Performance des petites et moyennes entreprises au Sénégal, Direction des PME, July 2005. 43Stefano Scarpetta, Suzanne Durea, Gustavo Marquez, Carmen Pages: "For Better or for Worse? Job and Earnings Mobility in Nine Developing and Emerging Economies", January 2007; J. Haltiwanger, Understanding Creative and Destruction: Implications for Labor markets, 2006. 31 6. LABOR PRODUCTIVITY AND WAGES 6.1 Employment growth is not an objective per se for a company. The latter will hire additional workers if they produce more than they cost and if they cannot be replaced by another production factor that is more profitable. In the previous chapter, we showed that formal companies operating in Senegal have preferred to accumulate more physical capital than to use workers. However, this outcome may overshadow worker productivity. In other words, it could be suggested that formal sector employment has not increased significantly, or less rapidly than economic growth, because modern companies benefited from productivity gains with the workers that they already used fostering increased salaries and economic growth in the medium- term. 6.2 This chapter will demonstrate that the above interpretation is erroneous in the case of Senegal. Limited formal employment expansion has corresponded to a weak increase in average productivity of Senegalese workers in the last decade. Not only have productivity gains been marginal both in the modern sector and in the informal sector, but when they have occurred in some sectors such as telecommunications, they have been more than offset by wage increases. The result is that the unit cost of labor has increased with time, reducing the international competitiveness of Senegalese companies. Box 6.1: Average and marginal productivity of labor There is often confusion around the concepts of average and marginal labor productivity. Average productivity measures the quantity of value added per labor unit in an business or industry, whereas marginal productivity is the quantity of value added generated by an additional labor unit. Consequently, these two concepts are not equal. Indeed, it is possible for a business to report low average productivity and high marginal productivity because of increasing profitability of the labor force. Average productivity reflects competitiveness of the labor force within the business, whereas marginal productivity influences the decision of the business on the choice of production factor, especially with regard to labor and capital. To the extent that, in this study, we are mainly interested in the impact of labor on the competitiveness of Senegalese enterprises, we have retained the use of the concept of average labor productivity. 6.3 Our approach is threefold. First, we will start with a macroeconomic analysis to capture the overall development of average labor productivity within the Senegalese economy in the last thirty years, with a view to comparing Senegal to other developing and emerging countries. Second, we will conduct a sector analysis based on national accounts, which will allow us to examine the differences not only in terms of productivity developments but also in terms of wages (particularly in the modern sector) in the last two decades. This analysis will also help identify the variations of labor unit costs within the formal sector, which is a measure of competitiveness of Senegalese businesses on international markets. Finally, we will conclude with an analysis at the level of businesses using databases comprising data from the 1-2-3 Survey 32 for the informal sector as well as data from the ICA Survey for the formal sector. This analysis will allow us to underscore a certain number of characteristics not only at the level of businesses but also at the level of workers who play a role in the determination of productivity and wage levels in Senegal. To the extent that similar surveys have been carried out in other countries, we will also compare these results internationally. A. INTERNATIONAL COMPARISON OF LABOR PRODUCTIVITY 6.4 There is a growing trend of current economic literature that is highly interested in comparing average labor productivity, measured by the ratio of total employment to GDP, across countries. An international comparison of this concept provided an indication of the degree of competitiveness of national economies and, therefore, is perceived as one of the key explanatory factors of the medium-term growth rate.44 On this basis, many ratings have appeared, like those proposed by Heston and Summers in their famous Penn World Tables , A. Maddison,45 or, more recently, Duarte and Restuccia [2006].46 6.5 A look at the rating proposed by Figure 6.1: Overcoming the productivity gap the latter study shows us that labor with emerging countries productivity in Senegal equals 5 percent of that observed in the United States, or 25 seven and five times less than that observed on average in Asia and Latin 20 America, respectively. This outcome is )1=lagene hardly surprising and reflects the country's S( p 15 lack of economic and human development. ga As a matter of fact, Senegal ranks even 10 lower than the average for African ytivitcudo pr r countries, which equals 12 percent of US 5 boaL productivity, even though this result will 0 be qualified when formal and informal 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 sectors are distinguished. It is at about the Botswana Korea, Rep. Senegal same level as observed in countries like Source: World Bank Cameroon and Benin. 6.6 In a dynamic perspective, average labor productivity has virtually stagnated in Senegal since 1980, at about 0.3 percent a year on average. However, there are two distinct periods. The first one, from 1980 to 1994, before devaluation, was marked by continuous decline in labor productivity, which fell by about 0.3 percent a year on average. The second period started in 44Several articles have tried to underscore the influence of Liverpool 70 on growth prospects through econometric analyses, such as Charles Jones, On the Evolution of the World Income Distribution, Journal of Economic Perspectives, 11(3), 1997 or X. Sala-I Martin, The World Distribution of Income: Falling Poverty and... Convergence Period, Quarterly Journal of Economics, 121(2), 2006. 45A. Maddison, Monitoring the World Economy, 1820-1992, Paris, OECD, 1995. 46M. Duarte et D. Restuccia, The Productivity of Nations, Federal Reserve Bank of Richmond, Quarterly Volume, 92/2, summer 2006. 33 1995 and witnessed the recovery of labor productivity at the average pace of 1.4 percent a year.47 The latter rate remains modest compared with those observed in fast growth countries such as Korea and Chile, which are over 5 percent a year, or even compared with the average of OECD countries, reporting about 3 percent growth a year. The modest gains related to labor productivity in Africa had already been underscored by Hall and Jones [1999],48 explaining the growing gap between Senegal and emerging countries observed in the last few decades. By way of comparison, while labor productivity in Botswana equaled half of that observed in Senegal in the early 1960s, it has now become nine times higher (Figure 6.1). The same difference in trajectory, though even more striking, is pointed out between Korea and Senegal. 6.7 This overall analysis suggests that Senegal has not benefited from labor productivity gains in the last few years, and is now lagging far behind countries that have been successful in their economic transition. Though negative, this outcome shows that progress is possible as can be seen from the experience of Botswana and Korea, which shared more or less the same characteristics as Senegal after independence. B. SECTOR-RELATED CHANGES IN PRODUCTIVITY 6.8 The above-mentioned macroeconomic outcome overshadows both time-related and cross- sector variations of average labor productivity in Senegal. While it is true that overall productivity gains have been modest in the last decade, the formal and informal sectors have not had the same behavior. Indeed, the formal sector (defined as including companies with a NINEA or taxpayer number) as a whole has seen Figure 6.2: Changes in the productivity of the its productivity increase at an annual pace formal and informal sectors of 2.2 percent between 1980 and 2004, (Informal sector on secondary axis, right ) whereas that of the informal sector has virtually stagnated around 0.2 percent a 8,000.0 650.0 year (Figure 6.2 and for more details, 7,500.0 Annex 7). 600.0 7,000.0 6,500.0 550.0 6.9 Not only has labor productivity in 6,000.0 5,500.0 500.0 the formal sector increased at a higher rate 5,000.0 than that of the Senegalese economy as a 450.0 4,500.0 whole, certain sectors have even posted 4,000.0 400.0 4 0 6 2 rates higher than 10 percent a year, 80 68 29 98 40 19 1982 198 19 1988 199 19 1994 199 19 2000 200 20 including telecommunications and real Secteur form e l Se cteur inform el estate activities (see details in Annex 7). Source: National Accounts. We have not found such disparities in the 47It is certain that labor productivity is characterized by a relatively high volatility from one year to the next. However, this volatility shows the vulnerability of a certain number of sectors in the Senegalese economy to exogenous shocks or of aggregate demand, like when, for example, the productivity rate changed from a 2.3% decline to a 3.8% increase between 2002 and 2003, as a result of the drought that caused a sharp fall in agricultural and agri-food production. In any case, it is preferable to be interested in productivity trends during a relatively long period of time than in short term variations which are more reflective of exogenous shocks or fluctuations in aggregate demand on the level of production. 48R. Hall et C. Jones, "Why do some Countries Produce so Much More Output Per Worker than Others?". The Quarterly Journal of Economics, Vol. 114, February 1999. 34 informal sector, where virtually all activities posted annual productivity gains below 3 percent over the 1995-2004 period. 6.10 In terms of absolute values, a formal sector worker is about ten times more productive than an informal sector worker, and this gap has increased over time. However, such gaps vary by sector of activity, as a limited number of informal sectors have appeared almost as productive as the formal sector, including fisheries, furniture making, health, and especially, fishery products processing.49 6.11 Beyond variations in average Figure 6.3: Variations in wages and in average labor productivity, sector information productivity, 1990-2004 derived from national accounts shows that wage growth has most often superseded productivity gains in the modern sector, thus generating an increase in the unit cost of labor over time.50 By and large, while the latter indicator has been relatively stable between 1990 and 200451, it can be noted that it has increased in most sectors, especially in those that reported the highest productivity gains (Figure 6.3). In other words, when a sector has been able to generate a significant Source: National Accounts. increase in its productivity, it has not been able to reap the fruits in terms of competitiveness because of the more than proportional increase in wages. (In terms of equity, we are yet to understand the wages that have increased as we will see in Part III of this study). This behavior has been manifest in the sectors of communication and real estate. 6.12 In conclusion, sector-based analysis allows us to qualify the initial diagnosis obtained on the basis of macroeconomic data, by ensuring that, while average labor productivity gains have been generally modest in Senegal, they have nonetheless been significant in some formal activities of the economy, in particular in the areas of communications and real estate. However, it confirms that the Senegalese economy has not posted significant productivity gains in the last few years. Indeed, when productivity gains have been present, they have been more than offset by wage increases, thus generating a virtually steady increase in labor unit costs since 1998. 49However, it is worth noting that these comparisons are to be taken cautiously as they reflect, in part, the presence of other factors (such as differentiated production functions or variations in terms of capacity), yet they help qualify the judgment that the informal sector reports an average labor productivity systematically lower than that of the modern sector. We will revisit this issue in the next section, where we will establish the existence of several categories of informal employment. 50In agreement with the experts of the Agence nationale de la Statistique et de la Démographie, we did not use sector data of national accounts or in the informal sector salaries, which do not offer all the guarantees of reliability. 51 We eliminated the years 1995 and 1996, which immediately followed the devaluation of December 1994 and which are characterized by a catching up of real salaries rates (8.2% per year), as a result of the sharp rise in the consumer price index. 35 C. ANALYSIS AT THE LEVEL OF SENEGALESE BUSINESSES 6.13 Recent surveys of the formal and informal sectors of the Senegalese economy allow us to define average labor productivity and salary levels according to characteristics of businesses and workers. Although those surveys only cover the Dakar metropolitan area,52 they have gathered essential information for our effort to better understand the labor market in Senegal. To the extent that similar surveys have been conducted in several developing countries, we will carry out cross-country comparisons and, thus, rank Senegalese businesses in terms of their international competitiveness. Figure 6.4: Productivity and salary gap between 6.14 Data from surveys have shown the formal and informal sectors that a typical company operating in the modern sector in Dakar is approximately 450 five times more productive than a 400 company in the informal sector AF 350 (measured in Figure 6.4 by the median CF 300 rather than the average, as there is high ed 250 Secteur formel variability within each sector). This sr 200 Secteur informel result is homogeneous, irrespective of ielli 150 m the economic activity of the company. 100 50 0 6.15 At the international level, Productivite moyenne Salaires average labor productivity within a typical company of the Senegalese Source: ICA and 1-2-3 Surveys modern sector located in Dakar is relatively high compared to other countries in Africa (Figure 6.5).53 With an average productivity of US$9200, it is higher than that of Figure 6.5: Comparing average labor Cameroon and Mali, and more than productivity (in US dollars) double that of Burkina Faso, Mauritania, Benin and Madagascar. $25,000 $21,872 However it remains below the labor $20,204 $20,000 $18,318 productivity observed in emerging countries such as China, Chile, $15,000 $14,250 $12,089 Malaysia, and Poland. $10,457 $9,229 $10,000 $8,921 $6,944 6.16 Average labor productivity in $5,000 $4,154 $4,150 $3,687 Senegal varies according to certain $2,310 $1,325 $1,067 characteristics of businesses, among $0 eli ) iesi lise l il ed ei oun nin arc eib which are the following (see Annex 8 Ch enitneg enz la Br engol egane Ma er osaF In anti Be gas hen Ma Po S Ar am ura Gam for details): S( C anikr M ada en M Bu hi C · Labor productivity is Sources: 1-2-3 and ICA surveys 52The statistical sources are the ICA survey for the formal sector and the 1-2-3 survey for the informal sector. The sources have the advantage of providing information on a considerable number of characterics of both businesses and employees. 53Cross-country comparison of average productivity (and of salaries subsequently), except for the CFAF and euro zone countries, is affected by the exchange rate. 36 positively correlated with the size of the company, especially in the modern sector; · Foreign-owned companies' labor productivity is twice higher than that of local companies; · Labor productivity is higher in exporting companies than in other companies, which seems to suggest that they are capable of adapting to prevailing conditions on international markets. 6.17 Average labor productivity gaps are in part reflected in the disparities in terms of labor remuneration, which is about three times higher for a typical worker in the modern sector than in the informal sector (Table 6.1). Within the formal sector, the median salary paid by the company is around CFAF 100,000 (about US$200) a month and is generally higher in large, foreign- owned, and industrial firms. Skilled workers with higher education and experience within the company also get a higher pay than the others. 6.18 At the international level, salaries received by a worker in the Senegalese formal sector are among the highest in the continent. They are four times higher than those in Gambia, Benin or Madagascar (Figure 6.6). Compared with emerging countries, the diagnosis is more mixed: if salaries are still far from those paid in Chile, Argentina, or Poland, they are nonetheless higher than those paid in China, and hardly different from those received by Brazilian workers. 6.19 In the Senegalese informal sector, salaries depend on the worker's age and gender: (i) the older the worker, the more likely it is that he/she will earn a higher salary; and (ii) a man's salary is almost double that of a woman. In contrast, it seems more difficult to make schooling profitable as wages do not increase Figure 6.6: Comparison of average annual significantly depending on the level of salary (in US dollars) education (to a lesser extent than in the modern sector). We will revisit the reasons $9,000 $8,102 for this weak correlation in the next $8,000 chapter. $6,985 $7,000 $6,000 $5,323 6.20 A closer analysis of labor income $5,000 in the informal sector confirms that $3,997 $4,000 employment in that sector is not $3,146 $3,000 $2,751 $2,525 homogenous.54 As previously indicated in $2,393 $2,000 $1,717 $1,298 our dynamic analysis of informal $1,204 $999 $1,000 $636 $633 $573 employment, one group, the large $0 majority, earns a negligible labor income eli ani a and liza ) al o il n Ch nt ol Br onore en eni nz asF aid rac Ma In B with a median value below CFAF 40,000 ger P ysiala eneg S m he ianaitru gas A M Ca S( Ma naik ehT,aib ada ur a month (US$80), represented on the left an B Gam M hi C side of Figure 6.7 below. This group Source: 1-2-3 and ICA surveys represents those "excluded" from the formal labor market in the vision popularized by Harris and Tordaro. However, it is worth noting 54The existence of two distinct groups within the informal sector was also highlighted in the Ivory Coast. See Andrey Launov and Isabel Günther, "Competitive and Segmented Informal Labor Markets", paper presented at the IZA-World Bank Workshop: The Informal Economy and Informal Labor Markets in Developing, Transition and Emerging Economies, January 2007. 37 that their labor income is low as their productivity is hardly high (we will revisit this point, especially when we examine in greater detail the profitability of education). This group tends to increase during periods of economic slowdown. Table 6.1: Monthly salary per worker (median value in thousands of CFAF) Formal sector Informal sector Total 100.6 34 Sector Primary 93.9 106 Industry 110.4 40 Trade - 26 Services 91.1 37 Size Sole proprietorship - 32 Small company 85.8 40 Large company 105.2 - Capital structure (majority shareholder) National 97.6 - Foreign 169.1 - Total 100 32 Age Under 21 30 13 Between 21 and 40 90 35 Over 40 134.4 42 Experience within company Less than 5 years 87.5 25.3 Between 5 and 10 years 100 33 More than 10 years 125.3 47 Education Uneducated 80 28 Primary 71 35 Secondary 95 37 Higher 190 49 Gender Male 97.6 40.5 Female 127.1 22 Type of work Permanent 115 34 Temporary 60 20 Occupation Employer - 174 Self-employed - 9 Wage earner - 35.6 Paid apprentice - 20 Family aid worker - 0 Associate - 26.5 Source: 1-2-3 Survey and ICA. Note: The monthly salary per worker within the firm was obtained by dividing total monthly payroll (wages, bonuses and benefits) by the number of workers. The monthly salary received by the worker includes direct wages, bonuses, and benefits. For the informal sector, the salaries of employers, independent workers and associates correspond to the firm's earnings before interest, taxes, depreciation and amortization (that they share among themselves when there are associates in the informal business). 38 Figure 6.7: Distribution of salaries in the informal sector in Dakar 600 500 400 The salary of 17% of informal sector workers is higher than CFAF that of formal sector workers of 300 Thousands200 The salary of 57% of workers is lower than 40000 CFAF per month 100 0 Observations (individuals) Source: 1-2-3 Survey. 6.21 In parallel, there is a second Figure 6.8: International comparison of the minority group of informal workers, unit cost of labor whose salaries are at least equal to those paid in the formal sector (represented 0.60 on the right in Figure 6.7, whose 0.51 0.50 0.47 0.43 salaries can exceed US$400 per month). 0.40 0.37 0.35 These informal workers are not the 0.31 0.30 0.28 0.28 0.30 0.27 0.26 "excluded" of the formal sector, but 0.24 0.17 rather employers and workers who have 0.20 0.13 made the rational choice to stay in the 0.10 informal sector because their benefits 0.00 exceed their costs. According to the oland hile ali C Faso eroon enin razil India M B B approach popularized by H. de Soto,55 P auritania henzen) M adagascar rgentina enegal alaysia S A am M C (S M urkina they represent the informal sector that B hina C remains on the fringe of formality, Source: ICA surveys because they seek to avoid bureaucratic red tape and fiscal burdens and are not rewarded by better access to the banking and legal systems, which are usually the benefits associated with formality in industrialized countries. 6.22 Finally, the information collected from companies' surveys allows us to assess their competitiveness through the concept of the unit cost of labor. We can underscore two findings that will certainly be of interest to policy decision makers in Senegal. The first is that the unit labor cost in the modern sector is nearly half as high as that of the informal sector, with even a 55H. de Soto, Mystery of Capital, 2000. 39 larger gap in the industrial sector (3 times) and in small businesses with less than ten employees (2.5 times), since the productivity gap between both sectors is not compensated by the differential in terms of salaries. Over time, any effort that would seek to open up the informal sector to the outside world must take into account this gap in terms of unit cost of labor, which will hinder its competitiveness. 6.23 The second finding is that the Senegalese modern sector seems moderately competitive at the international level (Figure 6.8). Its unit cost of labor is lower than that observed in Mauritania and Madagascar, approximately the same as in Burkina Faso, but significantly higher than in Benin and Mali. Furthermore, Senegal has not really succeeded in making a difference in relation to emerging countries such as Chile and Malaysia, which offer additional advantages other than productive labor with regard to their economic and technological environment, and appears much less competitive than China, which is more productive and offers lower salaries. 40 7. IN SEARCH OF LABOR COMPETITIVENESS 7.1 Job creation in the Senegalese economy's formal sector has been limited because of the sustained increase in labor unit costs over the last decade. This increase arises from two phenomena: (i) insufficient labor productivity gains, especially in comparison with emerging countries; and (ii) excessively rapid salary adjustments with regard to productivity gains. The first phenomenon is even more visible in the informal sector because average labor productivity is three to ten times lower than in the formal sector, further limiting its prospects of expansion, in particular towards international markets. 7.2 This chapter aims to understand the causes behind these two phenomena. We will start by identifying the constraints weighing on labor productivity gains in Senegal, and then examine in detail the salary adjustment mechanisms which should, in principle, be aligned on productivity gains. This approach should provide a number of avenues that will help us develop recommendations aimed at reducing labor costs and, thus, stimulate job creation in a competitive environment in Senegal. A. INCREASING LABOR PRODUCTIVITY 7.3 Labor productivity is influenced by several factors. First, it depends on the environment within which the worker operates, especially its complementarity with other factors of production such as machines and technology used by the company. Secondly, it is related to the skills of workers, i.e., not only schooling, but also experience acquired on the job. Finally, it is influenced by the operational features of the labor market, such as the absence of discriminatory practices with regard to certain categories of workers, the fluidity of information, and the free movement of workers through and within activity sectors or companies. 1. Factors related to the company and its environment 7.4 The country's economic, social and institutional context plays a determining role in labor productivity. For example, Hall and Jones [1999] have revealed a positive correlation between labor productivity and the quality of institutions. This finding is confirmed by D. Cohen [2004]56, who shows that immigrant workers' productivity increases tremendously once they reach their host country if the latter has strong institutions. The Senegalese worker is generally more productive in France or in the United States than in Senegal, as the environment is more conducive to his or her professional development and not because of a sudden increase of his or her skills. 7.5 While the economic, social and institutional context should not be overlooked, our intention here is to underscore that labor productivity depends, in part, on the production 56See D. Cohen and M. de Soto, Growth and Human Capital: Good Data, Good Results, CEPR, working paper. No. 3025, 2001. 41 function of businesses and on the constraints that they must face. This inter-dependence is at the heart of the concerns of such authors as D. Acemoglu57, who claimed that the main factor behind the productivity gap between an industrialized and a developing country stems from the inability of the local workforce to adapt to new imported technologies. A major body of the economic literature has also shown that worker output depends on the size, localization, and openness of the company and on its complementarity with other factors of production.58 This concern has captured the attention of the Senegalese authorities as part of the Accelerated Growth Strategy which seeks simultaneously to improve the business climate and to promote the expansion of five specific value-added and job-creating clusters (agriculture, textile, fishing, technology/communications, and tourism). 7.6 In this context, we have sought to identify a certain number of characteristics related to companies and their environment, which contribute to limiting labor productivity gains in Senegal. In order to isolate the effects associated with each variable, we have followed the methodology summarized in Box 7.1.59 Before commenting on the results obtained, it is worth pointing out that only the contemporaneous correlations between labor productivity and a series of potential explanatory factors were captured due to the lack of data over a long period of time. This shortcoming is prejudicial to analysis because it is likely that certain effects will be delayed on labor productivity, such as the acquisition of new machines, which require a learning curve for the majority of workers. 7.7 For the formal sector, the result of our analysis shows that average labor productivity is positively influenced by the degree of openness of the business, its age, and its capital intensity (first column of Table 7.1). In other words, the more the company faces competition on the international market and the more it has invested in machines and technology, the more productive its workers become. These findings correspond to expectations that could be formulated based on theoretical arguments and on the results obtained in other countries, even if the sense of causality between these variables is not always easy to determine. The complementarity between labor productivity and physical capital deserves to be underscored as it suggests that the recent increase in physical capital observed in the last few years, substituting to labor in the short term, generates an increase in labor productivity and, thus, will stimulate demand for labor by formal businesses in the near future. 57D. Acemoglu et al. Productivity Differences, Quarterly Journal of Economics, vol. 116, pp. 563-606, May 2001. 58 Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?", Journal of International Economics, Elsevier, vol. 45 (1), pages 115-135, June. 59 In order to confirm the above findings, we estimated a simple production function of the Cobb-Douglas form by distinguishing the capital factor from the labor factor. In general, production elasticity in relation to a change in physical capital is 0.31 and 0.17, respectively, for the formal and informal sectors. With regard to the labor factor, elasticities are 1.0 and 0.64, respectively. Furthermore, this analysis has allowed us to underscore that the productivity gap between a formal and an informal business (this gap varies between 3 and 10) is explained mainly by differences in employment qualifications (35%, see next section for more details), capital intensity (35%), and differences in total factor productivity (25%), which are related to the technological and institutional environment of businesses. For more details, see D. Echevin et F. Murtin, What determines productivity in Senegal ? Sectoral disparities and the dual labor market, mimeo, March 2007. 42 Box 7.1: Estimating average labor productivity In order to formalize the estimation of average labor productivity in Senegal, we adopted the approach suggested by Dearden, Reed and Van Reenen [2006], which takes as a starting point the following production function: (1) Q = ALK where Q represents value added, L labor quantity, K physical capital, and A a neutral technological parameter as defined by Hicks. We then postulate that workers (N) are split in two groups: skilled (Nt) and unskilled (Nn); (2) L = Nn+ Nt with higher than 1, as long as skilled workers are more productive than the others. If N = Nn + Nt is total employment, and if ( ­ 1)Nt/N is weak, by substituting (2) in (1) and assuming that yields are constant (( + =1), we can express average labor productivity in the log form as follows: (3) ln (Q/N) = lnA + (1-)(-1)Nt/N + ln(K/N) Equation (3) can be generalized to take into account a certain number of labor force characteristics (gender and age for example). The influence of enterprise characteristics (captured by vector X) on average productivity can be taken into account through the impact of parameter A in such a way that (3) can be rewritten as follows: (4) ln(Q/N) = (1-)(-1)Nt/N + ln(K/N) + X Equation (4) serves as the basis of our estimations presented in the main text. Source: L. Dearden, H. Reed, et J. Van Reenen, The impact of training on productivity and wages from British Panel Data, Oxford Bulletin of Economics and Statistics, 68, 2006. 43 Table 7.1: Estimating average labor productivity (in log) (t- statistics in parentheses) Modern sector Informal sector Exports (% of VA) 0.006 0.844 * (1.98) (3.15) Age of business (in log) 1.994 0.640 (3.08) (4.51) Number of years of education, 0.756 0.541 ** employees (2.86) (3.37) Union members 0.008 (2.85) Capital intensity (K/L in log) 0.184 0.164 ** (2.72) (4.14 ) Construction sector 0.816 (2.02) Gender (men) 0.002 (2.44 ) Permanent workers 0.004 (3.41) R2 0.347 0.348 Notes: (*) Measured by a dummy variable for export-oriented informal businesses. (**) Only for informal enterprises reporting a higher productivity than the median of modern companies, by introducing a multiplying dummy variable. 7.8 However, we were unable to find a statistically significant impact associated with several characteristics of Senegalese companies and of the business environment on labor productivity within the formal sector. Neither the sector of activity (except construction), nor the size and location of the company seem to exert a significant influence on average labor productivity. Furthermore, we have not identified a significant correlation between productivity and several constraints linked to the business environment. For example, companies that report serious constraints regarding access to financing and to basic infrastructures and do not systematically report a lower average productivity than the rest of the sample.60 7.9 The results obtained for informal businesses indicate that average labor productivity is positively influenced by the age of the company, its degree of openness to international markets, and its capital intensity (2nd column of Table 7.1). These last two results are statistically significant only for informal businesses that are on the fringe of formality (or close to the productivity of modern sector businesses), suggesting the existence of a minimum threshold at which there is complementarity between labor and capital. As is the case for the formal sector, we were not capable of identifying a link between the size of businesses and sectors of activities and average labor productivity. 7.10 Finally, the analysis of the production function has made it possible to identify the presence of strong non-linearity in the impact of physical capital investment on labor 60This finding contradicts the one obtained by A. M. Baye, which suggests such a correlation, but using a bi- variable regression analysis. See A. MBaye, Quelle mise à niveau pour les entreprises sénégalaises, AFD conference, June 28, 2005. 44 productivity of informal businesses,61 which would suggest that a policy to promote an increase in their physical capital would create positive externalities for the Senegalese economy, especially through their complementarity with labor productivity. In this sense, informal activities conducted by women systematically use less physical capital than if they were conducted by men, in part because women are more present in sectors with low capital intensity (trade and household services). However, this result also stems from the greater difficulty women face in obtaining credit in financial institutions.62 It could therefore be beneficial, in order to promote the expansion of the private sector, to encourage productive investments by women by facilitating their access to microfinance (this proposal will be elaborated on in the last part of this study). 2. Factors related to labor qualification 7.11 The low labor productivity in Senegal arises from the lack of a skilled labor force. As Table 7.2 below shows, this is particularly pronounced in the informal sector where more than half of the workers in Dakar declare having never been to school and only 2 percent of them have pursued higher education. Within the formal sector, there seems to be a more equitable distribution between workers who have never been to school and those who stopped at the primary, secondary, or higher education levels. The median schooling level is about eleven years (or the end of the secondary cycle) for workers employed in a modern business. 7.12 The link between the qualifications of workers and their productivity is measured in Table 7.1. Each additional year of schooling translates into a 7.5 percent and 5.4 percent increase in labor productivity for the formal and informal sectors, respectively. With respect to the informal sector, this effect only exists for companies that already report a relatively high level of productivity (equivalent to that of the median value of the modern sector), suggesting that labor qualification has an effect on productivity only in certain favorable environments or as of a minimum level of education. 7.13 The existence of complementarity between skilled labor and capital has been confirmed in the modern and in the informal sectors, but in the latter only for companies operating in the trade and services sectors (which often report an average productivity level close to that of the modern sector as mentioned above). Finally, the qualification of managers (which is not surprising given the high level of self-employment rate and small size of companies) also seems to be a decisive factor on the labor productivity of informal businesses. 61See D. Echevin and F. Murtin, 2007, op. cit. 62The analysis presented in Annex 5 shows the existence of a gap in the degree of utilization of physical capital according to gender, taking into consideration the size of the business and the sector. 45 Table 7.2: Characteristics of labor force qualifications in Dakar Formal sector Informal sector No. of years of schooling 11 4 (median) Uneducated (% of total 9.2% 52.8% workers) Primary (%of total workers) 19.45% 35.3% Secondary(% of total 37.6% 10.15% workers) Higher (%of total workers 33.8% 1.7% Received training (%of total 39.2% - workers) No. of years of experience in 10 - the field (median) Scientists/Technicians (% of 29.1% - total workers) Source: 1-2-3 Survey and ICA 7.14 If an increase in the level of qualifications leads to an increase in labor productivity within businesses, the question then is why the level of qualifications does not increase more rapidly in Senegal. Although the average number of years spent in school in Senegal increased sevenfold between 1960 and 2000 and the situation in Senegal is favorable compared with that in WAEMU countries, the gap with industrialized countries has increased over time. It rose from 8.3 to 9.5 years over the last 40 years, which is worrying for the future of the Senegalese economy, especially as it does not take into account differences in terms of quality. 63 We will show below that the low investment in human capital is partially attributable to the relatively low yield associated with education in Senegal in comparison with emerging and industrialized countries, which discourages workers from investing in education, notably in secondary education. 7.15 To determine the rates of return associated with education, we estimated a wage function within the Senegalese economy (Table 7.3) through which we were able to highlight that the salary level rises by 4.0 percent and 3.2 percent for each additional year of schooling in the formal and informal sectors, respectively (taking into account the other characteristics of workers).64 We separated the effects associated with the primary, secondary (including lower and general secondary) and higher levels to account for the possibility that the impact of schooling on salaries is not linear. Those whose level of education is higher than the Baccalauréat report a salary that is 70 percent higher than that of those who are not educated. For those with primary or secondary level education, the expected gains are less since salary premiums do not exceed 12 percent and 30 percent, respectively, in the formal sector and hardly more than 15 percent and 23 percent in the informal sector. It is useful to note that positive 63See D. Cohen and M. de Soto, op. cit. 64It is understood that the impact of education on salary levels does not allow us to really capture the return on education, which must still be assessed in terms of the cost of education. Since this extension would go beyond the scope of this study, we refer to the study by Diagne, Bocccanfuso and Barry (2003), which showed that the net returns associated with education in Senegal were negative because of: (i) the mitigated impact on salaries; and (ii) the high costs of education, especially at the secondary level. A. Diagne, D. Boccanfuso et D. Barry, La rentabilité de l'investissement dans l'éducation au Sénégal, Cahiers du CIRPEE, December 2003. 46 effects are also associated with technical/scientific options and with vocational training on salaries in the formal sector. 7.16 Apart from education and qualifications, several explanatory factors seem to have a significant impact on salaries in Senegal. In the formal sector, salaries rise when (i) the enterprise is located in Dakar and has more than ten employees; and (ii) the workers are married, older, have a permanent contract, and are expatriates.65 In the informal sector, sole proprietorships offer lower salaries, in particular, for independent activities. Men are better paid than women, and salaries are, in general, lower when the employees are from the same family as the proprietor. The systematic bias concerning the salaries of women is attributable to their concentration in "very informal" activities, often in mobile production areas with low capital intensity, and their involvement in domestic activities within their households. According to the 1-2-3 Survey, it seems that women who report an activity in the informal sector often devote part of their time to domestic activities (on average twenty hours per week, compared with four hours for men, see Annex 5 for more details). 7.17 Although the impact of education on salaries in Senegal is positive, its magnitude is lower than what is generally observed in emerging and industrialized countries. For example, the returns associated with an additional year of schooling stand at around 10.3 percent in Chile and 9.3 percent in the United States, double the return found in Senegal. 66 In addition, wage premiums appear relatively low for those who decide to invest in secondary education, which translates into only an 18-percent and 19-percent increase in salary in the formal and informal sectors, respectively, compared with workers who only have a primary school education. These low premiums should be compared with the cost of secondary education (direct costs and the opportunity costs because of income foregone), which is non-negligible according to Diagne et al. 67 This finding explains the lack of progress in the enrollment of Senegalese students in the secondary cycle and, above all, the high dropout rate, which increases significantly as studies progress. 7.18 The challenge for Senegalese policymakers is thus to break the vicious circle in which the Senegalese economy seems to be caught. On one hand, companies are not really productive because of the chronic shortage of skilled labor; on the other hand, students have no real incentive to invest in their education because of the low returns, notably at the secondary level where the opportunity costs related to studies become more significant than at the primary level. 65In general, these findings are similar to those found in the World Bank report, Sénégal, Une évaluation du climat des investissements, March 2005. 66See, E. Leuwen, H. Oostrebeck and H. van Ophem, "Explaining International Differences in Male Skill Wage differential by Differences in demand and Supply of Skill", The Economic Journal, No. 114, April 2005. 67A. Diagne et al., op. cit. 47 Table 7.3: Salary estimates (in log) (t- statistics between parentheses) Modern sector Informal sector Located in Dakar 0.662 0.649 (9.47) (9.25) Sole proprietorship -0.716 -0.713 (-8.21) (-8.17) Employer/Independent 1.503 1.499 worker (11.77) (11.68) Company with more than 0.174 0.162 10 employees (5.91) (5.49) Employee from same -0.389 -0.389 family as owner (-2.97) (-2.96) Male 0.573 0.571 (7.79) (7.74) Married 0.156 0.157 (4.40) (4.42) Age 0.009 0.009 0.007 0.007 (3.78) (3.92) (2.14) (2.14) Permanent 0.389 0.399 (9.63) (9.84) Expatriates 0.252 0.227 (3.64) (3.28) Number. of years of 0.013 0.012 0.011 0.010 experience in the field (5.81) (5.55) (2.27) (2.29) Continuing education 0.104 0.101 (3.19) (3.09) Number of years of 0.049 0.030 schooling (15.70) (3.59) Primary education 0.122 0.145 (2.19) (1.96) Secondary education 0.302 0.237 (5.77) (2.20) Higher education 0.757 0.705 (12.95) (2.90) Technical/scientific 0.088 training (2.49) R2 0.547 0.547 0.218 0.210 The weaknesses of the education system in Senegal 7.19 The low returns associated with education stems, to a large extent, from the weaknesses of the education system, notably in terms of quality, despite the recent initiatives that have been taken to increase the number of children with schooling and the training of the labor force in Senegal. 7.20 The weaknesses of the basic education system in Senegal. These weaknesses are well known since they have been the subject of several diagnoses; they are therefore simply summarized here. Some of the weaknesses have already been addressed by the authorities who have undertaken reforms which have already started to bear fruit, notably at the primary level, which has seen an increase in enrollments and a decline in the disparities between boys and girls. 48 These advances are worth underscoring for they reflect the Senegalese Government's efforts, and the allocation of more and more significant share of the Government budget to this sector, in line with the PRSP priorities. Actions should now focus on the quality of education to ensure that by the end of the primary education cycle, pupils have a solid foundation in reading and arithmetic. 7.21 In contrast, the situation remains worrying at the secondary (middle and general secondary) and technical education levels, which remain the missing links in the education system in Senegal. From the outset, it is worth emphasizing that these sectors are neglected in the education budget since they only receive 17.4 percent and 8.3 percent of the total budget allocated for the sector. This is particularly striking considering the amount allocated to tertiary education (20 percent) which concerns only a tiny proportion of students. In these circumstances, it is hardly surprising that these education sectors are plagued by deep weaknesses, which include (i) lack of access and the underdeveloped physical environment of schools; (ii) the inadequate state of buildings; (iii) the negative impact of discontinuity in education supply on access to and maintenance of pupils in school; and (iv) the poor academic and technical qualifications of teaching staff. 7.22 Consequently, the number of Senegalese students excluded from secondary education remains high. It is estimated that virtually seven children out of ten are excluded from middle school (13-17 year old age group) and that this rate of exclusion rises as the school years go by, in particular after the 4th year, which ends with the BFEM examination that determines access to the Baccalauréat through the classics or technical options (this condition was recently relaxed for those with an average of twelve and above). The success rate of the BFEM examination in public education was just slightly higher than 30 percent in 2004-2005. 7.23 The Baccalauréat option is therefore only taken by a small number of students, who account for barely 5 percent of the student population. The success rate of the baccalauréat has remained relatively stable over time: it stood at 45.5 percent in 2005, compared with 45.4 percent in 1999--however, there are significant disparities among the regions. In terms of orientation, it is well known that the majority of students neglect the science options, which, in 2005, attracted slightly more boys than girls countrywide. The majority of students enroll in general secondary education dominated by literary or legal studies, contrary to the demands of the labor market and of businesses, as we will see later on in this study. 7.24 In parallel with the Baccalauréat, Senegalese students who have successfully passed the BFEM may choose a technical education option and vocational training (ETFP). The same weaknesses described above are present here since this option is also marginalized and only comprises slightly more than 170 public and private training institutions with 19,000 students. The quality of the system leaves much to be desired, with low success rates: less than 50 percent for the CAP, 30 percent for the BEP and 20 percent for the BTS. In short, this option produces only around 3,000 graduates per year, in all specializations and levels, whereas the estimated need of the labor market (in 2004) is ten times higher. Ultimately, the Senegalese education system remains unable to produce a sufficient number of graduates, either with the Baccalauréat or from the technical options. The majority of students are excluded, notably at the point of passage from the primary to the secondary level or at the level of the BFEM. 49 7.25 Finally, to conclude our brief description of the school system in Senegal, the tertiary or university system concerns only a tiny part of the active population in Senegal. Although we do not wish to neglect this education sector, which remains central to training and to the work performance, we prefer not to dwell on its weaknesses that include : (i) mismatch between university infrastructures and the growing number of students, notably in the Dakar area ; (ii) insufficient financial resources and their misallocation to the social needs of students (food, housing) through a non-transparent scholarship system ; and (iii) lack of importance given to scientific and technical options as well as their weak link with the demands from private companies and the job world. This assessment is further detailed in Annex 9 of this study, because it benefits from a full coverage in the recent World Bank Institute's study on the knowledge economy in Senegal.68 7.26 Youth and adult training initiatives. Aware of the lack of preparation and training of the young and of adults, the Senegalese authorities launched a number of initiatives, starting with the willingness to assume responsibility for traditional apprenticeships and to integrate them into the general vocational training system. In all Sub-Saharan African countries, traditional apprenticeships remain largely dominant, and are characterized by on-the-job training, which consists of acquiring in the workplace the basic techniques needed to practice a trade. It most often involves training, without any precise duration (may last up to eight years); it is not recognized with a diploma,69 and putting into production dominates the learning dimension. For these reasons, young people involved in such learning systems encounter two major difficulties: (i) poorly qualified master artisans who are unable to theorize or to formalize certain technical concepts; and (ii) the lack of a structured pedagogical learning process. Assuredly, traditional apprenticeships remain deficient with respect to integration in the formal sector, leaving the following as the only alternatives: self-employment or paid employment, which is frequently more insecure, in the informal sector. 7.27 In their efforts to formalize apprenticeship and training, the authorities have launched several initiatives, projects and programs, which all have at least one thing in common: develop skills and promote integration and retention in employment, or promote qualifying self- employment and a spirit of entrepreneurship. Below we review three of these initiatives considered to be the most important: · The National Vocational Training Office [Office National de Formation Professionnelle--ONFP] is a state-funded industrial and commercial establishment created in 1986, which, in collaboration with training centers, provides short-term training in different economic sectors, but is aimed primarily at craftspeople, associations, or individuals. The training /professional development is free and is financed with an annual operating budget of about CFAF 500 million, financed by the share (5 percent) of income derived from the vocational training tax [taxe sur la formation professionnelle--CFCE]. Thus, between 1992 and 2005, more than 42,000 68Banque mondiale, l'Economie du savoir au Sénégal, (forthcoming). 69With respect to certification: "traditional" apprenticeship is not underpinned by any legal framework agreement with the specifications of the rights and obligations of each party, the duration of the apprenticeship, the content, the modalities for assessing the skills learned, etc. As a result, there is no certification or evaluation system to sanction the completion of this apprenticeship: a simple attestation, which is not equivalent in any way whatsover to the diplomas issued by the formal system, is issued to the apprentices. 50 people (4,440 per year) benefited, either on an individual basis or in the context of collective action (through an association), from training and/or a professional development in the fisheries, livestock farming, agriculture sectors, or in other areas based in the informal sector (reproductive and social economics, crafts, literacy, processing of local cereals or fruits and vegetables, etc). However modest or relatively limited the training, it still has the merit of bringing some structure to the skills required for an economic activity (market gardening, leather craftsmanship, mixing and dyeing techniques for Batik, etc.) likely to generate revenues. · Programs to promote paid employment under the national Government-employer convention for the promotion of youth employment [Convention Nationale Etat- Employeurs pour la promotion de l'emploi des jeunes diplômés--CNEE]. This program, implemented in the form of training in participating companies ("apprenticeship training", "incubation training", "adaptation and requalification training"), is aimed at young graduates, age 18 and over, who are selected in priority from the list of job seekers managed by the Employment Directorate. The duration of the internship is on average six months and the participants' costs paid by the Government is about CFAF 220,000 per trainee. According to the Employment Directorate, the trainees are almost always recruited by the host company at the end of their internship. To date, close to 1,500 graduates have completed internships lasting six months at a minimum in companies that are signatories of the Convention. · The Technical Education and Vocational Training Development Fund [Fonds de développement de l'enseignement technique et de la formation professionnelle-- FONDEF], created in 2004 by the Senegalese Government, in conjunction with social and private partners, is aimed at promoting continuing vocational education, in line with the needs of Senegalese companies. FONDEF is jointly financed by the Government, which remits to FONDEF part of the payroll (CFCE) taxes collected from, and by, companies which, in requesting support from FONDEF for vocational training of their own employees, are required to assume 25 percent of the operating costs and remit this amount to FONDEF in a blocked account. In general, FONDEF intervenes in all sectors of economic activity, in particular, in financing public and private companies' training plans, or even in training programs defined with professional organizations for sectors, branches and groups of companies in accordance with a mechanism described in Box 7.2. 7.28 These three initiatives are still too recent for an assessment of their contribution to the integration of the young and adults into the labor market and of their effectiveness in offering high quality training programs. However, it should be noted that they are still modest in scope because of their limited resources. Experts and enterprises seem to have a positive opinion of the FONDEF initiative, which depends on close collaboration between the public and private sectors. This collaboration seems central to its mode of operation, unlike the approach used to implement the Convention which relies only on management by the Employment Directorate. While it is true that only a limited number of companies have used FONDEF facilities, and one may question whether the very high level of the latter's contribution to training actions does not result in a "bargain effect", it must, however, be pointed out that the implementation of this body, already announced in the PDEF, will lead without any doubt towards the development of vocational training actions for formal sector businesses and their employees. 51 Box 7.2: FONDEF Operating procedures and initial results Once training projects presented by businesses or by branches are retained by the selection and accreditation committee (comprising representatives of social partners and of the Government), their execution is entrusted, following calls for bids that guarantee transparency and equity, to training providers that are legally constituted and accredited by FONDEF. The contribution of FONDEF may reach 75% of pedagogical costs--the balance as well as the definition of training needs and actions are the responsibility of businesses seeking financial support from FONDEF. To date, close to 130 training providers have been accredited by FONDEF, and almost half of them are public and private training centers under the supervision of the Ministry and of ETFP. During the last eighteen months, FONDEF has contributed to the financing of action/training plans of 106 companies (89% from the private sector)--or a total of close to 650 training actions implemented for close to 6,900 training trainees--the total cost of contracts standing at close to CFAF 790 million, of which CFAF 221 million from businesses. Of this total, 52% of requests were presented by SMEs and 31% by large companies. A very large proportion, or 38%, of industrial companies (agro processing industry public works and civil engineering, textiles) was also noted, whereas close to 20% of requests presented concerned financial companies (banks, insurance companies, etc). As well, a significant portion of training actions concerned management and information technology. 7.29 Finally, it is worth concluding that other programs and measures have been put in place to support the development of skilled human resources. These are generally moderate in size and quite recent, such as in the area of agricultural training or in the crafts sector, notably with, in the latter case, the establishment of an Artisanal Projects Guarantee Fund [Fonds de garantie des projets artisanaux--FGPA] under the aegis of the Artisanal Promotion and Development Agency [Agence pour la promotion et le développement de l'artisanat] aimed, among others, at apprentice artisans at the end of their training as well as at graduates from artisanal vocational training schools. The establishment of three sectoral vocational training centers which, unlike public training centers, will be directly managed by professionals of the sectors concerned (under the dual supervision of the Ministry of Technical Education and Vocational Training and the Ministry of Economy and Finance) is an interesting pedagogical exercise. The continuing education centers which will be establish by AGETIP as the contracting authority under contract with the METFP and with financial support from the AFD (France), will put emphasis on private/public partnerships both with respect to financing as well as to management. 3. Other Explanatory Factors 7.30 The existence of barriers on the labor market hampers the efficient allocation of workers to the most productive jobs. In Senegal, these barriers are regulatory, such as payroll taxes, but they are also cultural or social, such as the departure of qualified workers abroad or the prestige of the civil service. Finally, difficulties in obtaining information on job offers may explain the excessive use of informal networks, which, although they are useful, are often at the root of privileges based on criteria other than qualifications. 52 Crowding-out of skilled labor by the public sector and brain drain 7.31 The supply of skilled workers in Senegal is very low, notably for the reasons that we reviewed in the previous section. This supply is all the more limited for Senegalese companies due to the dominance of the public sector and the brain drain abroad. We will begin by reviewing these two phenomena in order to grasp the magnitude of the problem before seeking solutions. 7.32 The significant weight of skilled workers in the public sector can be highlighted through the results of the 1-2-3 Survey in Dakar. The survey shows that the number of workers in the public sector is about ten times less than that of the private sector; but the number of skilled workers is approximately the same (about 25,000 in 2002). Added to this is the number of skilled workers captured by the "aid industry" which is flourishing spectacularly in Senegal. The last Public Expenditure Review produced by the World Bank in June 2006 showed that more than 400 projects were in progress by the end of 2005, employing a minimum of 10,000 workers. The wages paid (three to five times above those of Government services and the private sector) has led to a non-negligible crowding-out effect of skilled workers. We therefore need to understand why skilled workers seem to prefer working in the public and para-public sectors in Senegal. 7.33 In principle, the criteria for choosing employment in the public or private sector should be the same. We were unable to find any major difference between the salaries paid to skilled workers in these two sectors, according to data collected from the 1-2-3 Survey in Dakar. Generally, although a public sector worker may report earning more than a worker in the formal private sector (CFAF 154,000 versus CFAF 110,000), the difference tends to disappear when the level of qualifications and the duration of the contract are taken into account. This explains why formal private sector workers with an open-ended contract report a monthly salary of CFAF 161,000, which is even higher than the average of the public sector. 7.34 One explanation may therefore be that the preference for employment in the public sector stems from non-financial advantages such as job security and better social security coverage, which are unquestionably higher for most public sector employees. In addition, it is possible that the choice is also influenced by political interference and the prestige of the position. Such non- financial benefits are extremely important even though they are difficult to quantify in Senegal, which should become a priority for Senegalese authorities, as we will propose in the last part of this study. 7.35 The flight of skilled workers to industrialized countries is well-known. From a theoretical point of view, Hatton and Williamson (2001)70 have shown that although the cost of immigration does not vary greatly according to the level of education of the immigrant,71 the decision to leave is related to the gap between the potential income that the worker can hope to earn in the foreign country and what he currently earns in his country (see also, Haque and Kim [1995]). Because of the relatively low wages of a skilled worker in Senegal compared to what he may aspire to earn in Europe or the United States, it is therefore logical that a good number of workers seek to settle 70Hatton and Williamson, Human Capital Flight: Impact of Migration on Income and Growth, IMF Staff Papers, vol. 42, No.3, September 1995 and Demographic and Economic Pressure on emigration out of Africa, NBER working paper, No. 8124, February 2001. 71It is easier for a skilled worker to obtain a work permit in an industrialized country, which further reduces his costs. 53 abroad. This phenomenon is commonly referred to as "brain drain". At the global level, Asia is by far the region with the highest number of skilled labor flight, but Africa is also affected since it is estimated that about 12 percent of skilled workers are established abroad.72 7.36 However, it is still difficult to quantify the magnitude of the brain drain in a country like Senegal because of the chronic lack of statistical information. In a recent article, Docquier and Markouf [2004]73 attempted to estimate migration flows in 100 countries around the world, including in Senegal. Their findings confirm (i) the high number of immigrants leaving Senegal (proportionately the third highest in West Africa in 2000, after Cape Verde and the Gambia); (ii) the rate of emigration practically doubled between 1990 and 2000; and (iii) about a quarter of skilled workers left the country in 2000. These figures seriously underestimate real flows, as they leave out illegal workers and do not take into account students who do not return to their countries of origin at the end of their studies abroad. 7.37 Brain drain is therefore a reality in a country like Senegal and plays a major role in the lack of labor productivity growth. It would, however, be wrong, and even counterproductive, to seek to limit these flows by imposing barriers on emigration (these flows will gradually decline as employment prospects improve in the country). First, in view of the differences in potential incomes, it is very likely that workers will continue to leave, at any cost, as we are sadly reminded by the images of despair on Spanish and Italian coasts. Second, immigration should be understood in a dynamic perspective. The problem for Senegal is not necessarily the departure of these skilled workers to industrialized countries, because in so doing they can acquire knowledge and skills that they could not acquire back home. The problem is that they do not return or do not try to establish links with the Senegalese economy. Regulations and wage costs 7.38 For a very long time, the argument put forth to explain the lack of labor market productivity in a country like Senegal focused on the rigidity and cumbersome nature of regulations. But this explanation lost part of its relevance with the adoption of the 1997 Labor Code, which helped relax the laws and regulations governing the labor market.74 The explanation also lost some of its popularity following the findings of several surveys in companies, which indicated that labor regulation was not among their major concerns, at least in comparison with other constraints like taxes and access to financing.75 Finally, labor legislation applies only to a very small proportion of the labor force employed in Senegal, since, as we have already seen, the share of informal jobs exceeds 65 percent, even in Dakar. 7.39 However, it will be unconscionable not to consider the labor regulation as one of the reasons for the relatively low labor productivity in Senegal. The high level of workers employed in the informal sector is partly due to the heavy wage costs and other constraints weighing on firms and their employers, thus influencing work allocation and leading to possible declines in 72See WBI, Chapter 7. 73 Docquier and Markouf, "Measuring the International Mobility of Skilled Workers" (1990-2000), World Bank working paper, No. 3381, 2004. 74 For an overview of this opinion, see World Bank, Mémorandum économique sur le pays, and Senegal: Policies and Strategies for Accelerated Growth and Poverty Reduction, 2003. 75For an example, see World Bank: Sénégal, Evaluation du climat des investissements, 2005. 54 productivity. In addition, the recent ranking of Senegal (152nd out of 175 countries) in the Doing Business report is a reminder that the costs associated with labor legislation are far from negligible in Senegal compared with other countries, including those on the continent.76 7.40 In this context, we would like to highlight three specific aspects of labor regulations which we believe have a negative effect on the demand of businesses and on the productivity of their workers in Senegal, namely:77 · costs associated with hiring and firing workers; · the importance of public holidays and leave; and · the burden of taxes and social contributions on wage costs. 7.41 Before showing how these three aspects contribute to the reduction of labor productivity in Senegal, labor regulations should also be assessed from the perspective of their contribution in terms of social justice, as will be done in the next part of this study, when we examine labor regulations from the perspective of workers. 7.42 Hiring and Firing procedures are laid down in the Labor Code (see Box 7.3). Despite improvements made to increase flexibility, these procedures are still deemed costly for companies since, according to the World Bank's Doing Business report, it is estimated that recruitment costs are equal to 21.4 percent of the employee's wage, which is practically double the average in Sub-Saharan Africa. In contrast, firing costs are lower than the regional average. 7.43 The large number of legal feast days and public holidays in Senegal reduces the effective working days and affect workers' productivity. Indeed, Law No. 74-52 of November 4, 1974 institutes twelve legal feast days, excluding the national day on April 4, Easter, and Pentecost, which falls on a Sunday. Only three of these feast days are declared "paid days off" by law, but eight additional days are provided for by labor collective agreements. In addition to these public holidays, 24 days of leave are granted by law. Finally, it should be noted that, in practice, there are even more leave days because of "bridge" days and the duplication of religious holidays. In total, it can be estimated that the number of leave days is between 42 and 44 per year. In the words of an official of the workers trade union: "There are too many public holidays, the economy is not competitive; we do not work well or enough because there are too many holidays." 7.44 By way of international comparison, a Senegalese worker may count on nearly ten additional leave days compared with a French worker or practically 20 more days than a Chinese or American worker. This comparison conveys the perception that Senegalese workers are significantly less productive than those in emerging or transition countries. If one refers to the results presented in Figure 6.5 and adjusts to the number of days really worked, the daily productivity of a Senegalese worker would be the same as that of a Polish worker and barely less than that of a Malaysian worker. Senegal's problem thus seems to stem in part from the insufficiency of working days. 76Source: http://www.doingbusiness.org 77This analysis will be completed in the next part when we examine other regulations, such as the minimum wage and non-financial benefits on the part of workers. 55 Box 7.3: Hiring and firing regulations Hiring: · Hiring workers of Senegalese nationality is free but must be declared at the Labor Services. With regard to expatriate workers, their recruitment is subject to prior authorization and their employment contract must be submitted for approval by the Ministry in charge of Labor; · A fixed-term contract may not exceed twenty-four months and may not be renewed more than twice. It is forbidden to resort to fixed-term contracts to fill on a long-term basis a position linked to the normal and permanent activity of the enterprise; · All employers must update the so-called legal ledgers which constitute the wage register; · Workers should be registered in the following social bodies: Senegalese Institute of Retirement Insurance (IPRES), and the Social Security Fund (CSS). Firing: A fixed-term contract may be terminated only in the event of gross misconduct and in accordance with the following procedures: · before any dismissal: the employer must issue a dismissal notice to the worker (varying between eight days and three months); · a dismissal letter stating the reason for dismissal should be drafted; · staff representatives: protected by Article 1-214 et sec: need for an authorization from the appropriate Labor Inspector; · dismissal for economic reasons: procedure under Article l-60 et sec: - meeting with staff representatives to seek alternatives (transmission of meeting report to labor inspector within eight days, mediation led by the inspector within fifteen days, drafting of dismissal order by employer). 7.45 Wage costs. One of the arguments put forth to explain the relatively high salaries in Senegal is the heavy burden associated with taxes and social contributions (see Table 7.4). This tax burden contributes to the rise in labor factor costs bringing about a loss in competitiveness compared to companies operating in countries with lower costs or in comparison with informal sector businesses. Not only does it reduce labor demand from formal businesses, but it also helps reduce their choice in favor of physical capital, especially as the tax burden on the latter has declined significantly in recent years.78 78The effective marginal tax rate on physical capital investment is estimated to have dropped from 0.35 to 0.25 between 2000 and 2006, by applying the methodology proposed by FIAS in 2000. FIAS, Sénégal: une évaluation du système fiscal sur les entreprises, December 2000. 56 Table 7.4: Rate of deduction from wages Overall Employer's Worker's Ceiling rate share share (in CFAF) Retirement Public pension plan 14% 8.4% 5.6% 200 000 Supplementary plan 6% 3.6% 2.4% 60 000 Family allowances and Occupational injury benefit Family allowances 7% 7% 60 000 Industrial accidents 1 to 5% 1 to 5% 60 000 Health insurance 6% 3% 3% Vocational training tax 3% 3% Total 37 to 41% 26 to 30% 11% 7.46 In order to highlight the heavy fiscal and social burden on wages in Senegal, we used the effective marginal tax rate (EMTR) methodology that measures the costs associated with taxes and social contributions on the last labor unit used by businesses and provided by workers.79 As a reminder, the EMTR is defined as the difference between the gross salary paid by the company and the net salary received by the employee adjusted by the real wage: tc TL (1) = twe (1 - tis Dis ) +1+ tc + 1+ tc 7.47 The EMTR is influenced by three components: (i) the net cost of social contributions paid by the employer; (ii) the consumption tax paid by the employee (who is also a consumer); and (iii) social costs and income tax paid by the employee. Apart from the wage costs summarized in the table above, the consumption tax is equal to the VAT (with an 18 percent rate) and the corporate income tax is equal to 25 percent; whereas personal income tax varies according to income brackets to a maximum of 35 percent. 7.48 The application of the EMTR methodology indicates that the weight of taxes and social contributions in Senegal is as high as 0.69 for a company and a worker who pay their full retirement contributions (without supplements) and their family allowances as well as their health insurance.80 This rate is the highest from a sample of countries which include countries in the sub-region (Côte d'Ivoire), the continent (Kenya), emerging countries (Malaysia, Tunisia), and OECD countries (USA, Korea). The only exception is France, which is not surprising since the Senegalese system is based historically on the same model (Figure 7. 1). 79 For a description of this methodology, see Desiderio Romero-Jordan & José Felix Sanz, An international comparison of effective marginal taxes on labor use, Public Economics, 2004. 80It is also assumed that the company makes a profit which is taxed at the company tax rate of 25%, while the worker is taxed on his income at the rate of 17% (which is the average rate) 57 7.49 Apart from the relatively high overall EMTR in Senegal, social costs and labor taxes are borne disproportionately by workers, in their capacity not only as payers (44 percent of the total cost) but also as consumers (18 Figure 7.1: The weight of deductions from wages in percent). This bias against workers Senegal is rivaled only by that in France is found only, to a lesser extent, in France and Tunisia. Kenya 7.50 Formal sector businesses in USA Senegal are therefore disadvantaged Chile in comparison with their Tunisie international counterparts (all equal Malaisie elsewhere). In addition, they suffer Korea from unfair competition from the Cote d'Ivoire informal sector since a company Senegal that does not declare its workers to France the retirement and insurance 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 schemes (but which pays the Taux Effectif d' Imposition company tax and whose workers are Source: World Bank nevertheless liable to the income tax and the VAT on their consumption) would report an EMTR of 0.44, almost half of what would be applicable with the Labor Code. Of course, if the company and workers paid no charges (except for the VAT), the EMTR would drop even more to 0.15. These simulations make it possible to better understand the fraction of workers identified in Figure 6.7, who are as productive as those operating in the formal sector, but who prefer to remain in the informal sector. Segmentation of the labor market 7.51 Economics literature highlights that loss in productivity, as high as 20 percent in the United States, emanates from labor market segmentation that prevents the optimal allocation of workers.81 As argued below, several barriers exist in Senegal that favor labor market segmentation and penalize its efficiency. 7.52 At the outset, it is important to distinguish between barriers which originate from outside and those from within the labor market. Those originating from outside include the lack of access to infrastructure, especially road infrastructure, which impedes or delays the mobility of workers. This barrier is most visible within the Dakar agglomeration where traffic congestion has become a major problem. For instance, workers who live in Rufisque (about 15 km) may spend four hours every day to get to their workplace in the city center. This lack of access is also significant in the regions where the road network is still embryonic. 7.53 Another barrier originating from outside the labor market is the precarious health of workers. According to the recent Investment Climate Assessment Survey, a typical worker in the manufacturing sector loses annually more than 40 work days (or four days per month) due to sick 81For example see J. Haltiwanger, op. cit. 58 leave, most often a malaria attack. This number of days is similar to those observed in Kenya and Uganda. 7.54 It is obvious that the lack of infrastructure and the poor health of workers strongly affect labor productivity in Senegal. The solutions are well known and have been included in recent strategies, especially in the Accelerated Development Strategy where major infrastructure works have been proposed by the Senegalese authorities as well as the development of health centers. For this reason, we will focus on barriers originating from within the labor market. 7.55 One of the major reasons for segmentation in the Senegalese labor market is the absence of information on job positions. There is virtually no data on the needs of companies because publication of vacancies is not yet a generalized practice. According to the results of the ICA Survey, almost 60 percent of businesses and employees are obliged to use family networks. The use of public and private recruitment agencies, though on the rise, are still confined to a few companies, notably foreign firms such as the new call centers in Dakar, foreign companies operating in the building and construction sector, and NGOs. 7.56 Although the recourse to informal networks helps address a market deficiency, it relies on asymmetric information. The company often finds itself in a position of force to negotiate, especially with unskilled workers who are available in large numbers. It also tends to favor family and personal connections, which are not usually based on skills and competencies. Finally, companies have to spend a considerable amount of time looking for skilled workers (close to six weeks) or even unskilled workers (four weeks). In terms of international comparison, the figures place Senegal in an intermediate position, much better than Peru, for example, but far behind countries like China and Pakistan where the time required to find an unskilled worker is under two weeks. 7.57 Because there is no free flow of information on the labor market, there are often disparities between the demands of companies and the supply of workers. Employment agencies face difficulties finding qualified technicians and engineers while there is an excess supply of accountants and salespersons. From the perspective of most companies, there is a shortage of middle management, in terms of quantity and quality, which does not facilitate their daily management and openness towards international markets. This lack of middle management is partially attributable to the lack of clear incentives and, above all, of training such as skills development within companies. It would be useful to introduce the use of job or functional descriptions, since this shortcoming extends the search for candidates and increases the likelihood of making a wrong choice. In general, Senegalese companies have no well developed internal human resources management procedures and structures. B. STREAMLINING SALARY ADJUSTMENT MECHANISMS 7.58 The sectoral analyses presented in Chapter 6 show that during the last decade salaries have risen faster than average labor productivity in Senegal. Although this overall result masks variations across sectors, it is robust enough to explain the rise in the unit cost of labor and the limited growth in formal sector employment. 59 7.59 We will now try to understand the reasons underpinning the faster adjustment of salaries. In principle, in an economy that is in perfect competition, the wages of workers would depend on their productivity or, in a more dynamic approach, wage differences over time should be equal to variations in labor productivity. This balance is, however, not maintained in the presence of disequilibria or information gaps between labor market players.82 7.60 The main explanation for the excessive salary adjustments in Senegal lies in these imbalances. Some categories of workers are indeed in a position to obtain wages that are higher than their contribution to the productivity of the business. Comparing the estimates we obtained on average labor productivity in companies and wages paid to workers (see Tables 7.1 and 7.3), we note that in the formal sector expatriates and workers (preferably married and relatively old) employed in larger companies located in Dakar83 are able to obtain higher remuneration, which can reach 25 percent more for expatriate workers and 15 percent for workers in large companies, in comparison to their contribution to labor productivity within the company. Permanent workers also earn higher salaries, suggesting that they can exert some pressure on their companies since they are better protected by labor regulations. It should be noted that we did not find any significant influence of the level of union activity on the capacity of groups of workers to extract wage premiums in excess of their productivity.84 This absence of significant influence reflects two simultaneous movements: (i) the decentralization of wage negotiations, which began in 1999; and (ii) increased competition between the numerous workers' unions (more than 18) in Senegal.85 7.61 The main factors of discrimination in the informal sector seem to be gender (men are paid two times more than women) and age. Such discrimination is considerable even when other factors such as qualification, company size and the sector of activity are taken into account. It is worth noting that discrimination against women is contrary to ILO Convention 150, which was ratified by Senegal and which stipulates equal pay for work of equal value for men and women. 7.62 In many African countries (such as Tanzania, Kenya, and Côte d'Ivoire), it was noted that skilled workers could obtain additional benefits in the form of salary premiums that were above their contribution to company output. In contrast, in Senegal, it seems that formal and informal companies can take advantage of the situation with respect to skilled workers. A comparison of our estimates shows that workers enjoy fewer financial benefits (about 5 percent 82For further discussions on the subject, see J. Van Biesebrock, Wages equal Productivity: Fact or Fiction ?, NBER Working Paper, No. 10174, December 2003. 83An alternative interpretation to the one that the groups may obtain more benefits in the form of a salary supplement is proposed by the school of thought personified by C. Shapiro and J. Stiglitz, Equilibrium Unemployment as a Worker Discipline Device. American Economic Review, 74, 1984. The authors argue that these groups of workers are paid more by the companies to motivate them and thus increase, over time, the productivity of the company as well as to penalize it if they left the company. 84The level of unionism in the Senegalese formal sector seems significant, since 45% of manufacturing companies and 20% of services providers reported having employees who belong to unions. For an overview of the literature on Africa, see. P. Alby, J. P. Azam and S. Rospané, Labor Institutions, labor-management relations, and social dialogue in Africa, mimeo, 2006. 85We shall revisit the role of unions in the next part. For a discussion on the role of these two effects in the European context, see. O. Blanchard and T, Philippon, « The Quality of labor relations and Unemployment », NBER, working paper, 10590, June 2004. 60 for each additional year of education) than those captured by formal sector enterprises which recorded a 7.5 percent.86 average increase in productivity. 7.63 All the results presented above suggest that some categories of workers and/or companies have the capacity to take advantage of their strategic positions in the labor market. This capacity has no doubt been enhanced since decentralization of wage negotiations began a few years ago. Indeed, as we shall see in more detail in the next part of this study, negotiations are taking place more and more often within companies. Although such a system allows for more flexibility, it exacerbates information asymmetries, thus allowing the most powerful groups to dictate their views, especially considering the absence of information or data on salary movements in Senegal. 86See J. Van Biesenbroaek, op. cit and P. Alby, Unequal Rent-Sharing and Wage Determination in the Formal Ivoirian Economy, working paper, No. 8, Ecopa, 2006. Our results are, however, robust if we use marginal rather than average productivity. The impact of one additional year of education on the marginal productivity of Senegalese businesses is estimated at about 10.7% while the impact on salaries is only 8.5%. 61 8. CONCLUSION 8.1 Until the mid 1990s, the labor market in Senegal was different in rural and urban areas (especially Dakar). In the former, working conditions were extremely precarious, with primary- sector-based activities that offered no job security and wages that fell far below the legal minimum wage. This insecurity was widespread amongst the entire active population. In urban areas, the situation was more heterogeneous on account of the presence of a formal sector comprising public administrative services and para-public corporations in search of employees. This formal sector offered better prospects with higher wages and more diverse job opportunities, which explains the magnitude of the rural exodus. 8.2 Nevertheless, during the last decade, this duality has been fading out as working conditions have deteriorated in urban areas. While the Senegalese economy was able to absorb the excess labor that entered the local labor market each year, this absorption was borne almost exclusively by the informal sector. This phenomenon was expected in rural areas on account of the high demographic rates, but it was also observed in urban areas due to the growth of commercial activities and domestic services, with a high proportion of women. This leveling down of labor market conditions in Senegal has led to gradual changes in emigration flows which, after being characterized for a long time by rural exodus, are now increasingly witnessing emigration abroad. 8.3 The analysis proposed in this second part highlights that the proliferation of informal employment stems from the quasi-stagnation of formal employment. It is certain that the crisis in sectors that employ many workers, such as the chemical, oil, and textile industries is not unconnected with the said stagnation. In addition, the expansion of the formal sector (which still exceeded 4 percent per year on average between 1995 and 2004) was mostly led by companies which invested more in physical capital rather than in hiring additional workers, thereby reflecting the trend in the world economy whereby companies must adapt to new technologies. Finally, it is worth underscoring that job creation in the formal sector was disadvantaged by the structure of the sector, which comprises only a small number of small and medium-sized companies (representing less than 20 percent of total employment in the formal sector). Indeed, these are the companies that create most of the jobs in Senegal, as elsewhere, through a job- creation and destruction mechanism that can revitalize the labor market. In Senegal, this mechanism remains marginal because of difficulties creating small companies in an extremely unfavorable business climate. 8.4 The virtual stagnation of employment within the formal sector can also be explained by low labor productivity gains over time. If workers' productivity continues to be low, companies hardly have any incentive to employ them. Of course, some will argue that Senegal's formal sector remains competitive in comparison with its African neighbors, but the gap with emerging countries and with OECD countries is widening. Furthermore, the productivity (and competitiveness) of Senegal's informal sector is three to ten times lower than that of its formal sector, thereby limiting its capacity to sustain growth in the medium-term. 62 8.5 At least four major recommendations have been suggested to help increase labor productivity in Senegal, thereby stimulating labor demand. The first recommendation confirms the accuracy of the diagnosis made by the Senegalese Government in its Accelerated Growth Strategy by underscoring the interdependency between workers' productivity and the need to improve the investment climate. Workers become more productive in an expanding business that also invests in physical capital, including those operating in the informal sector. Such complementarity is more pronounced in export-oriented companies which must adapt to world market conditions. 8.6 The second recommendation underscores the need to enhance the qualifications of Senegalese workers. Unsurprisingly, the skill level of Senegal's labor force is very low (more than half of informal sector workers have never been to school). Blatant deficiencies still exist even in the formal sector. This notwithstanding, we have highlighted that the lack of progress stems in part from the lack of incentives for students to invest in many years of studies, which yield only marginal financial benefits. In order to break this vicious circle, the quality of Senegal's education system should be improved and its relations with the labor market improved. 8.7 The third recommendation concerns the need to eliminate the distortions that directly affect the labor market and prevent the efficient allocation of workers. There are at least three types of distortions: (i) the crowding out of skilled workers by the public sector and brain drain towards industrialized countries; (ii) the regulatory bottlenecks that penalize companies and workers, while encouraging them to remain in the informal sector; and (iii) information asymmetries that exacerbate the discrepancy between labor demand and supply, lengthen the duration of corporate search, and facilitate recourse to other parallel networks which are based on criteria not often related to workers' skills. 8.8 Finally, wage adjustment mechanisms should be reviewed, given that, even when productivity improves, as was the case in the communications and technologies sector, it is offset by salary increases, especially for some categories of workers who are able to benefit from a rent situation. In other words, the increase in the unit cost of labor, observed in most Senegalese companies, has played a role in limiting their competitiveness and expansion in international markets. 8.9 In all, these conclusions should form the basis of a reform agenda aimed at stimulating labor demand from companies. Such an agenda is important, but it should be assessed from the perspective of workers, as we will examine in the next part of this study 63 PART III: THE LABOR MARKET FROM THE PERSPECTIVE OF WORKERS 1. The labor market has a social function, which is to provide an income that is, at a minimum, sufficient for the population to remain above the poverty line but, more generally, to help improve living conditions. This function lies at the heart of the fight against poverty in an African country such as Senegal, where labor compensation constitutes practically the single source of the population's income. The objective of this third part is thus to assess whether the labor market can provide the means of livelihood for the vast majority of the Senegalese population. 2. A quick look at employment statistics will reveal the distress experienced by most Senegalese workers, thus completing our earlier diagnosis of the labor market in rural and urban areas (Chapter 4). However, we will still have to quantify and to understand better who are the most penalized workers. They fall into two distinct categories: First, those who are looking for employment, but are unable to find it (the unemployed and persons who are involuntarily not active in the labor force). Second, those who are capable of obtaining a job, but are employed inefficiently or underemployed, enforcing them to accumulate several small jobs, count on family solidarity or subsist below the minimum income for survival. 3. From the perspective of workers, the Senegalese labor market is characterized by serious weaknesses that justify the Government's intervention. First and foremost, the Government sought to offer a legislative and regulatory framework aimed simultaneously at protecting employed workers from possible abuse by companies and securing insurance for them, in case of an accident or illness, as well as financing their retirement. Our objective therefore is to assess whether this regulation really succeeds in protecting Senegalese workers and in improving their well being. Curiously, this assessment is often forgotten as most analyses tend to focus on the negative effects of the regulation on labor demand from companies (which was reviewed in Chapter 7). Second, the Senegalese Government has developed a number of programs aimed at promoting employment, notably among groups most affected by unemployment and underemployment (the young, women, etc.). These programs should complement the regulatory framework in the sense that they target those looking for work instead of those who already have jobs. For this reason, they are expected to play a vital role in a country like Senegal, where there are clearly more people in the first category than in the second. 4. Our assessment of the Government's interventions, if necessary, will be mixed. On the one hand, the ambitious legislative and regulatory framework does protect workers but only the tiny part of the active Senegalese population that holds a job in the formal sector. On the other hand, employment programs seem, for the most part, poorly managed and lacking in any systematic assessment of their concrete results. We will argue for deep reform of the Government's role, with assistance from donors, to make the labor policies the social integration instrument that they are expected to be in Senegal. 64 9. THE WEAKNESSES OF THE LABOR MARKET 9.1 In the Poverty Reduction Strategy Paper (PRSP-II), the Senegalese Government describes the population's responses to questions related to poverty as follows: "According to the population, the main signs of poverty are, in order: difficulty feeding oneself, lack of work, lack of health care, lack of decent housing. They also believe that the Government's priorities should be in the following order: (i) youth employment (20.1 percent); (ii) reduction of basic commodity prices (18.9 percent); (iii) access to basic health care services (17.7 percent); and (iv) education of children (11.3 percent). Work is thus the first value that should be promoted to escape poverty." 9.2 If the first priority identified by the population relates back to the need to create jobs in sufficient quantity, particularly for the young, the second and even the last three relate back to the quality of work, notably the insufficiency of income, in particular earned income, which constitutes ¾ of household income, for the numerous basic needs that have to be met. Thus, in this third part, which focuses on the perspective of workers, notably with respect to job security, we will examine, in detail, the capacity of the labor market to provide employment that will help the majority of the population live free of poverty. 9.3 This complex issue will be examined in a sequential manner. First, we will analyze the population in a situation of economic dependence, the population that does not participate in the labor market (the population that is usually inactive and the active population that is unemployed). Second, we will assess whether access to a job allows people to escape poverty and to live decently in Senegal. A. THE POPULATION IN A SITUATION OF ECONOMIC INDEPENDENCE: UNEMPLOYMENT, UNDEREMPLOYMENT AND ECONOMICALLY NON-ACTIVE POPULATION 9.4 By international standards, Senegal stands out because of its relatively high economic dependency ratio. At first glance, there is about one active person out of two on the labor market, two-thirds of whom declare full time employment. In a nutshell, although the dependency ratios (number of full-time workers in relation to the total population or the working age population) are going to be qualified in the analysis that follows, they are 1.5 to 3 times higher than those observed in the other countries in our sample and demonstrate the role of financial transfers within the Senegalese society. They also reflect the fact that a large part of the population, especially women, work without pay within households (see Annex 10 for a detailed description of statistics). 9.5 Before continuing, it is worth setting our static description (based on the 2002 population census) back in a dynamic perspective. Indeed, in the medium term, the pressure on the labor market in Senegal is expected to remain high because of the population growth rate, around 2.5 percent per year, and the important fraction (43 percent) of the population which is under 15 years old today. Owing to these two factors, it is estimated that the Senegalese economy will need to absorb about 100,000 new job seekers per year over the next few years simply to be in a position to stabilize the current unemployment and underemployment rates. Ultimately, the 65 expected fall in birthrates should reduce this pressure even though it will be partially offset by the greater participation in the labor market of women, who will also become more educated thanks to the efforts undertaken by the Senegalese authorities in relation to primary education.87 To better understand the future pressure on the labor market, the national (city-village) and international migration flows should also be taken into account, as they will certainly affect the supply and mix of employment; but the highly illegal nature of these flows makes it difficult to quantify them, and assess their impact on employment in Senegal over time. Table 9.1: International Comparison 1/ Senegal Burkina Bangladesh Nepal Pakistan France USA Population 10.5 12.6 138.1 24.7 148.4 60.2 293.7 Working age population 5.3 6.3 77.9 13.8 78.7 39.3 193.5 Active population 3.1 5.3 72 11.3 55 27.2 145.9 Employed 2.7 5.2 64.1 11.1 52.7 24.5 137.8 Full-time 2.1 4.4 38.6 8 40.7 20.9 118.5 Part-time 0.6 0.8 25.5 3.1 12 3.6 19.3 Unemployed 0.4 0.1 7.9 0.2 2.3 2.7 8.2 Economically non-active 2.1 1 5.9 2.5 23.7 12 47.6 Memo: Full-time / active and 39.8% 69.8% 49.6% 58.0% 51.7% 53.2% 61.2% employed Full-time /Total Population 20.1% 34.9% 28.0% 32.4% 27.4% 34.7% 40.3% Unemployment rate 12.9% 1.9% 11.0% 1.8% 4.2% 9.9% 5.6% Underemployment rate 21.8% 15.4% 39.8% 27.9% 22.8% 14.7% 14.0% Dependency index / 2 146.3 43.2 101.8 72.5 93.4 87.6 63.4 Rate of inactivity 39.6% 15.9% 7.6% 18.1% 30.1% 30.5% 24.6% Source: OECD, World Bank Note: 1/. These figures are not strictly comparable because of the different methodologies and definitions according to country 2/ The economic dependency ratio is measured here by the relation of the number of unemployed persons to the number of employed persons. This rate does not take into account underemployed people. 9.6 According to the last General Population and Housing Census [Recensement Général de Population et de l'Habitat--RGPH III, 2002], 47.5 percent of the population aged 15 and over is either inactive (pupil/student, housewives, disabled persons, retired persons) or unemployed. Although we are going to delve further into the composition of the economically inactive population in Senegal below, the observed rate (39.6 percent) is definitely higher than the rate reported in several other African countries like Kenya (15 percent), Uganda (21 percent), and Burkina Faso (15.9 percent). However, it is close to the rate observed in Ethiopia (35 percent). In this last country and in Senegal, the non-participation rate of women is particularly high (55 percent in Senegal), which may be reflect cultural and social habits and the large percentage of 87For a discussion of these two factors; cf. J. Angrits and W. Evans, Children and their parents' Labor Supply: Evidence from Exogenous Variation in Family Size, NBER Working Paper, No. 5778, September 1996. There is also a negative relation between the insertion of women into the labor market by improving their skills and the fertility/birth rate. A recent study estimated that for each additional year of education for women, the fertility rate declined by 0.26 births in Nigeria. See Osili, Long Does Female Schooling Reduce Fertility? Evidence from Nigeria, NBER Working Paper No. 13070, April 2007. 66 women carrying out their activities within households, whereas the non-participation rate of men (about 22 percent) is close to the rate observed in the continent as a whole. 9.7 The distribution of the unemployed population by area of residence and by gender in Senegal shows that economic dependence is more pronounced: (i) in urban areas (56.5 percent) than in rural areas (38.1 percent); and (ii) among women (59 percent) than men (31.3 percent). The first finding mostly reflects a higher unemployment rate in urban areas (17.1 percent compared with 9.8 percent, respectively), while the second is attributable to the numerous housewives (close to three women out of ten aged 15 and above stay at home) considered inactive. 9.8 Comparison with the results of the 1988 census (RGPH II (1988) shows that the overall dependency ratio88 declined from 222.8 in 1988 to 184.6 in 2002, but remains relatively high compared to other developing countries. This result is due to a combination of the large size of the population under 15 and the significant increase in the number of people who have chosen to pursue studies as well as the increase in unemployment, notwithstanding the increase in the participation of women, who have left their homes to become active on the labor market. Table 9.2: Distribution according to labor market status, by place of residence of persons aged 15 and over RGPH 3 ESAM II December 2002 First round (June-Sept 2001) Third round (Feb.-May 2002) Dakar Other Dakar Other Dakar Other Rural Total Rural Total Rural Total urban urban urban urban urban urban Employed 49.0 46.3 54.2 51.3 42.8 41.6 60.0 51.9 38.9 35.5 35.4 36.2 Unemployed 11.1 8.3 5.9 7.7 22.0 19.9 10.2 15.2 6.2 3.7 3.2 4.0 Unemployment rate 18.4 15.2 9.8 13.0 33.9 32.3 14.5 22.6 13.7 9.4 8.2 9.9 Active 60.1 54.7 60.0 59.0 64.8 61.5 70.2 67.1 45.1 39.1 38.6 40.2 Labor force participation rate 61.1 55.8 61.8 60.4 66.6 63.3 72.3 69.1 48.7 43.3 41.9 43.8 Studies/Training 12.9 14.1 4.6 8.6 11.3 11.1 2.5 6.5 13.8 15.0 5.9 9.6 Homemakers 23.2 26.9 30.3 27.8 13.9 15.4 17.4 16.1 22.6 25.0 28.8 26.6 Other Economically non-active 2.1 2.3 2.3 2.2 7.3 9.3 6.8 7.4 11.2 11.4 18.7 15.5 Economically non- active 38.2 43.2 37.2 38.7 32.5 35.7 26.8 30.0 47.6 51.3 53.4 51.6 ND 1.7 2.1 2.8 2.4 2.8 2.8 3.0 2.9 7.3 9.5 8.1 8.2 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: ANSD, RGPH III and ESAM II 9.9 Survey data reveal that the number of not working people has historically been very high in Senegal and has been on an upward trend over time, raising two important concerns with respect to medium and long term prospects. The first relates to the burden on the employed people who have to take care of not working people; about two unemployed persons are currently under the care of one active employed person. The second concern relates to the necessity of creating enough jobs in the medium term to absorb the relatively high number of 88The economic dependency ratio is measured here as the number of economically inactive people to the number of economically active people. This ratio does not take into account those who are underemployed. 67 temporarily economically inactive persons such as pupils/students who hope to get a job after completing their studies. 9.10 In order to find a response to each of these two concerns, there is a need to conduct a detailed analysis of the structure and evolution of the economically inactive population, the unemployed, and the underemployed. Below we will distinguish successively between voluntary dependents (the inactive and students) and involuntary dependents (unemployed, housewives who work, those who have abandoned the search but who would like to work). This distinction will allow us to underscore that, on the one hand, the number of dependents in Senegal is overestimated because of the exclusion from statistics of housewives working in domestic services and, on the other hand, underestimated because of the relatively high number of workers who are in a situation of underemployment. 9.11 Before proceeding with the proposed analysis, it is worth specifying that it is difficult to distinguish between voluntary dependents and involuntary dependents because of the instability of employment over time, which characterizes the large majority of the Senegalese population, as shown in Box 9.1 below. Box 9.1: Job instability in Senegal The situation of Senegalese workers varies enormously over time through connected channels as it can be illustrated between the first and the third rounds of ESAM-II, which were only eight months apart. Between these two rounds, the active population who declared they were employed (with a job the week preceding the survey) declined by 900,000 persons (a 33% drop) and the number of unemployed fell by close to 600,000. This drop was absorbed by an increase in the number of the economically non-active (close to 1 million) and a reduction of the working age population and of non-identified individuals (around 500,000). Beyond the inaccuracies in the coverage of the two surveys, a significant fraction of the employed active population and unemployed returned to their households (500,000) or to an activity that is not precisely defined (500,000). These variations occur with men as well as with women, but they are much more pronounced in rural areas (which account for 75% of the variation in the rate of inactivity). This phenomenon illustrates the instability of employment in rural areas where, depending on the season, people are employed or inactive (but likely with an occupation within their households). It also highlights that unemployment can only partially capture the active removed from the labor market because a good number of them are hidden within the economically non-active group. Voluntary dependents 9.12 A priori, all persons not in the labor force should be considered as having voluntarily abandoned the search for employment. In principle, this is the case for persons aged 15 and above who are pursuing studies or training (8.8 percent) as well as the other non-labor force participants comprised essentially of retired persons, the sick, and the handicapped (2.3 percent). These rates are comparable to those observed in other countries in the sub-region. 68 9.13 However, it is worth noting that a portion of these non-labor force participants left the labor market after a long period of job search (four years on average), but would like to work if given the opportunity. These "disheartened" labor force participants constitute a non-negligible part of the working age population since, in the Dakar agglomeration, there were 66,800 individuals in this situation in 2002, out of a total work force of 756,300, a rate of close to 9 percent. 9.14 A non-negligible proportion of non-labor force participants are women, notably homemakers (28.5 percent), which is high compared to regional and international levels. These women are mostly concentrated in rural areas where more than six women out of ten aged 15 to 64 stay home. Indeed, three different behaviors have been noted: (i) housewives who have decided not to participate in the labor force because they are aware of their limited chances of finding decent employment owing to their weak productivity, which stems their low education level; (ii) housewives who have decided voluntarily not to participate in the labor force because the gains from their work would not compensate their disutility (in terms of loss of time and of recreation); and (iii) housewives who do work within the household but who are not paid. 9.15 In view of the social and cultural realities of Senegal, where family ties are extremely strong, it is likely, even if it is difficult to quantify, that the second and third behaviors are predominant. This assumption is supported by the research of A. Alesina and P. Guliano, which shows that the stronger family values are, the less likely women are to participate in the labor market because they spend more time within the household. 89 In Annex 5, we show that Senegalese women who are active in the informal sector spend close to 20 hours per week on domestic occupations, which is almost equivalent to the number of hours spent by those who declare they are not in the labor force and which is, above all, four times higher than the number of hours reported by men who work in the informal sector. The weight of domestic work is heavier in Senegal because of the sizes of households (which is on average 9.7 persons according to ESAM-II) which requires more domestic services. If a domestic services market existed, the women would choose to participate in the labor market if their incomes were higher than the cost of acquiring these domestic services. 9.16 This simplified analysis has the merit, on the one hand, of providing an explanation for the significant proportion of women who are not in the labor force and, on the other hand, of raising the issue of responsibility for domestic services within the household, which constitutes one of the most significant constraints to the participation of women in the labor market. We note that this constraint lessens as the level of education of women increases, since the gap between the earned income and the cost of acquiring the domestic services becomes significant. 9.17 Three types of actions can be envisaged to find a solution to this problem which prevents the optimum utilization of resources at the macroeconomic level and whose microeconomic reasons are accepted by the society. The first type of action includes measures aimed at reducing the time spent on household duties by disseminating related technological progress (and reducing the sizes of households) in order to free women of their domestic responsibility since, in the short term, it is women who have the skills for the proper coverage of these services; the second 89Alberto Alesina and Paola Giuliano, The Power of the Family, NBER Working paper, No. 13051, April 2007. 69 type of action includes those aimed at defeminizing coverage of these services, and the third type of action comprises those aimed at creating a formal market for the exchange of services. Involuntary dependents 9.18 There are two main categories of involuntary dependents in Senegal: unemployed and underemployed workers. 9.19 Unemployment. In Senegal, 7.7 percent of the population aged 15 and above report that they are unemployed compared with 51.3 percent of employed persons, representing an unemployment rate of 13 percent for the whole country.90 This rate, calculated from the results of the RGPH III is defined as permanent unemployment, for it is based on the employment status of the active population over the preceding 12 months (see Annex 1 for details). When unemployment is defined as the situation of the active population during the preceding week (which corresponds to the definition generally used by the ILO), the rate varies significantly during the year. Indeed, the current unemployment rate fluctuated from 22.6 percent at the first round of the ESAM II to 9.9 percent at the third round of the same survey (eight months later). This seasonal variability seems pronounced in urban as well as in rural areas. Table 9.3: Unemployment by place of residence and by level of education for persons with formal education aged 12 and above Place of residence Level of education Employed (%) Unemployed (%) Unemployment rate Primary 28.7 5.8 16.8 Secondary 34.9 9.0 20.5 Urban area Higher 58.1 5.2 8.2 Total 32.7 7.0 17.6 Primary 21.9 2.4 9.9 Secondary 35.0 4.9 12.3 Rural area Higher 57.5 7.2 11.1 Total 24.8 2.9 10.5 Primary 25.9 4.4 14.5 Secondary 34.9 8.2 19.0 All Higher 58.0 8.0 12.1 Total 30.0 5.6 15.7 Source: ANSD Rapport de présentation RGPH III 9.20 Unemployment is higher in urban areas (17.1 percent) than in rural areas (9.8 percent) and is more widespread among the young (30 percent) since about six unemployed out of ten are less than 35 years old. Women seem to be more vulnerable than men with unemployment rates of 14.7 percent and 12.2 percent, respectively. These differences according to place of residence, gender, and age are robust and persistent, since they emerge in all surveys conducted in Senegal and this at different periods. 9.21 The analysis of the unemployment rate by place of residence and by level of education brings out two observations. The first is that overall, there is no negative linear correlation 90This rate is practically equal to the one observed in Ethiopia (14%), but seems lower than in Burkina Faso. 70 between the level of education and the rate of unemployment. Indeed, unemployment is more prevalent among those with an intermediate level of education (secondary) than among those at the extremes (primary and higher). This result stems from a lack of strategy for retraining those who have reached the secondary level, but are unable to continue to the higher level and who are quite advanced in age (15-20) to learn some abilities in the informal sector, in contrast with those who abandoned their studies at the primary level, most of whom are absorbed by the informal training system. The second observation is that the link between the level of education and the unemployment rate is very weak, or even negative, in rural areas. This is explained by the fact that activities practiced in rural areas do not require a high level of education as the result of the low degree of sophistication of agricultural technologies, and that the active population is obliged to work because of its extreme insecurity and poverty. 9.22 Certainly, among the major causes of unemployment, we can cite the low level of qualifications of job seekers and the inadequacy of qualifications in Senegal; as emphasized by the persistence of unemployment among young graduates in the Dakar area. In fact, the average duration of unemployment remains particularly long among young unemployed seeking their first job (more than four years in Dakar) and those previously employed (more than three years in Dakar). 9.23 The relatively long duration of unemployment and the multiple unsuccessful searches end up having a strong impact on the behavior of job seekers who become more and more indifferent about the type of job despite a marked attraction for wage-earning employment. These job seekers then resort to parental relationships. Meanwhile, no matter the type of job being sought, the majority of the unemployed prefer to have a permanent full time job rather than to be under employed. 9.24 Underemployment. Because of the relatively low unemployment rate, some researchers interpret positively the capacity of the labor market to create jobs in Senegal. In reality, the concept of unemployment does not fully capture the weaknesses and limitations of the labor market in a country like Senegal. Indeed, even if they are employed, a large proportion of the active population works less than 35 hours a week (against their will) or earns less than the minimum hourly wage. In the Dakar agglomeration, 53 percent of the working active population declares that they are in one or the other of these situations (which is certainly below the national average since job insecurity is more pronounced in rural areas). 9.25 The definition of underemployment varies from survey to survey. For example, in the 2002 household survey, it is defined as workers who wish to do more work than they are doing, which corresponds to about 21.8 percent of the working active population. In total, if one takes into account the number of unemployed and underemployed workers, the combined rate would stand at around 34 percent of the working active population. This latter rate seems higher that the rate reported for Burkina Faso (20 percent) but is approximately at the same level as that for Pakistan and Nepal (around 25-30 percent) and lower than that of Bangladesh (45 percent). 9.26 There hardly seems to be a notable difference between the underemployment rate for women and that for men at the national level, whereas this rate is higher in rural areas (24 percent) than in urban areas (18.7 percent). At the national level, the underemployed are 71 concentrated in activities with a high level of informality, such as trade (30.7 percent) and the primary sector (21.5 percent) and other trade related services (11 percent). 9.27 In Dakar, where labor market conditions are better owing to the higher concentration of jobs in the public sector and in the private formal sector, the overall rate of underemployment is about 17.2 percent. The 1-2-3 Survey also defines the number of workers who declare several professional occupations, which is a way of fighting underemployment, but this only stands at 4.3 percent of the working active population. B. EARNED INCOME AND POVERTY 9.28 Having a job is not enough to guarantee living above the poverty line. Below we will examine the extent to which the position of household heads in the labor market influences the level of income of their households. Before presenting the results of our analysis, it is useful to specify that in contrast with the preceding chapters, we will use households, rather than individuals, as the unit of reference. In a country like Senegal, decision making, including participation in the labor market, are community-based and not individual because they aim to meet the needs of the whole household. Furthermore, a number of activities take place within households, resulting in a complex network of transfers that are extremely difficult to capture at the individual level.91 9.29 Generally speaking, heads of households are employed since their unemployment rate is relatively low (2.9 percent). However, this access to work is not a guarantee of prosperity or even of decent living conditions (Table 9.4). The categories of households that are most likely to suffer from poverty are those headed by (i) apprentices (92.1 percent of households live below the poverty line); (ii) family aid workers (59.8 percent); (iii) self-employed workers (54,1 percent); and (iv) jobbers (49.6 percent). In contrast, households where the heads are employers (28.2 percent) and wage earners have a lesser probability of finding themselves below the poverty line. There is a differentiation according to location since the propensity for a household to be poor according to the occupation of the household head is higher in rural areas than in urban areas, especially in Dakar. 92 91This line of reasoning was at the root of the decision by the Senegalese authorities to collect data on expenditures and revenues that are only available at the level of households in the second household's survey (ESAM-II). 92In addition, we note that not only are several households poor, but that they live far below the poverty line, since their level of consumption is on average 18.4% below the line. 72 Table 9.4: Incidence of poverty according to place of residence, gender of household head and the occupational status of the household Other towns Dakar urban Rural area Total Occupational status F H Total F H Total F H Total F H Total Family aid worker 63.7 56.7 60.6 59.0 63.8 62.7 57.2 60.8 59.8 Apprentice 100.0 100.0 100.0 100.0 86.7 86.7 92.1 92.1 Other 69.7 74.2 72.2 19.7 32.9 30.7 7.9 7.9 46.9 29.2 32.3 Employer 0.0 26.4 24.5 17.3 27.0 25.8 77.1 25.9 33.4 41.7 26.4 28.2 Self- employed 39.0 53.5 49.4 36.3 38.3 37.8 35.4 60.3 57.7 36.6 57.1 54.1 Wage earner 32.8 27.8 28.3 21.9 21.8 21.8 22.2 45.2 44.5 25.3 28.5 28.2 Jobber 38.9 45.8 44.5 26.5 47.7 46.6 0.0 58.4 56.0 29.1 51.6 49.6 (ND) 38.4 50.2 45.1 34.2 39.9 37.9 42.8 61.2 56.9 37.8 51.0 46.7 Total 39 46 44 33 34 34 39 59 57 37 51 48 Source: ANSD, ESAM II and author's calculations Notes: F= Female and H = Male 9.30 Although access to a job hardly allows a large majority of Senegalese households to escape poverty, it nevertheless allows them to avoid extreme poverty (Table 9.5) 93 Only one household out of ten where the household head is employed is in a situation of extreme poverty (and less than 2 percent in Dakar). Once more, the rate is higher in rural areas since close to two households out of ten have not enough to eat. 9.31 Households headed by women are less likely to suffer from poverty (and from extreme poverty) than those headed by men. This finding is paradoxical since the 1-2-3 survey in Dakar showed that women's salaries were half those of men. This paradox is solved by extrapolating the results of the first household survey (ESAM-I) conducted in 1994/95, which had shown that households headed by women received relatively high remittances, which allowed them to live above the poverty line. In general, earned income accounted for 75 percent of the total income of households in Senegal, with highs of 88 percent and 95 percent for wage earners and employers, but only 56 percent for women and some categories of workers such as apprentices and jobbers. Thus, beyond the size of the household, which is slightly smaller in the case of households headed by women, with an impact on the household living conditions, the Senegalese society seems to have an income distribution support system for women, implicitly recognizing their vulnerability. 93Extreme poverty is defined as the threshold of food poverty, which is 2,400 kilo calories per adult equivalent per day. 73 Table 9.5: Incidence of extreme poverty according to place of residence, gender and the occupational status of the household head Other towns Dakar urban Rural area Total Occupational status F H Total F H Total F H Total F H Total Family aid worker 0.0 0.0 0.0 0.0 0.0 0.0 32.2 22.6 24.9 23.4 20.2 21.1 Apprentice 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other 23.0 0.0 10.1 0.0 0.0 0.0 7.9 7.9 12.6 3.0 4.7 Employer 0.0 0.0 0.0 0.0 2.4 2.1 0.0 14.7 12.5 0.0 6.0 5.3 Self-employed 6.5 6.9 6.8 0.6 1.7 1.5 6.0 18.2 16.9 5.1 15.1 13.7 Wage earner 5.5 3.5 3.7 0.0 0.4 0.4 0.0 7.8 7.5 1.7 2.9 2.8 Intern 42.8 42.8 0.0 0.0 0.0 42.8 21.4 Jobber 6.9 4.0 4.5 0.0 1.1 1.0 0.0 14.5 13.9 4.2 7.2 7.0 (ND) 4.3 7.1 5.9 0.8 2.6 2.0 8.5 21.2 18.3 3.9 11.4 8.9 Total 5.2 5.8 5.6 0.7 1.7 1.4 8.0 18.1 16.8 4.8 12.1 10.7 Source: ANSD, ESAM II and author's calculations Notes: F= Female and H = Male 9.32 So far, we have shown that access to work by the head of a household does not guarantee that the latter will live above the poverty line. This depends on the household head's (i) occupation; (ii) place of residence; and (iii) access to other sources of income in addition to earned income (notably remittances). These inequalities are present irrespective of the level of income or of consumption of the household. Figure 9.1 below illustrates the probability of a household attaining a given level of consumption per adult-equivalent according to the occupation of the household head. For example, a household headed by a wage earner has about a 55 percent chance of falling below CFAF1,000 per day compared with 70 percent for households headed by an employer and more than 90 percent for those headed by a family aid worker and a self employed worker. In general, this distribution function remains stable independent of the level of consumption, except for high levels where it appears that households headed by employers are most likely to consume more. 9.33 In summary, this chapter showed that access to the labor market is limited for a significant section of the Senegalese population. Not only is the unemployment rate close to 13 percent, but there is still a non-negligible proportion of workers who are underemployed or who are excluded from the labor market (such as involuntary non labor force participants). Furthermore, access to employment does not guarantee decent living since almost half of the households with working household heads continue to live below the poverty line. These labor market weaknesses seem more pronounced for some categories of workers such as those operating in the informal sector, the young, and, to a lesser extent, women. The Government should therefore focus its interventions on these groups either with respect to the protection of workers or to the active programs on the labor market. 74 Figure 9.1: Distribution function of expenditures per adult equivalent and per day according to the occupational status of the head of the household 1.00 ge 0.90 nae 0.80 m 0.70 0.60 de 0.50 geatnec 0.40 0.30 0.20 our P 0.10 0.00 0 1,000 2,000 3,000 4,000 Consommation par equivalent adulte Aide familiale Employeur Indépendant Salarié Non occupes 75 10. PROTECTION OF WORKERS 10.1 The social protection of workers in Senegal is based on a paradox. On one hand, there is a mechanism for the protection of workers, which is characterized by an ambitious institutional and regulatory framework. On the other hand, in reality, this framework concerns only a small fraction of Senegal's active population. We shall argue that resolving this paradox should be at the heart of the agenda pursued by the Senegalese authorities under their accelerated growth and poverty reduction strategies. A. THE LEGISLATIVE AND INSTITUTIONAL FRAMEWORK 10.2 In theory, a country may choose to provide more or less strong social protection for its workers. Some countries have chosen to provide minimal protection, allowing flexibility for the labor market, which should help reduce the number of unemployed or underemployed workers through salary adjustments (USA, Korea). Other countries intervene, at the cost of some degree of rigidity, through legislation and institutional mechanisms in order to manage employee- employer relations and hence offset possible market failures (such as information asymmetries, dominant market position, etc). Senegal is clearly in the second category of countries as demonstrated by the application of the methodology proposed by the OECD (see Box 10.1) Box 10.1: Labor legislation in Senegal from an international perspective The OECD has designed a methodology based on 18 indicators to measure the rigidity of employment protection legislation. These indicators can be classified under three areas: (i) employment protection of workers against individual dismissal; (ii) regulation of temporary forms of employment; and (iii) special requirements for collective dismissals. The application of this methodology in Senegal shows that current legislation is relatively rigid Source: Annex 2.A.1, OECD Employment Outlook 2004, OECD 2004 Appendix 2.A.1 compared with OECD countries. With a 3.5 score, Senegal is on par with Turkey, Portugal, and Mexico. This score is higher than those of France (2.9), Italy (2.4) and Anglo-Saxon countries such as the USA 10.3 (0.7), England (1.1), or Ireland (1.3). This indicator shows that labor legislation in Senegal is Legal protection of workers is stipulated in the Labor Code (adopted in 1997 and modified in 2003) and in some sector collective agreements. particularly strict with respect to collective (or economic) dismissals,94which require consultation with Since the labor legislation employee representatives as well as with the Ministry of Labor. The regulation of temporary enshrined in the Labor Code is well known in Senegal (see Annex 11 for details), only the main employment contracts also lacks flexibility, in part because it still has to be supplemented by decrees ideas are summarized below: aimed at increasing mobility of workers that was introduced in the Labor Code. · Minimum wage: The minimum guaranteed wage [salaire minimum interprofessionnel garanti--SMIG] is set by Decree 96 ­ 154 of February 19, 1996 at CFAF 209.10 per hour. For most collective agreements, the monthly salary for the tier 1 category is about CFAF 47,700 for 173 hours of work per month and 33 hours per week. The minimum guaranteed wage [salaire minimum agricole garanti--SMAG] in the agriculture and related industries is set by the same decree, at CFAF 182.95 per hour. 94Senegal has also ratified a series of international treaties, such as those on child labor (Convention 138 and 182,) non discrimination in the work place (Conventions 100 and 111) the elimination of forced labor (Conventions 25 and 105,) the right to association and collective bargaining (Conventions 87 and 98). 76 · Social Protection: Workers enjoy some fringe benefits including Social Security (CSS), a retirement fund (IPRES), and compensation in the event of illnesses or accidents. Total contributions related to these benefits are described in chapter 7, however, it should be noted that they are borne by both the employer and employee. · Non- wage related advantages. The Labor Code provides a long list of advantages or rights for workers, the most important of which are paid vacation (up to 26 days per year), sick leave, and authorized absences for personal reasons.95 · Measures for recruitment and dismissal. These measures were described in Chapter 7, but their goal is to reduce the risk of being recruited under poor conditions and the risk of abusive dismissal. 10.4 There are additional measures aimed at protecting workers against possible abuse. These measures cover issues related to remuneration, such as payment for overtime and night work. They also concern the adoption of hygiene, health and physical protection standards, in line with international best practices, especially child labor. 10.5 In many sectors of the Senegalese economy, the Labor Code is superseded by Collective Agreements (CAs), which were adopted before independence: Building and Construction in 1956; Trade in 1956; Transportation in 1956; General mechanics in 1957; Banking sector in 1958; Fats and Oils in 1958; Chemicals industry in 1958; and Food Industries in 1958. Collective agreements are usually concluded for an indefinite period, but may be amended or terminated by the parties. Each agreement is signed by professional organizations which commit all companies in the sector. The Ministry in charge of Labor may, by decree, extend the application of an agreement to other companies. If well understood and applied, the collective agreement technique allows for flexibility that takes into account the specificities of the branches-- something which cannot be done by the Labor Code. Regarding salaries, the parties concerned have to negotiate every five years. For the other issues, a collective agreement may stipulate a period of validity, at the end of which the parties may terminate it leading to new negotiations. Moreover, the Government has the habit of calling for new annual negotiations, after receiving the grievances report from labor unions during the May 1 [Labor Day] celebration 10.6 To ensure the implementation of the legislative framework reviewed above, there are a number of institutions, which can be described as follows: 95The right to normal leave is obtained after twelve months of effective service. It is calculated on the basis of two working days per month of service or at least four calendar weeks per year of effective service. It may be accumulated without exceeding a period of three years; however, a minimum of six days must be taken per year. Additional leave for seniority include: (i) one working day after ten years of service; (ii) two working days after 15 years of service; (iii) three working days after 20 years of service; and (iv) four working days after 25 years of service. There is additional leave for mothers: (i) one additional day per year for mothers for each child under 14 with civil status registration; (ii) two additional days for female wage-earners or women apprentices per child under their care if they are under 21; and (iii) two days per child under their care beginning with the fourth if they are over 21 on the last date of the reference period. Sick leave (as defined in Article 19 of the National Interprofessional Collective Agreement) cannot exceed a period of: six months maximum, with the possibility of extension depending on seniority (eight months for seven to fifteen years of seniority, above that, ten months). 77 · At state level, the Ministry in charge of Labor and Professional Organizations intervenes in the functioning of the labor market through its significant prerogatives regarding regulation (cf. Box 10.2). · Employer representatives are grouped under several associations. The main ones are: the National Council of Employers [Conseil National du Patronat--CNP]; the National Confederation of Employers of Senegal [Confédération Nationale des Employeurs du Sénégal--CNES], and the National Union of Traders and Industrialists of Senegal [Union Nationale des Commerçants et Industriels du Sénégal--UNACOIS]. · Employee representatives are divided into 18 unions, including the National Confederation of Workers of Senegal [Confédération Nationale des Travailleurs du Sénégal--CNTS], the National Union of Autonomous Unions of Senegal [Union Nationale des Syndicats Autonomes du Sénégal--UNSAS], and the Confederation of Autonomous Unions [Confédération des Syndicats Autonomes--CSA], which are the three largest. Box 10.2: The Directorate of Labor and Social Security The mission of the Directorate of Labor and Social Security covers the following six areas: - The work environment: health and security at work: sanitation and security at work Committees, occupational medicine services; - Working conditions: employment of children and women, working hours and vacations; - Work relations: salaries, employment contracts; professional relations; - Conciliation and negotiation: conciliation for individual and collective conflicts; negotiation of collective agreements; - Employment: managing employee turnover; - Social Security: managing the obligations of employers; supervision of social security bodies; social insurance prevention and investigations. This Directorate comprises five divisions and two units (see Annex 11). Its professional staff comprises labor and social security inspectors and controllers (see Table10.1). 10.7 The national charter on social dialogue [Charte nationale sur le dialogue social] came into force in March 2003 with the National Committee for Social Dialogue as its main executive body. The committee comprises the institutions described above.96 This tripartite committee was created to facilitate dialogue on the adoption of legal instruments (especially implementing decrees for the Labor Code) and to provide a consultation framework for salary negotiations and in the event of conflicts. Its introduction seems to have begun bearing fruit since labor conflicts hardly seem frequent in Senegal, not exceeding one working day in 2003 according to the investment climate assessment (ICA) survey, except in administration (especially the education sector). Consultations also led to the gradual adoption of a number of Labor Code implementing decrees97 and the amendment of some collective agreements, notably those for banks, the hotel 96This tripartite approach was not new in Senegal, since there was already the National Consultations Committee for the labor Market and Social Security which was set up in 1961 at the time of adoption of the former Labor Code. 97More than 27 decrees were adopted by the authorities including practical details for the application of the contracts of jobbers, or the practical details for improvements in the textile industry. 78 industry and food service sector. In contrast, we shall see below that the committee hardly served as a framework for salary negotiations, which, more and more, tend to take place at the company level, in line with what is done virtually all over Africa.98 B. THE REAL FACTS 10.8 For the most part, labor legislation provides only limited protection to Senegalese workers. Indeed, only a small fraction of the active population is highly protected, while the rest finds itself excluded from the official protection system. In general, the Senegalese system favors those who are already employed, ("insiders") to the detriment of those seeking employment ("outsiders"), thus generating a dual labor market which does not promote cooperation as it is the root cause of deep-seated inequalities. 10.9 Our understanding of the elitist nature of the protection system set up in Senegal is demonstrated by the following three observations: · First, coverage by the social security system is limited to 245,000 workers, or 5 percent of the working-age population. The coverage rate is even lower when only the private sector is taken into account (below 3 percent in Dakar). · Second, the number of employees who have a written contract is below 30 percent in the city of Dakar, suggesting that labor legislation is not applicable to the majority of workers (even though a verbal contract is acceptable) who are confined to the informal sector. · Finally, the legal minimum wage is hardly used as a reference in practice. The 1-2-3 Survey showed that 46.6 percent of the active workforce in Dakar earn a salary below the legal minimum wage, with a high proportion of women and youth. This rate is bound to be even higher in rural areas where work and remuneration conditions are more insecure than in urban areas.99 10.10 From a dynamic perspective, regulation tends to deepen inequalities among the Senegalese people. It protects those who have formal employment since it reduces their likelihood of being dismissed, but it penalizes job seekers since it increases hiring costs. We have noted that formal employment is held by workers who are about 40 years old, have spent 11 years in school, are relatively qualified and work in a large company in an urban environment. All the other categories of workers, especially youth (and in part women) are therefore highly penalized by currently applicable labor legislation in Senegal.100 98Salary negotiations are conducted for the most part within companies in six countries (Kenya, Ethiopia, Namibia, Cameroon, Cote d'Ivoire, and Ghana) out of the sample of ten countries analyzed by Alby, Azam and Rospabé, op. cit. The exceptions are South Africa, Zambia, Zimbabwe and Nigeria. 99 As a comparison, the percentage of workers earning a salary above the legal minimum wage is lower in Latin America, standing at 5% in Uruguay, Brazil, Bolivia, Honduras or Argentina. Only in Nicaragua is this rate around 40%. 100 This finding is not applicable to Senegal alone and has been identified in other developing and industrialized countries, see "OECD Employment Outlook 2004," or G. Allard and P. Lindert, Euro-productivity and euro-job since the 1960s: Which institutions really mattered ?, NBER, Working Paper No.12460, August 2006, or also for 79 10.11 The weaknesses or malfunctions of the employment protection system in Senegal are undisputable, including by the Government and workers' unions; however, the causes need to be identified. Without seeking necessarily to be exhaustive, we can suggest that the Senegalese authorities do not have the means to achieve their ambitions. The implementation of the regulatory framework requires considerable human and financial resources but the Directorate of Labor, which is responsible for the implementation of the Labor Code, is understaffed, with a total of 34 inspectors and 50 controllers covering the entire country. The Fatick region does not even have inspectors and there are never more than two in the other regions, with the exception of Dakar. Even in Dakar, 35 inspectors and controllers cover more than 3,000 companies registered in the trade registry. This represents about 80 companies per person each year. Under these conditions, it is not surprising that companies do not respect the rules, since the risk of sanctions is practically non-existent. Table 10.1: Staff of the Directorate of Labor and Social Security Inspectors Controllers Dakar 21 14 Thiès 2 6 St Louis 2 5 Louga 1 2 Matam 2 2 Kaolack 1 6 Diourbel 1 1 Ziguinchor 2 2 Kolda 1 2 Tambacounda 1 3 Fatick 0 2 ZFID 0 5 TOTAL 34 50 Note: ZFID= Dakar Industrial Free Zone 10.12 The second reason that can be put forth is that the labor regulatory framework is both incomplete and partly outdated. Indeed, in spite of recent efforts made by the authorities, there are still many Labor Code implementing decrees lacking, such as the one which determines payment modalities for overtime and the one that establishes the general regime for exemptions to the legal duration of employment. In addition, the Labor Code is not really binding in most formal sectors of the Senegalese economy which are practically all covered by collective agreements. Yet, these agreements, which date back to the end of the 1950s, for the most part, are outdated and very restrictive if they were really applied. Only the parts concerning agreements relating to salaries have been partly updated over time. 10.13 The third and last reason we would like to put forth is that the social protection system proposed by the law is costly for both firms and workers. This burden is most visible for the social security and retirement systems, which impose salary deductions of up to 40 percent. For example, an employee who receives a gross salary of CFAF 50,000 would only be paid a net salary of CFAF 30, 000 (assuming that the company is able to deduct all the contributions from Chile, C. Montenegro and C. Pagés, Who Benefits from Labor Market Regulations ? Chile: 1960-1998, NBER Working paper, No. 9850, July 2003. 80 the salary of the employee). This would place him below the minimum wage. In these circumstances, it is highly likely that the employee agrees with the owner of the firm to be paid a salary of CFAF 40,000 without being declared in the social security system. This type of arrangement is not fictional, and helps understand why only one worker out of five who has a written employment contract is simultaneously registered with the CSS (Social Security) and the IPRES (Retirement Fund). 10.14 The main conclusion that emerges from our analysis is that the Senegalese labor market has adapted to the rigid and cumbersome regulatory framework which mostly protects workers who have already secured employment in the formal sector. As for the others, they have chosen to remain outside the official social protection system, which remains not only very costly for companies but also for employees themselves. This adaptation of the labor market is also visible when social partners opted to gradually decentralize salary negotiations in spite of the setting up of centralized institutions (such as the committee for social dialogue). For a long time, salary negotiations were centralized around the Ministry of Labor, which convened employer and employee organizations; but this system lost its attractiveness after the crises within some major state companies (SONACOS became SUNEOR and SENELEC) and the freezing of salaries in the civil service, both of which served as references during negotiations in the 1980s and 1990s.101 This movement was further facilitated by the fragmentation of employer and, mostly, employee associations. Today, most salary negotiations take place at the company level, eventually at the sector level in some cases such as the banking and hotel sectors, with neither employer associations nor workers' unions deeming them as penalizing for their members. 101The decentralization of salary negotiations is the reason for the lack of a correlation between public and private sector salaries in recent years. This is contrary to the findings presented by several authors, especially Rama (1998) who found that during the 1980s and the first half of the 1990s. Increases in the public administration guided adjustments in the private sector, especially within large formal companies. Rama, Martin, Wage misalignment in CFA countries: are labor market policies to blame?, Policy Research Working Paper Series 1873, World Bank, 1998. 81 11. EMPLOYMENT PROMOTION PROGRAMS 11.1 In spite of the absorption rate of new jobseekers that is, by and large, spectacular, the labor market has been unable to satisfy the aspirations of a vast majority of Senegalese workers. The unemployment rate remains high, especially in urban areas, and the number of workers who declare they are underemployed and underpaid remains worrying given that this number is now close to half the active population. In parallel with existing labor regulations which mostly aim to protect those already working, the Senegalese Government has implemented several programs aimed at promoting employment especially of the most vulnerable groups such as youths and certain categories of vulnerable groups (women artisans, etc.). 11.2 An overview of these programs will allow us to evaluate their mechanisms and their effectiveness. This evaluation will also include a comparison with international experience in order to identify several suggestions for reform which could guide the Senegalese authorities in their efforts to promote jobs in the country. It should be made clear that if we will focus on active programs that promote employment, our assessment should be made in relation to the training programs examined in the previous chapter. A. AN OVERVIEW OF JOB PROMOTION PROGRAMS 11.3 International experience shows several possible options that could be used to support job creation. Following the classification proposed by a recent World Bank study,102 we could successively identify programs that focus on: (i) services that provide information on employment opportunities; (ii) subsidizing salaries in order to encourage employment; (iii) development of public works; and (iv) promoting microcredits aimed at facilitating the emergence of new entrepreneurs. 11.4 Although most African countries have not really pursued a proactive employment promotion policy, Senegal stands out because of the large number of programs that spread out over a complex network of ministries and agencies. Table 11.1 attempts to classify the 16 existing programs according to the four categories described above. To limit the scope of the study, we present only the programs whose primary objective is to create jobs even though it can be argued that employment support is a secondary objective of several projects, such as the village management organization project or the local community development projects. Similarly, we will not cover the REVA plan, recently launched by the Senegalese authorities to facilitate return towards agriculture, because of the lack of information at the time this report was drafted. 102Betcherman, Luinstra, and Ogawa, Impacts of Active Labor Market Programs: New Evidence from Evaluations with Particular Attention to Developing and Transition Economies, World Bank, 2004. 82 Table 11.1: Employment promotion programs in Senegal Intervention Objective Program in Senegal (date Ministry responsible created) Placement and Placement service which seeks to Labor service Directorate of Labor information service match job-search with the National Agency for Youth Autonomous Agency. demands of companies. The Employment (2001). services generally offer a collection of information and advice to job seekers, including contact with potential employers Salary subsidies Subsidies paid to companies to National Employment Fund Directorate of Labor encourage them to employ (2000). workers and train them over time. National convention The subsidies are generally State/employer (2006). conditional to an undertaking of long term employment in vulnerable sectors or regions or of groups of workers like youth seeking their first job. Public Works Direct creation of jobs through the Agency for the Execution of AGETIP. execution of public works .The Public Interest Works against projects generally generate underemployment (AGETIP temporary jobs which are (1989). relatively unskilled. May be used National Civic Service(1999). to target the development of regions that are lagging or to encourage the passage from informal to formal jobs Credit to micro- Offers financial assistance to National Youth Fund (2001). National Fund for the enterprises and unemployed workers who wish to National Employment Fund promotion of Youth for self- create their own company. This (2000). Agency . employment assistance may include support National Fund for Female Directorate of Labor. measures, training, and advice. Entrepreneurship(2004) Ministry of the Family. These programs may be universal Project for the Integration of National Fund for the or more generally target the Graduates from Arab institutes Promotion of Female informal sector and micro and Universities (1998). Entrepreneurship. enterprises which do not have Project for the Integration of Agency for the Social access to alternative sources of Discharged Soldiers (2005). Reintegration of funding and only require small ASC/ Youth Employment Soldiers/Ministry of credits /grants. Maisons de l'outil (2004). Armed Forces. Project for the Promotion of Ministry of Youth Rural Entrepreneurship (1996). Affairs Regional Solidarity Bank PROMER/Agency Small and Large Dairy Projects Ministry of Agriculture (PPGL) in the Cotton Producing Areas 11.5 Insofar as all the programs in force are described in Annex 12, we shall focus here on only the five programs considered to be the main instruments used by the Government in Senegal: 83 · The National Fund for Employment Actions [Fonds national d'actions pour l'emploi--FNAE]: (i) supports the employment of wage-earners by providing subsidies; and (ii) supports self employment by providing credits to operators who have to make a personal contribution of ten percent to benefit from a credit at an eight percent interest rate for an average duration of three years through two credit institutions: Senegalese Association for Support to the Creation of Socio Economic Activities [l'Association Sénégalaise pour l'Appui à la Création d'Activités Socio Économiques--ASACASE] and Action Plus CEDS-Afrique · The objective of the National Fund for the promotion of Youths [Fonds national de promotion de la jeunesse--FNPJ] is to help resolve problems related to the insertion of youths into productive sectors through research, the mobilization of financial resources, and the development of new financing mechanisms. In other words, the FNPJ aims to contribute to the funding of individual or collective projects initiated by youths (18-35) in different areas of economic activity. To this end, the FNPJ offers three alternative credit lines: the Financing Fund, the Participatory Loan Fund, and the Guarantee Fund.103 Furthermore, within the framework of the Financing Fund, the FNPJ has developed a new program called "Tous petits crédits, jusqu'à 500,000 FCFA " (Very Small Loans, up to CFAF 500,000) to support micro activities in the craft and trade sectors with a view to reducing delays by simplifying procedures. Finally, the FNPJ and the National Youth Employment Agency have set up a common project to promote youth employment in the agricultural sector by granting CFAF 10,000,000 as funding to private agricultural sector companies that recruit ten youths. · The Agency for the Execution of Works of Public Interest [Agence d'Exécution des Travaux d'Intérêt Public--AGETIP] is an original structure set up by the Senegalese Government in 1989, to strengthen the technical and financial management capacity of business/project managers through training as well as providing jobs and training to unemployed workers in the construction sector. · The Project for the Promotion of Rural Micro Enterprises (PROMER) was created in 1997 by the Government of Senegal and the International Fund for Agricultural Development (IFAD) for 8 years. The project has been active in the Kolda and Tambacounda regions since June 1997 and in Fatick and Koalack since July 2000. The main objectives of PROMER are to: (i) improve the incomes of poor rural families by creating new lucrative and sustainable seasonal or permanent jobs; (ii) diversify jobs beyond that of agricultural work; and (iii) mitigate rural exodus by offering job opportunities to youths in villages. · The labor service within the Directorate of Labor which was set up in accordance with the provision of the Labor Code which stipulates that "any worker seeking a job 103The financing fund intervenes for the creation of new projects. The ceiling is CFAF 5 000 000, and the term of the loan could be 12 months or 36 months, with a possible grace period of six months. The participatory credit fund, with a ceiling of no more than 20% of the total project cost, with a maximum of CFAF 5 000 000 and a grace period of one year. The guarantee fund, with an intervention ceiling of 50% of total credits, which cannot exceed CFAF 5,000,000. In cooperation with the Banque régionale de Solidarité (BRS), this guarantee fund targets young graduates from schools of medicine and pharmacy, young lawyers and other members of the judiciary, and more generally, all those proposing high value added projects that can generate sustainable employment. 84 is required to register as a job seeker in the labor service, any head of a company is required to notify the service in charge of labor of any vacancies in his establishment and of the corresponding job offer. The labor service is empowered to effect the placement of workers." In principle, this service should therefore play a pivotal role in the support offered by the Government to the active population seeking employment in Senegal. B. PROGRAM EVALUATION 11.6 In principle, the effectiveness of programs aimed at promoting employment should be assessed in terms of their capacity to generate jobs in relation to their costs (even though most often their objectives are multiple, like the inclusion of underprivileged groups and the development of specific areas). It is, however, difficult to carry out this cost- benefit analysis for several reasons, which are examined below. 11.7 First, the results are not void of ambiguities at the international level, as indicated in Table 11.2, since they vary depending on modalities and countries.104 However, it emerges that public programs that subsidize the employment of workers or assist qualified workers are rarely effective in developing countries because they suppose a targeting capability and represent considerable opportunity costs by siphoning human and financial resources, which could have been allocated to programs that address more serious problems in the labor market, such as lack of training or of access to financial resources to workers operating in the informal sector. These two weaknesses are evident in the operations of the labor service and in the FNAE in Senegal. On the contrary, general programs based on the development of public works of public utility (or of general interest) and programs that grant financial support to the most disadvantaged groups are most likely to yield positive results in terms of job creation. 11.8 The second difficulty related to the evaluation of active programs in the labor market is that the monitoring and evaluation process is incomplete in Senegal. With the exception of AGETIP and, to a lesser extent, FNPJ, which was recently audited by the Audit Court [Cour des comptes], there is no detailed information on the concrete impact of these programs in terms of job creation over time. Thus, available information is limited to measuring the intentions of beneficiaries and not necessarily their achievements. In addition, there is no evaluation of the permanent nature of the jobs created or on their quality. For example, the success of a job promotion program should be measured both by its capacity to create permanent jobs and with a salary at least equal to the minimum legal wage, as well as its ability to create temporary jobs. 104For an overview, see. A. Dar et Z. Tzannatos, Programmes actifs du marché du travail: Examen des témoignages tires des évaluations, World Bank, January 1999 and Global Inventory of Interventions to Support Young Workers, the World Bank, 2007, and Sierra Leone Youth and Employment ESW, the World Bank, 2007. 85 Table 11.2: Impact of programs -- Lessons from international experience Mode of Impact Success intervention Placement and Generally positive in industrialized and National observatory for information transition countries, notably because of employment and Qualifications service relatively low costs. Little evidence in [Observatoire nationale de developing countries but tends to favor L'emploi et des Qualifications] qualified workers who could have still found (Tunisia) jobs without these services Subsidies on Generally negative because tends to favor salaries workers who would have still found jobs in any case. Expensive program and rarely used in developing countries. Public Works Mixed because capable of generating jobs in Expanded Public Works large quantities but at a relatively high cost Programme (South Africa) and of short duration AGETIP (Senegal) Credit for Positive if accompanied by services and Program for the Promotion of micro- monitoring on their use over time. Creates Children and Youth (Uganda) enterprises and distortions in the SME markets Farm Youth Development self employment Program (Philippines) Entra 21 (Latin America) Source: G. Betcherman, K. Olivas, and A. Dar. Impacts of Active Labor Market Programs: New Evidence from Evaluations with Particular Attention to Developing and Transition Economies, World Bank, 2004. 11.9 In spite of these problems, we sought to determine the efficiency of all programs in force in Senegal using a pragmatic approach. Our starting point was to consider the total number of jobs (direct and indirect) that these programs claim to have generated since their creation and to compare them with the financial resources placed at their disposal. This comparison shows that the annual number of jobs created by these programs is approximately 16,000, which is just a fraction of the number of active persons in search of jobs in Senegal (the estimated number of unemployed and underemployed in Senegal is close to 400,000). Furthermore, it appears that the cost per job created varies between US$364 for the FNAE and US$3,000 for AGETIP (Table 11.3). These results which would need to be refined have the merit of highlighting that these programs are not free since, by comparison, the median salary in the informal sector in Dakar is estimated at aboutUS$800 per year 11.10 Before examining in detail the efficiency of the AGETIP program, which is by far the most ambitious in Senegal, it is worth recalling that the estimates presented above do not allow an assessment of the quality of jobs created. It would also have been useful to be able to examine the regional allocations in terms of job creation since unemployment is higher in rural areas. It can, however, be noted that FNPJ and AGETIP, whose results are broken down by region, confirm the concentration of their actions in urban areas (2/3 of authorized operations) rather than in the rural areas.105 11.11 Similarly, detailed information on jobs created by gender and age would also have enabled us to better measure the real effectiveness of the programs set up in Senegal. These two 105These results are available at the level of projects approved by FNPJ. The rural areas received 33 percent of the allotted credits and 40 percent of the created jobs. At the sectoral level, one third of the projects focused on agriculture, 28 percent on commerce, 21 percent on services and 12 percent on industries. 86 groups are the most disadvantaged in terms of unemployment and underemployment and therefore need support from the Government. It should be noted, however, that most programs target the population between ages 18 and 35, which is fully justified because of their vulnerability in the labor market (as illustrated in Chapter 9). This, of course, is the case with FNPJ and other larger programs like AGETIP and FNAE. Beyond these programs, Senegal has been active at the international level in the promotion of youth employment by playing a pioneer role in the UN Secretary General's Youth Employment network, which helped support the development of the National Plan of Action for Youth Employment (PANEJ) in 2004. 11.12 Special attention on AGETIP results is justified by its importance, in terms of jobs created and resources allocated. This program created almost 50, 000 jobs in 2000-2004, but apparently at a high cost per job (more than US$3000 according to our estimates). These results should be qualified by noting that this program has helped create relatively permanent and well paid jobs lasting an average period of eight months. When these two last factors are taken into consideration, the cost per day for each job created amounts to about US$37, which is comparable to a similar program in Burkina Faso (the BAARA) that has a daily cost of US$26. This difference reflects a higher standard of living and a longer duration of work on construction sites in Senegal. Table 11.3: An assessment of employment programs in Senegal Jobs Accumulated Jobs created created Agency budget (CFAF) (total) per year Cost per job created FCFA US$ FNJ 6 231 853 144 12 240 2 448 509 138 1 018 FNE 2 001 150 302 11 000 2 750 181 923 364 Convention 325 441 080 876 876 371 508 743 AGETIP 73 000 000 000 46 870 9 374 1 557 499 3 115 PROMER 5 200 000 000 6 147 479 845 941 1 692 Total 77 133 15 927 Sources: Program and author's calculations 11.13 Finally, the evaluation of the labor service in the Directorate of Labor indicates a weak performance, at least when compared to the ambitious objectives established by Senegalese legislators. Indeed, only a small number of job seekers registered in this service, which processed only 7,790 job applications between 2000 and 2002. The service claims to have put about 42 percent of these applicants in touch with companies, leading to the recruitment of about two percent of them, equivalent to about 50 jobs created per year. C. DIFFICULTIES RELATED TO LACK OF EFFICIENCY 11.14 By creating approximately 16,000 direct and indirect jobs per year, the impact of the active employment programs on the labor market in Senegal is relatively limited. The first explanation for this is that the resources put at their disposal are inadequate since, on the whole, the resources do not exceed US$30 million per year, or about 0.3 percent of the GDP. If AGETIP is excluded, the amount will only be US$6.6 million per year (or 0.2 percent of the Government budget) and the resources allocated have further declined significantly since 2004 owing to governance problems in the FNPJ. If Senegal had spent proportionately as much as the average 87 for OCDE countries, or one percent of GDP, the number of jobs created would have tripled (of course, assuming the same level of efficiency in these programs). If the resources had been as much as in Sweden and in Finland (two percent of GDP), the number of jobs created would have practically reached 100,000 per year. 11.15 It would, however, be unconscionable to believe that lack of efficiency in the active employment programs in Senegal stems only from lack of resources. In addition to the inadequate financial resources allocated to them, their reduced impact on employment could be explained by lack of rigorous management, as recently underscored in the Audit Court report on FNPJ. This report identified several irregularities and political interferences in the distribution of credits. 11.16 In general, with the notable exception of AGETIP, programs are not monitored to assess their real impact over time. The services responsible for FNAE and FNPJ do not seem able to give a precise description of the number of jobs that their programs have created in the field (and not on the candidate's intentions) and to determine their duration and remuneration. This lack of monitoring is also reflected in the low recovery rate of loans, which did not exceed 24 percent in the case of FNPJ by the end of 2006. Furthermore, it has not been proven that the subsidies granted trainees within the framework of the recent "employment/private sector" convention is really effective in promoting the recruitment of new workers who would not have been recruited in the private sector. Fortunately, the authorities have taken note of these shortcomings and are trying to introduce ex post monitoring and evaluation, notably by the new FNPJ management in 2007. 11.17 Lack of efficiency in the active labor market programs is also due to lack of coordination between the ministries, between services within each ministry, and between agencies. The current programs are spread over a multitude of services, which have no sustained and organized contacts among them, whereas their objectives and targets are often the same. For instance, FNPJ and FNAE both grant micro loans to persons under 35 years old, but often operate in a parallel manner to the detriment of their respective managements. Similarly, ANEJ and FNPJ would gain from closer collaboration (or even from being merged) since they offer complementary services to workers seeking jobs, even though there are already some attempts to bring the two agencies closer. Better coordination among the programs would generate economies of scale that could reduce their operating budgets which are currently very high (for example, more than 750 million CFAF for FNPJ and ANEJ). 11.18 In summary, the difficulties limiting the efficiency of active employment programs in Senegal lie simultaneously in their lack of financial resources, poor quality of management, lack of monitoring of concrete results in the field, and lack of coordination. The desire to reduce, or eliminate, all these constraints should be at the heart of the reform agenda that will be proposed in the last part of this study. 88 12. CONCLUSION 12.1 Labor regulations and active job promotion programs are complementary instruments for the Government aimed at increasing the welfare of workers and at protecting them against possible labor market failures. We have seen that these failures are numerous in Senegal today and that they affect the majority of Senegalese workers, thus justifying Government intervention. The cumulative unemployment and underemployment rate reaches almost 35 percent of the active population and half of those who are employed are not able to ensure that their families live above the poverty line. 12.2 In the existing Government's interventions, there is an obvious imbalance between the protection of those who work in the formal sector and those who are employed in the informal sector or are looking for a job. The first group is a minority who benefit from regulations that offer generous social protection and coverage. In contrast, the second group, which represents the vast majority of the active Senegalese population, lives without social protection, on the verge of insecurity, and with marginal support from the programs put in place by the authorities to help them find a job or move from the informal to the formal sector. 12.3 The search for a new balance between the protection of these two groups of workers should be the major objective of the Senegalese authorities. Otherwise, the number of those "excluded" from the labor market will continue to grow and could cause a rift in the current social consensus in Senegal and derail the poverty reduction and accelerated growth strategies in the medium term. Based on this, we will argue in the next chapter that this rebalancing calls for dual simultaneous action: (i) strengthening active labor market programs for the poorest (the young, women, and active populations in rural areas); and (ii) relaxing social protection for those who are employed to promote social mobility in the labor market and stimulate labor demand from formal sector businesses. 12.4 It should be noted that the search for optimum complementarity between the use of labor legislation and the implementation of active labor market programs is at the heart of the agenda of several countries, including the Organization for Economic Co-operation and Development (OEDC) countries. At the international level, one is forced to admit that the balance seems to be tilting more and more in favor of programs aimed at protecting those who are seeking a job rather than those who already have one, notably in the wake of Denmark's success in recent years.106 This same approach will be proposed for Senegal, because it is expected to reduce hiring costs, while increasing assistance to employment in precarious situations, and thus promoting the creation of quality jobs over time. 106See OECD Employment Outlook 2004 89 PART IV. AN AGENDA FOR REFORM 1. The analysis presented in the first three parts of this study leaves no doubt about the severity of the weaknesses that exist today with respect to both the supply and demand of labor, which contribute to undermining the competitiveness of businesses, and increasing inequity and insecurity within the country. This diagnosis has already been endorsed by policy decision makers in Senegal as declared by the President of the Republic: "Young people of my country, do not be discouraged. We are going to build our country, create jobs, and create an environment where you can develop your full potential." 107 2. This awareness needs to be underpinned by a reform agenda. Consequently, we are going to propose an agenda based on seven [7] priority pillars, subdivided into 33 recommendations (Table 1). These pillars will be described in detail in the rest of this part, but it is important to underscore from the outset that the order in which they are presented is not fortuitous. It first puts emphasis on the need to improve access to the basics, namely education (including vocational training), the creation of businesses (notably SMEs), and unbiased information. It is only thereafter, to complement these actions, that the Government should intervene to correct market failures by implementing an adequate regulatory and institutional framework and by providing assistance to job seekers. 3. Our proposed agenda is broad enough to take into account the aspirations of companies and workers. In many cases, these aspirations will overlap because of the prevalence of self- employment, particularly in the informal sector. They will often be complementary, for example, with respect to improving labor qualifications, which should be beneficial to all partners. Sometimes, they will need to be reconciled as they will result in the redistribution of gains between the parties involved, as will be the case in labor regulations. In this context, we will give priority to the implementation of gradual reforms that will seek to maintain a consensus between those who will gain or lose through the reforms. When more radical approaches can be envisioned, they will be suggested in the text. This choice in favor of a consensual approach is in response to the preferences expressed by our counterparts in the working group set up by the Senegalese authorities and is in line with the approach adopted by the Government in preparing its poverty reduction and accelerated growth strategies. 107Speech of 3 April 2007 on taking the oath of office. 90 Table 1: Summary table of labor market reforms Objective Recommendations/Actions/Reforms Examples Pillar 1. Promoting qualifications for employment through training Address the weaknesses in 1. Increase financial resources for secondary and South Africa, secondary and technical technical education Tunisia. education 2. Promote pre-professional training modules 3. Strengthen the autonomy and governance of public professional training centers Rehabilitate those excluded 4. Formalize traditional apprenticeships (validations Benin, Germany, from the school system of experiential learning) France 5. Establish training centers in synergy with intermediate structures (consular chambers, professional organizations) Strengthen continuing 6. Allocate the tax CFCE to finance training Malaysia, Kenya education by promoting 7. Target SMEs and micro-enterprises in training private/public partnerships programs. 8. Develop partnerships with foreign companies Pillar 2. Developing links with the Diaspora to improve quality Promote the return of 9. Develop targeted voluntary return policy Taiwan, Israel. students and young 10. Launch targeted information campaigns. professionals Develop synergies and 11. Create directory and network of emigrant workers Scotland contacts 12. Promote coordination with host countries (conventions on taxes, pensions, conditional scholarship upon return). Pillar 3. Optimizing the allocation of workers between the private and public sectors Reduce the crowding-out 13. Improve information on financial and non- Tanzania effect of qualified workers financial benefits within the public administration by the private sector and undertake public service reform Reduce the crowding-out 14. Promote aid in the form of budget support Ghana, Mozambique effect of qualified workers 15. Coordinate donors for joint support of projects by the aid industry Pillar 4. Encouraging labor productivity through business development Promote labor productivity 16. Promote opening up to international markets Malaysia, Taiwan, gains within firms. 17. Optimize complementarity between physical Chile capital and labor productivity Encourage creation and 18. Streamline registering procedures (business Morocco. development of SMEs. climate). 19. Promote synergies in education and health within businesses and with training and labor programs (see axes 1 and 7) as well as with health centers. Align salary adjustment 20. Encourage access to information on wages and OECD with labor productivity disseminate it in medias. gains. Pillar 5. Developing networks and access to information for all Collect and produce 21. Finalize jobs directory Tunisia statistics on the labor 22. Conduct periodical surveys with the objective of market in a sustained collecting information on jobs and salaries manner over time 23. Develop participatory mechanism with private sector, NGOs, labor unions and the education system. 91 Dissemination of 24. Encourage the use of media (job search) and information private employment centers (implement legal framework). Collaboration with 25. Offer assistance programs to SMEs in the area of companies and private personnel management agencies Pillar 6. l Relaxing labor regulations Promote social mobility 26. Adopt implementation legislation for the Labor OECD Code with particular attention on (i) alternative modes of hiring using open-ended contracts (and acting); (ii) overtime regulation; and (iii) freedom of expression for workers within the company. Improve working 27. Increase the number of inspectors (train them and conditions provide them with resources) to implement the laws aimed at security and hygiene within companies; and express public will to apply sanctions in case of non-respect of regulations Develop alternative social 28. Pursue reform of the social security system protection systems towards a level premium method, and develop alternative systems that are less costly for the informal sector, following the example of the pilot project for truck drivers Pillar 7. Rationalizing and promoting employment programs Increase monitoring and 29. Develop evaluation and monitoring systems AGETIP financial resources (including audits, cost/benefit analysis, etc.). 30. Increase resources according to results Encourage coordination 31. Implement a stable institutional anchor. Uganda, Philippines, across programs. 32. Promote integrated active programs of Latin America. microcredits to vulnerable groups. Focus on vulnerable 33. Target young people and women (in the informal Kenya, India. groups sector) with the help of financial assistance programs for self-employment and micro- enterprises PILLAR 1: PROMOTING LABOR SKILLS THROUGH THE EDUCATION SYSTEM AND TRAINING 4. The vast majority of Senegalese workers are poorly paid, because they are poorly educated and not very productive. This is true not only for the formal sector, which cannot compete with foreign companies (therefore explaining the lack of export expansion and the need to overprotect their sales in local markets), but also for the informal sector, which seems to be three to ten times less productive than the formal sector. 5. Our analysis has highlighted the vicious circle that exists in the Senegalese economy, preventing the improvement of worker skills. Although qualification contributes to the productivity of businesses and the remuneration of workers, there is little motivation for the latter to invest in human capital because of the low returns associated with education, notably secondary education. Salary gains, if any, are marginal (less than in OECD and emerging countries), which explains the high dropout rates observed in the education system in Senegal. Despite efforts undertaken by the authorities during the last decade, the gap between industrialized and emerging countries continues to widen, since the average Senegalese student 92 spends 9.5 years less in school today than a student in an OECD country, compared with eight years in the early 1960s. 6. This study does not propose to the Senegalese authorities an overall human resource development strategy.. There are background documents (PDEF, for example) that are already being implemented, and which are beginning to bear fruit since Senegal is in the process of attaining its Millennium Development Goal related to primary education for all. We also deliberately left out the problem of higher education, which is the focus of parallel studies under preparation at the World Bank, notably the study on the WBI knowledge economy assessment and the expenditure review concentrated on higher education (see Annex 9 for suggestions). 7. However, in the light of experiences in other countries, including Sub-Saharan Africa, we will make a number of suggestions for Senegal, which, without making them «models», can enrich development and adjustment capacities in the country. We propose to focus on the following three actions that will seek to establish the missing link between the dual need to increase productivity and investment in human capital: · The effort to address weaknesses in secondary education, in particular technical education; · The need to reintegrate those excluded from the school system; and · The strengthening of continuous or professional education, notably by prioritizing cooperation between public and private actors. 8. Address weaknesses in secondary (average and general) and technical education. The failure rate at the secondary school level (high repetition and dropout rates), and the low quality of education that results in devalued diplomas, should be subject to corrective measures. To date, the rate of return associated with education is so low that it discourages students from pursuing their studies (except when it is a path to university studies, but this only involves a minority). The probability of a student with a BFEM level of education earning significantly more than a student who did not complete primary education or who did not go to school is marginal. Although the objective of this study is not to propose a general reform of secondary education in Senegal, it must be admitted that secondary education is the most disadvantaged with respect to the allocation of budget resources for education. Without any recognition of this, indications are that structural deficiencies such as lack of education and absenteeism of teachers, inadequacy of buildings and classrooms, and the poorly adapted school curriculum will continue and maintain the vicious circle between the lack of a skilled labor force and the lack of motivation for education, because the latter does not consistently ensure a higher income. 9. The key issue of structuring and, more generally, implementing a technical education and training policy, is then closely aligned with the employment policy. Those channels should represent a credible alternative to the Baccalauréat to help respond to the labor market demand for intermediate-level technicians and managers. 10. In this context, our first recommendation is to review the allocation of budget resources to secondary and technical education, which only mobilize a portion of the education budget in Senegal (Recommendation 1 in Table 1). It is difficult to provide a quantitative goal, however, since it is not sufficient to increase the level of financial resources. The objective should also be 93 to structure better, in a continuous and coordinated manner, the different institutional, economic and social actors (for example, in the form of a permanent employment/training board) to further enhance the credibility and visibility of the efforts that should be undertaken. It would also be important to support the implementation of a policy for exchanging, disseminating, and capitalizing on the results achieved through current initiatives and programs--something that is currently lacking in Senegal. This effort should be part of a broader program (partly described in the national education strategy and supported in the integrated expenditure framework), whose elements are outside the scope of this labor market study. Finally, it is important for rationalizing the necessary financial effort to link it explicitly with concrete results in terms of quantity (number of students) as well as a qualitative improvement of secondary education in Senegal. 11. Our second recommendation (Recommendation 2) is to encourage the development of pre-learnership modules in schools during the last two years of each of the two cycles, lower and secondary. One of the main problems concerning technical education and initial professional education in Senegal, like in a great number of Sub-Saharan African countries, is the devaluation of these education options. This, combined with the dropout rate throughout schooling, technical education and initial professional training are considered by students and their families as second rate education priorities. We suggest that Senegal could learn from the experience of South Africa, described in Box 0.1 below. Box 0.1: South Africa ­ The experience of professional modules in the school system The experiment conducted by the Sector Education and Training Authority (SETA) is known as the School Pre-Learnership Project (SPLP). Launched in 2006, this initiative offers students in the last two years of secondary education the possibility of being trained in the generic employment functions in a business. The training thus provided allows young people to acquire the key skills which form the basic qualification for employment. This pre-learnership (which integrates key areas such as the employment contract, the workings and organization of a firm, the preparation of a resume, the management of professional time, etc.--39 modules in total) helps establish a link between abstract learning in formal education and practical learning in a firm. Among other benefits, it also allows trainees as well as trainers and employers to maximize the value added of dual training. The services sector is currently implementing this project in more than 50 establishments in the nine provinces in South Africa, involving about 5,000 young people. 12. Our third recommendation (Recommendation 3) is to strengthen the autonomy and governance of public professional training centers. Currently in Senegal, with the exception of the National Center for Professional Qualification [Centre National de Qualifications Professionnelles], public professional training centers have no legal status: they are simply "sub- branches" of the Government--the financial and educational management of these institutions remains under the strict control of the Ministry of Technical Education and Professional Training. This "subjection" of training centers to the central Government with respect to management and financing (including the content of training and personnel management) is not unique to Senegal, but it weighs on their operations and distances them from the business community. Our recommendation is therefore to empower these training centers, give them more administrative, educational, and financial autonomy to the extent that they will become EPICs, with a real board of directors, chaired by a qualified person from the outside (for example, a business manager) and independent management structure so as to be responsive to the demand 94 for qualifications and skills from businesses. Such a reform would represent very significant progress, following the success of the recent example developed in Tunisia (see Box 2). Box 0.2: Tunisia ­ Sectoral training centers Within the context of the MANFORME program for the modernization of professional education and employment policy, financed by several international and national donors--including the World Bank--it was decided at the beginning of the year 2000 to make truly "autonomous" the sectoral training centers, which were up to that point sub-branches of the Ministry of Employment and Professional Training, directly attached to the Tunisian Agency for Professional Education [Agence Tunisienne de Formation Professionnelle--ATFP]. As part of this pilot approach, the training centers were transformed into EPICs; with their boards of directors (BD) being chaired by a business leader. Although the manager of the center is appointed by the BD (from a list proposed by the Ministry), the latter is responsible for hiring the necessary staff, whose work day in the establishment largely exceeds teaching hours. The center's annual operating budget is voted by the BD: it includes a subsidy from the Ministry, which does not cover all expenses. It is therefore the responsibility of the Center to find the additional resources needed, for example, by offering continuing education services to companies or to local authorities (it being well understood that the centers may compete with each other in such cases). 13. Rehabilitate those excluded from the school system. The number of those excluded from the system increases in the course of the school years, to reach about 15 percent at the end of primary education and practically 80 percent after the BFEM. In other words, the large majority of children aged 15 to 16 find themselves out of school, without any real diploma and without skills. For the most part, these young people find themselves in the informal labor market and live from day to day on "small jobs" without any real prospects for social and professional integration. In an economy that should be based on knowledge, i.e.. on technical, social, and interpersonal skills as well as on know-how, this exclusion is particularly costly. 14. The Senegalese Government should pursue an aggressive policy aimed at integrating the young people who are excluded from the education system by helping them acquire real skills that are recognized by the labor market. In this context, the "formalization" of traditional learning methods becomes a priority, especially because it remains the prevalent mode of skills acquisition in the country. Senegal, like several countries--not only developing countries-- focuses mainly on the acquisition of titles, diplomas, or certificates delivered within the framework of the formal education and training systems. At the same time, there is a need to encourage the validation of traditional learning processes which, combined with training for upgrading or literacy, would allow the young to become part of or again be part of a training standard learning system. 15. Our recommendation (Recommendation 4) is to speed up the establishment of a "validation of experiential learning" (VEL), which would help regulate the area of training, on condition, however, that professional associations and social partners are closely associated in the preparation and implementation of this measure. Although efforts have started in that direction, the results of recent surveys conducted in several sectors (agro-processing, auto mechanics, etc.) show very clearly that "traditional" learning is not yet considered as an essential endogenous component of professional training policies. The example of Benin (Box 3), with the 95 introduction of certificates of qualification, is a pilot project that could be followed by the Senegalese authorities. Box 0.3: Benin - Certificates of Qualification (CQP) Certificates of Professional Qualification [certificats de qualifications professionnelles--CQP] are aimed, above all, at apprentices aged 14 and above who have attended school up to the first year of middle school. It combines training with craftsman courses in a training center (which may be a "Maison des métiers" (trades house) or a "Maison de l'outil" (tool house) managed by the Chamber of Commerce and/or a professional association. It involves basic training, or upgrading (three levels of 200 hours each). The apprentice goes to the center once a week and spends the other five days with his "master". The training lasts two to three years and is co-managed by the professional association to which the head of the center belongs. At the end of three training cycles, the apprentice takes national CQP examinations which will certify his level of qualification. The interest and the originality of this approach is not so much the CQP (which originated from a similar formula implemented in France by the UIMM) as the educational engineering focused on skills and know-how as well as on a trades nomenclature. There are currently 1,500 apprentices in training, and the challenge is to train 3,000 apprentices per year with about 20 CQPs, ranging from fashion to air- conditioning. Other CQPs are being reviewed in areas such as auto mechanics or TV/radio repairs, sectors in which informal employment is highly developed. 16. Concurrently, we recommend that efforts be made to promote the development of traditional learning towards more structured forms of learning based on the German "dual system" model (Recommendation 5). This shift could be supported by the establishment of training centers which would support young people during their apprenticeship by providing them with a structured reference. Such support is important, whether it involves learning in the classical sense (the trainee thus has an apprenticeship contract with a training center placed under the responsibility of one or more companies) or a co-operative arrangement (in this case the trainee is in a training center with the status of a student, including during the periods of internship in companies). These training centers should be set up in close collaboration with private firm, in order to avoid the curriculum remaining academic and too far removed from the reality of companies. 17. In implementing these more structured forms of learning, one of the recommendations is to support intermediate structures such as consular chambers and professional associations that can act as interfaces, or as operators for the benefit of several SMEs/SMIs (and very small companies) in specific sectors or geographic areas, as successfully developed in Germany, France, and Cameroon (Box 4). This approach would help promote training in private firms which, in a country like Senegal, are most often SMEs or informal micro-enterprises, without many financial and human resources. 96 Box 0.4: Germany, France, Cameroon ­ The role of consular chambers in education In these countries, whose administrative structures with respect to professional associations and, more generally, to education, are very different, the chambers of commerce, and trades associations in particular, which include craftspeople, play a major role. Under the authority of these chambers, and with the sectoral professional associations, which `manage" initial professional training, national bodies like the CERQ in France or the CIBB in Germany play an advisory role, or support for the development of pilot projects. Furthermore, social partners in specific sectors or geographic areas are directly involved in defining the content of training and in validating the skills acquired, including the "informal" skills acquired in the workplace or outside the firm. Consular bodies as well as professional associations and social partners are both training providers and managers. It is worth underscoring that in Cameroon an original structure was set up, the GIPA [Groupement Interprofessionnel des Artisans]. Created in 1999, on the initiative of several managers of crafts businesses representing different trades groups, GIPA is responsible for strengthening technical and managerial capacities as well as structuring and standardizing the training of apprentices. GIPA currently comprises some 100 crafts businesses in the capital (Yaoundé), each employing on average three workers and two apprentices in 11 job options, including hairdressing, woodworking, electrical engineering, basket-making, or tailoring. GIPA's budget is funded to a large extent from the contributions of its members (18 euros/year), complemented by bilateral foreign aid (DED ­ Germany). Master craftsmen support with their own funds the costs of apprentice training. 18. Strengthen vocational education by encouraging public-private partnerships. Vocational education plays a key role in upgrading labor skills, notably in emerging East Asian countries (see Box 5) and in the OECD, because of its significant contribution to labor productivity gains.108 The Senegalese Government has already incorporated the essential role of vocational education in its search for improved labor productivity through the recent creation of FONDEF, which has already started yielding encouraging results, as described in Chapter 7. Box 0.5: Training in the workplace is a good way of increasing the productivity of workers Recent experience indicates that corporate training helps increase the productivity of workers significantly. For example, productivity gains as high as 25% have been reported in enterprises that provide vocational training for their employees in Colombia and in Malaysia. These gains seem even greater in the poorest countries such as Nicaragua and Indonesia where they are as high as 45%. Gains associated with continuing education are strongly related to the quality of the course, which is systematically better when there is competition between the trainers and when they are open to the private sector. Productivity gains tend to disappear when courses are given only by centralized public institutions. Source: Malaysia: Enterprise Training, Technology and Productivity, 1997, The World Bank. 108For quantitative evidence on the role of vocational education in enterprises, cf.; L. Dearden, H. Reed, et J. Van Reenen, The Impact of Training on Productivity and Wages: Evidence from British Panel Data, Oxford Bulletin of Economics and Statistics, No. 68, 2006. 97 19. The initial success of FONDEF is attributable to its adherence to a number of principles drawn from international experience. First of all, it is based on close collaboration between the public and private sectors. Indeed, it is essential to involve the private sector in the management as well as in the provision of financing for training programs so that they can address the needs of companies while ensuring that the latter do not abuse them (which is often the case when programs are free). The role of the State remains important to address two shortcomings that are likely to emerge if the initiative is left to private businesses alone: (i) it is possible that the companies, notably the SMEs and those in the informal sector, do not have enough resources to finance such programs; and (ii) a company can decide to invest in a sub-optimal manner in these programs because of the potential flight of its skilled workers to competing firms.109 20. We propose that the FONDEF initiative should be generalized through the three following recommendations that will help strengthen vocational education programs: 21. The first recommendation is to increase sources of financing by allocating all the resources derived from the collection of the CFCE (3 percent tax levied on wages paid by companies), which totaled CFAF 9.6 billion in 2006, to professional training programs (Recommendations 6). Today, the FONDEF annual budget represents only about 1/10th of this amount. Of course, private funding should complement this public financing, notably through matching grants mechanisms or cost-sharing programs. 22. The second recommendation is to focus the Government's subsidy on vocational training programs that would support SMEs/SMIs and companies in the informal sector (Recommendation 7). These are, in fact, the most likely to suffer from financing constraints, which prevent them from meeting their needs in terms of skilled workers. In this regard, the experiment conducted in Kenya through the distribution of vouchers to firms and to employees in micro- and small enterprises merits particular examination by the Government of Senegal (see Box 6). 109For a more detailed discussion of the reasons that justify Government intervention, see Malaysia: Enterprise Training, Technology and Productivity, 1997, World Bank. 98 Box 0.6: Jua Kali Voucher Program in Kenya One of the most well-known vouchers' program is the one implemented in Kenya, known as the "Jua Kali voucher program". It started in 1977as a pilot project managed by the Government and involved the distribution of vouchers to young jobseekers or those employed in a company with fewer than 50 employees, to allow them to select training based on their needs and objectives rather than on a decision by civil servants. This approach had already been used with success in some industrialized countries (e.g., the UK and Germany) to empower users and create competition among training providers, which could include the private sector. Within the framework of this program, beneficiaries receive a voucher which can be exchanged to pay a training provider. The voucher covers 90% of training costs and the rest is financed by the beneficiary. Master craftsmen turned out to be the trainers requested most often by beneficiaries. About 37,606 vouchers were distributed between 1997 and 2001. Empirical evidence showed a positive impact on the degree of qualification, generating employment growth among participants and productivity gains in enterprises. However, it appeared that the program became cumbersome for the Government to manage over time, suggesting that it would have been desirable to transfer it to the private sector. To better motivate participants, an incentive mechanism should have been introduced to encourage them to continue the training after the subsidy provided under the program ran out, particularly with companies that hired these workers. 23. Finally, the third recommendation is to promote the creation of partnerships with foreign businesses, which are often agents for the transmission of new techniques and networks allowing employees to improve their productivity (Recommendation 8)110 For this reason, countries like Malaysia and Tunisia have placed at the heart of their strategy the development of vocational education programs within foreign businesses established in their countries. It is worth noting that this has been a proactive strategy on the part of these Governments, which subsidize such programs because the medium term benefits exceed the short term costs. Finally, these recommendations also apply to major infrastructure works that are being launched (Dakar- Diamndiado highway, new Diass airport, etc.). The implementation of training programs for national workers should be one of the selection criteria included in project specifications for companies selected to carry out works, as it will have an eminently positive dynamic effect on workers' qualifications and skills in Senegal. 24. Other suggestions could be made about modernizing the education and training systems to make them more responsive, if not proactive in relation to the demand for skills. An example is the "Maisons de l'Outil", whose objective is to make available to urban and rural populations multi-functional resource centers, which can provide the young people excluded from the formal education system with the qualifications needed for their economic and social integration, while allowing them to perform income-generating services and, hence, to improve their living 110It can be demonstrated that because the entry costs are relatively high for foreign companies in comparison with local ones, they must be initially more productive and pay higher salaries to attract qualified workers. In the long term, there are external benefits for the local economy, because these workers can transfer their know-how and their technological and management knowledge to other companies or support themselves in their efforts to become independent workers. For a theoretical approach and empirical evidence of these effects in the case of Denmark, cf. Nikolaj Malchow-Møller, James R. Markusen, and Bertel Schjerning, Foreign Firms, Domestic Wages, NBER Working paper, NO. 13001, March 2007. 99 conditions. These "Maisons de l'Outil", which are called "Maisons des Métiers" in Cameroon, could serve as anchors for the integration of unskilled young people. In this regard, they are similar to the "studio-schools" established in Spain. 25. In addition, in view of the serious shortcomings of educational guidance and career counseling services, one may wonder if some special effort should not be made to establish, as is the case in France or in Belgium for example, some Permanences d'Accueil et d'Orientation (PAIO) and local missions (Missions locales) for young people. These are simple structures established locally, involving the local community as well as civil service NGOs. Such measures have the merit of helping young people design their own professional project and training program. 26. Lastly, a series of recommendations on tertiary education are developed in Annex 10, even though they go beyond the scope of this study. PILLAR 2: DEVELOPING LINKS WITH THE DIASPORA TO INCREASE LABOR QUALITY 27. Transforming the brain drain into a agent of development for the Senegalese economy should be one of the top priorities of policy decision-makers. Not only is the number of Senegalese living abroad significant, but they are also attached to their country of origin for cultural, social, and economic reasons. 28. There are two main benefits that may arise from the massive presence of Senegalese workers abroad. The first is the periodic repatriation of huge amounts of remittances, which stood at more than 400 billion CFAF in Senegal in 2006, thereby constituting a source of financing for the revival of the local economy. The second benefit is the transfer of the skills of these immigrant workers to the local economy, which may be achieved through several channels, including their return to Senegal or partnerships with workers and/or local businesses. This potential has been well understood by several countries that also have a huge Diaspora abroad. Senegal has begun drawing inspiration from it, and the recommendations proposed below are aligned with this perspective. In our opinion, it is one of the economic policy priorities that will allow the Senegalese Government to turn an apparent curse into a decisive advantage over a short period of time. 29. Our recommendation is to encourage the return of skilled workers, especially young graduates, by pursuing a proactive and voluntarist policy (Recommendation 9). A global census recently confirmed that virtually two out of three foreign students from developing countries who earned a doctorate degree in the sciences remained in the United States for five years upon graduation. This ratio may be extrapolated for Senegal, which has many of its young graduates and professionals in Europe and the United States. Consequently, Senegal, like Taiwan, should implement a targeted policy that will provide incentives for these young graduates or professionals to return home (See Box 7). This involves influencing individual decisions on the basis that the benefits for the society as a whole would far exceed the cost of the incentives. 100 Box 0.7: Initiatives to promote the return of qualified students ­the example of Taiwan Several emerging countries have instituted proactive policies to foster the return of their students established abroad, including Singapore, Taiwan, and South Korea. The Taiwanese authorities opted to play a prominent role in the return of their students, especially those trained in the sciences in the United States and who have gained experience in the communications and high technology sectors. The Government set up the National Youth Commission whose main mission is to promote the return of students established abroad. These measures include discounted flight tickets offered to students and their families if they decide to return to Taiwan to develop their professional career. The Commission also set up communications networks with students to inform them and simplify recruitment procedures. Sources: OECD (2002), Aggarwal,2004. 30. In parallel to targeted subsidies, the authorities should implement information strategies in host countries, especially in universities and research centers (Recommendation 10). This effort has begun in Senegal but there is a need to strengthen it by better coordinated and more ambitious programs carried out by the Government and not by the workings of cabinet ministries. 31. In addition, we recommend that a network of Senegalese skilled workers established abroad be developed to utilize their knowledge and contacts with foreign businesses (Recommendation 11). It is not absolutely necessary for skilled workers to return to Senegal to generate benefits for the local economy. In addition to sending money, immigrants may play the role of facilitator in the transfer of new technologies or in the penetration of new markets, as experienced by the Chinese or Indian Diaspora. An example of success in this area is illustrated by Scotland (see Box 8). Box 0.8: The Global Scot Network The global network set up by Scotland is an innovative initiative that has enabled the networking of 850 experts and skilled workers worldwide. The latter are seeking to use their position and knowledge to transfer skills and create contacts with foreign firms interested in moving to Scotland. This network is integrated in investment promotion and economic development agencies (Scottish Enterprise). The success of this initiative may be borne out by the following two examples: First, an investment project in an Internet company that was identified by one of the members of this network has grown into a corporation with a turn-over of millions of pounds. Second, the advice of network members helped solve problems at a crucial moment during negotiations between the Scottish Government and an American corporation. Source: M. McRae, Former Head, Global Scot, Scottish Enterprise. 32. Finally, we suggest close coordination between Senegal and the host countries (Recommendation 12) in the following three areas: · The return of skilled workers to their countries of origin may be fostered through fiscal arrangements that help avoid double taxation of assets and avoids losses incurred in the transfer of pension funds. 101 · Scholarship awarded to students should provide for their return to their countries of origin. · The mobility of skilled workers may be limited by developing a sound educational system in the country, especially through partnership initiatives between institutions and universities and the development of e-learning programs. PILLAR 3: OPTIMIZING LABOR ALLOCATION BETWEEN THE PRIVATE AND PUBLIC SECTORS 33. Skilled workers in Senegal are found in disproportionate numbers in the public and para- public sectors (for example, the density of skilled workers in Dakar is ten times higher in public administration than in the private sector). Moreover, the crowding out effect caused by the presence of several independent projects financed by development agencies (the "aid industry") on the availability of skilled workers is well known, both in public administration and the private sector. Although this allocation may be in part explained by labor market signals, the presence of bias and of constraints causes distortions which merit special attention. 34. To ensure the efficient allocation of skilled workers between the public and private sectors, our first recommendation is to enhance information transparency (Recommendation 13). The fundamental rule underpinning the smooth functioning of a competitive market is that information is homogenous and available to all participants. This is far from being the case in Senegal, where it is almost impossible today to determine how much a public civil servant earns once the financial and non financial benefits are taken into account. In this context, civil service reform will lead not only to improved productivity in the public sector, which is the usual justification for undertaking this type of reform, but it will also encourage better allocation of workers between the public and private sectors. The minimum number of skilled workers available to the private sector remains one of the main obstacles to the emergence of productive and dynamic firms in a developing country such as Senegal. 35. At the same time, we encourage the development of assistance in the form of budget support, which, through the streamlining of independent management units, will help minimize the negative impact of aid on the supply of skilled labor in Senegal (Recommendation 14). The actions will therefore be those that were highlighted in the last Public Expenditure Review conducted by the World Bank and those identified under the Paris Declaration agenda111. In summary, the transition towards increased budget assistance requires, on the one hand, action on investment budget preparation and execution (including procurement regulations) and, on the other hand, action to improve ex post controls on Government accounts by the judicial and legislative authorities. 36. Our final recommendation, which once more calls upon donors, is to improve their cooperation by encouraging joint projects as was the case with the water sector in Senegal (Recommendation 15). Such an action will help reduce the number of management units and thus minimize the crowding out of skilled workers who could then be available for the private sector. 111For further discussions, see World Bank, Senegal: Recent Developments and Sources of Funding, Public Expenditure Review, June 2006. 102 PILLAR 4: BOOSTING PRODUCTIVITY AND DEMAND FOR LABOR THROUGH ACTIONS AIMED AT COMPANIES AND THE BUSINESS ENVIRONMENT 37. Improving the qualifications of Senegalese workers is an imperative for the creation of a dynamic labor market. Productivity gains are and will be closely linked to the environment in which workers operate. This complementarity is obvious both with respect to the general business climate (cumbersome procedures, justice, taxation, etc.) and to the specific environment within the company (management, equipment, technology etc). D. Cohen thus highlighted that immigrant workers from developing countries are immediately more productive in industrialized countries than in their countries of origin because of the change in context rather than because of a sudden improvement in their skills. 38. Beyond the context within which workers operate, their output is also closely related to the company's expansion capacity and internal management. In principle, these factors are central to the Accelerated Growth Strategy which seeks to improve the general business climate in Senegal. Senegal is also implementing a series of projects, such as major infrastructure works, which are expected to stimulate employment and create synergies within clusters with high potential for growth, especially towards international markets, such as tourism, fisheries, agriculture, communications, and textiles. 39. The objective here is not to review this strategy but to underscore its importance for job creation, especially through complementarities that could enhance gains in labor productivity. We propose four recommendations which may be summarized as follows. 40. The first recommendation is to promote the expansion of outward-oriented firms because labor productivity is stimulated when firms face competition from international markets (Recommendation 16). This link is undeniable for modern and informal firms that have already reached an acceptable level of productivity. It is in line with the diagnosis formulated by the AGS, which seeks to focus on the promotion of sectors with high export potential. The positive link found in informal companies that are on the margins of becoming formal suggests that special attention should be given to these companies to facilitate their access to foreign markets, since this action will be reflected in the productivity of their workers. 41. The second recommendation is to foster complementarities between labor productivity and investment in physical capital (Recommendation 17). This complementarity seemed to be robust both for the formal sector and for informal sector companies that are on the fringes of the formal sector or have accumulated a significant level of physical capital. By investing in equipment, companies improve their environment, fostering an increase in the productivity of their employees, which, in the long run, should stimulate their sales and their demand for new workers. This recommendation should be associated with vocational training programs, which can help maximize the complementarities between physical capital and labor. 42. The third recommendation is to promote the development of small and medium-sized enterprises, which, in Senegal as in most countries, are the main engines of job creation through a destructive creation mechanism, especially by rationalizing their administrative incorporation 103 and operational procedures (Recommendation 18). Senegal's most salient feature is not the existence of this phenomenon, but rather the narrow base of formal employment in SMEs, which account for less than a quarter of formal employment in Dakar. The idea is therefore to promote the creation of small sized enterprises, notably by reducing administrative bottlenecks and encouraging competition. The latest Doing Business report notes slight progress in this regard, but Senegal is still far from being in the leading group in Africa. A brief overview of the Senegalese economy indicates that most sectors are still protected by the existence of many formal and informal barriers. This is highly deplorable because international experience shows that job creation is mostly the outcome of a dynamic process in which companies are created, destroyed, and recreated depending on existing opportunities and on their capacity to adapt their skills over time. The intensification of this destructive creation process is indispensable for the revitalization of the Senegalese economy. 43. To promote SME development, the recommendation is to target them within training, active employment, and health programs (Recommendation 19). Such a focus has been justified in our arguments developed in pillar 1 (education) and pillar 7 (promoting employment). Regarding health, the recommendations should be implemented through integrated programs within firms. According the ICA study, an average employee in the formal industrial sector loses about four days per month because of health problems (notably malaria) equivalent to 10 percent of his total working days. When employees face health problems, they have to use public health centers which are not very efficient in Senegal. For this reason, the development of partnerships between the public sector and private firms could help improve the current system, including information and preventive campaigns and the distribution of medicines (this partnership is being experienced in HIV/AIDS prevention campaigns). Concurrently, as will be suggested later in pillar 6, private firms need to implement new health and prevention standards. 44. Finally, the forth and last recommendation is to develop partnerships with private firms to collect and disseminate information and data on wages variations over time (Recommendation 20). One of the conclusions derived from our analysis has been that wages tend to adjust upward more rapidly than labor productivity gains in most sectors of the Senegalese economy. This finding was explained partly because of the relatively small productivity gains observed over the past decade and partly as the result of the lack of information that has allowed some participants in the labor market to benefit from unearned income (especially in the context of decentralized negotiations). A series of concrete measures aimed at improving the collection and dissemination of information on wages and employment will be proposed in Pillar 5 of our reform agenda. PILLAR 5: DEVELOPING NETWORKS AND ACCESS TO INFORMATION 45. The effectiveness of a competitive market is based on access to homogenous information by all participants involved. This lesson drawn from economics textbooks is far from being applied on the Senegalese labor market, as pointed out by all participants, from workers to employers and Government officials. Apart from the cross-sectional surveys summarized in Annex 2 of this study, data on employment and salaries are not collected in a systematic manner in Senegal. This shortcoming is the source of serious dysfunctions which contribute to the reduction of productivity gains as well as of the demand for employment and to the lack of social protection of workers. Our analysis has highlighted the following issues: 104 · Discrepancy between the needs of companies and the supply of workers. · Excessive recourse to informal networks, which are based on criteria that are not always transparent and cause significant delays for businesses in filling some positions. · The existence of rent-seeking situations through which some categories of workers may extract benefits that are higher than their contribution to the productivity of the company. 46. In order to improve the information network, the first recommendation is to finalize as quickly as possible the directory of jobs [Directoire des métiers ROME], whose preparation started at the end of 2005 (Recommendation 21). This directory should help to better define the needs expressed in terms of demand from companies and skills offered by workers. This information could then be incorporated by the companies and the workers in their decision processes, which would help to better harmonize their respective needs. 47. In parallel, the collection and monitoring of data on salaries and, more generally, on the labor market becomes a necessity through the recourse to periodic surveys (Recommendation 22). It is strongly recommended that this effort be integrated in the overall strategy pursued by the National Statistics and Demographics Agency [Agence Nationale de la Statistique et de la Démographie]. The central role of this agency is justified through its implication in the preparation of this study, which proves, if need be, its interest in the employment problem and its role in the collection and analysis of information. 48. To improve the monitoring of labor market information, it is indispensable to put in place participatory mechanisms between the main participants in this market (Recommendation 23). One of the solutions envisaged by Senegal, for several years now, is to put in place an employment and professional qualifications observatory (the decree was adopted in 2006). However, with the exception of Burkina Faso and Tunisia where an "employment observatory" was set up as early as 2002 (see Box 9 below), this institutional practice hardly seems widespread in North and Sub-Saharan Africa. In Tanzania, this same strategy led the authorities to establish a Labor Exchange Centre in the capital (with offices in each region of the country) to strengthen the relationship between demand and supply of employment and qualifications while strengthening the Directorate of employment within the Ministry of Labor. 105 Box 0.9: The national observatory of employment and qualifications in Tunisia In Tunisia, the National Observatory of Employment and Qualifications [Observatoire National de l'Emploi et des Qualifications--ONEQ], created by decree in March 2000, as a General Directorate of the Ministry of Employment, is a component of the national statistics system. Its mission is to develop a labor market information system, conduct analysis on employment and qualifications and disseminate the results. In this context, it is required notably to: · collect labor market information at the national, regional, and sectoral levels; · conduct surveys on the monitoring of the employment situation in businesses; · design and develop employment databases; · evaluate programs and instruments adopted in the employment area; · conduct studies and analysis in view of shedding light on the future development of jobs and trades; analyze employment-related statistics with a view to preparing indicators for monitoring changing conditions. 49. In the case of Senegal, it is important that the creation of such an observatory be integrated into the collaboration between the Ministry responsible for employment and other ministries (Labor, Economy and Finance, etc), agencies (APIX, the National Statistics and Demographic Agency), and private sector representatives. Partnership with the private sector is indispensable since companies will be the major source of information, and because they are, in principle, those most interested in the establishment of a transparent and effective information system. Besides, employer associations are already active in this area while calling on the need for Government intervention to ensure better coordination and dissemination of information. The participation of workers should also be necessary through their representative bodies, but also through improved communication channels aimed at presenting their interests during the information collection and dissemination effort. In summary, such an observatory should not be confined to a Ministry, weakly connected to market demands and resistant to changes. 50. The next recommendation is to promote the use of information networks through the media, including newspapers and radios, for job search and publication of information (Recommendation 24). It does not suffice to collect and analyze information; it also has to be made public. Since the liberalization of placement (with the elimination of the monopoly that the public service held on labor placement until 1987), private placement agencies are being established in Dakar. This movement must, however, be regulated by the Government (for example, there are still no implementation laws regulating temporary employment) and should be extended to the regions. 51. Finally, the last recommendation under this pillar is to help private firms develop their human resource management techniques (Recommendation 25) by focusing on the following 4 points: 106 · Establish a functional organizational structure whose main objective is to define each employee's area of activity according to a pyramidal process that goes from the highest to the simplest functions; · Define positions, specifying tasks and missions, expected skills, expected performance, qualitative and quantitative objectives determined by the manager; · Conduct one or two evaluations per year, in the form of an interview to "take stock"; · Help workers to attain their objectives by promoting dialogue through periodic and structured interviews during which employees can express their ambitions within the company (desire for development in position, for mobility, for training), as well as the problems they encounter. Such a process would help define the type of support and training to provide for employees. PILLAR 6: INCREASING THE FLEXIBILITY OF LABOR REGULATIONS 52. The Senegalese Government has developed an employment social protection system that is not adapted to the reality of the country. It promotes the protection of less than 5 percent of the active population, who already have a formal job, leaving aside all those who are under- employed, active in an informal occupation or searching for work. Even when workers have a chance of being employed in a private company that is registered in the business directory in Dakar, we found that only one employee out of five was registered in the social security system (CSS) and retirement fund (IPRES). 53. In theory, the Senegalese authorities could consider three alternatives for reform. The first would involve maintaining the current legislative and regulatory framework and trying to improve its application. The merit of this approach lies in the fact that the current framework supports the establishment of sustainable employment relationships and would thus motivate workers to invest more in their work, to cooperate, and to get training. These relationships could thus have a positive impact in terms of economic effectiveness for the entire Senegalese economy. Besides, a reasonable degree of employment protection could promote social responsibility among businesses and minimize possible conflicts when they have to adjust their workforce in response to worsening economic conditions. Strengthening the implementation of labor regulations would require increasing the human and financial resources available to the Directorate of Labor, which are insufficient today, and a strong political will to implement sanctions against companies and workers who do not respect the rules. 54. However, strengthening the current framework is not advisable as it would not take into account the cost of the current social protection system for the majority of firms and workers. Not only is the marginal effective tax rate of labor in Senegal among the highest in the world, but it also weighs disproportionately on workers. We have seen that, when inadequate regulations are imposed, the reaction of the market is to avoid them by remaining in the informal sector, which goes against the desired goal of ensuring social coverage for the greatest number of workers. 55. The second alternative would be to recognize that the current social protection system is ill-adapted to the current social and economic conditions in Senegal, justifying the overhaul of the whole system. This "big bang" approach has been pursued in several transition countries, as 107 one of the elements of their passage to a market economy, like the Republic of Slovakia. It was also used in Portugal and in Spain when the authorities decided to reform their labor codes in view of their joining the European Union. In the case of Senegal, this option may face resistance from those benefiting from the current systems who, although they are not many, are close to the policy decision-makers (public administration and para-public). In addition, the last reform of the Labor Code dates back only to 1997 and any new modification will have to take into account the current effort aimed at harmonizing codes within OHADA. 56. The third alternative, our favorite, is to choose an option that is halfway between the first two options. It would have the merit of trying to maintain consensus while seeking to increase social mobility in the labor market and improving social coverage. This intermediate approach would be based on the implementation of three major recommendations. 57. The first recommendation is to finalize the architecture of the legal framework proposed in the new Labor Code, by adopting a series of laws (the Code provides for 66) and texts which still prevent its concrete application (Recommendation 26). Emphasis should be given to the following three aspects: · As soon as possible, the authorities should adopt the decree mentioned in Article 43 of the Labor Code, which would define the sectors of activity where the use of fixed-term contracts would be fully liberalized so as to align Senegalese legislation with the standards in OEDC countries.112 Based on the same logic, which is to facilitate access to employment for those looking for work, implementing decrees for temporary work (Article 226 of the Labor Code) are necessary because the current legal void penalizes both companies and employees. Empirical observation and data collected show a strong increase in demand for this type of employment, which must then be regulated as soon as possible to avoid abuse. · It is necessary to implement the decrees establishing compensation modalities for overtime and those establishing waivers from the legal duration of employment, which are particularly important for new and booming sectors of the Senegalese economy. In agreement with the Senegalese private sector, the Ministry of Labor prepared draft laws highlighting the reduction of charges on overtime in exchange for allowance for additional rest time for workers. With respect to prior authorizations, the proposal is to simplify the current system by subjecting the firm to only one authorization per year (contingent on a number of overtime hours by workers) rather than individual and repetitive authorizations for each worker. · For the purposes of social dialogue within companies, the decree that will frame the exercise of the right to "direct and collective expression by workers on the content, occupational restrictions and organization of work" should be adopted. Article 5 of the Labor Code stipulates that workers "can participate in defining actions to be 112Article L. 43 of the Labor Code stipulates that "the first two paragraphs of Article L.42 do not apply to workers hired by companies in activity sectors in which it is customary not to use permanent contracts because of the characteristics of the activity, when the employment of these workers is temporary in nature. The list of these activities is established by decree." 108 implemented to improve their working conditions, work organization, production quality and productivity improvement within the work unit to which they belong." 58. The second recommendation is to strengthen the protection of workers with respect to security and safety conditions in the workplace and to adopt support measures to improve the understanding of and use of their entitlements within the company (Recommendation 27). This line of action would partially offset the first recommendation, which could be perceived by some groups of workers as a threat to their job security. In December 2006, the authorities approved the implementing laws in the areas of hygiene and workplace security. Resources should now be provided to the Directorate of Labor to allow it to play its role (and in providing them with the necessary technical and financial support), notably in the regions. Beyond this effort, a sanctions regime should be clearly established to penalize companies that do not respect these regulations. 59. Assistance should be provided to ensure the proper utilization of collective procedures (adjustment, liquidation of businesses in difficulty) associated with regulations governing the termination of employment on economic grounds (Articles L 60 to L 64), which do not seem to be well understood by the participants involved in their implementation, to help businesses to withstand shocks they experience, increase their productivity, and successfully overcome bad times. Employee representatives, who play an important role in these procedures, alongside management, are not equipped to effectively exercise their prerogatives with respect to collective procedures, as provided for by the Code des Obligations Civiles et Commerciales and the Labor Code. This is compounded by the slowness of the labor tribunals, the sometimes faulty interpretations of the Labor Code, delays, and the availability and execution of decisions that promote backroom maneuvering by experienced insiders. 60. Finally, the third recommendation is to adapt the social protection system to the social and cultural conditions in Senegal (Recommendation 28). Along these lines, we encourage the rapid implementation of the reforms that are being launched to make the official social protection system more attractive and flexible, notably by offering a capitalization scheme. These reforms are one of the components of the World Bank's private sector adjustment project. Furthermore, similar to what is being done with respect to taxation of small companies (with the introduction of a simplified comprehensive tax), it is desirable to develop social protection instruments, maybe less ambitious but also less costly, which would cover the informal workers in the Senegalese economy. In this regard, the authorities already lightened the payroll and fiscal burden on businesses by implementing a series of tax reforms in 2004 aimed at stimulating labor demand and access to social security systems.113 113The tax incentive system for employment promotion with ordinary exemptions (general tax code) comprises : Exemption from the CFCE for three years for companies that create a minimum of fifty new additional and stable jobs with a permanent contract, excluding contract renewals. This scheme was officially approved by the MEF (Art. 195 CGI). VAT exemptions for wage labor under the Labor Code (Art. 286 CGI). Exemption from the requirement to register labor contracts between managers of industrial or commercial firms, farm or forestry enterprises, and their workers or employees. The same goes for work certificates issued to these employees whenever they do no contain any provision giving rise to droit proportionnel. Exemption from stamp duty on salary receipts given by employees to their employers in accordance with the provisions of the Labor Code (Art. 832 of the CGI). Also, exemption from stamp duty on domestic worker's paybook and on any other document issued to verify wage earner status (Art. 836 of the CGI). 109 61. However, these reforms should be consolidated. Before proposing any concrete ideas, one should not think that there is no informal welfare system in Senegal. To the contrary, these are often based on community (including religious), or family initiative and their importance is illustrated by the magnitude of financial transfers, on the one hand, from abroad to Senegal and, on the other hand, from towns to villages.114 Although these informal welfare systems are important, they are based on mechanisms that are not always transparent and, owing to their scattered nature, are not capable of taking advantage of economies of scale that would allow them to diversify the risks inherent to the well-functioning of any social protection system. For this reason, we support the development of initiatives such as the insurance systems that have been proposed for road transporters and farmers that aim at integrating informal and formal protection systems (Box 10). PILLAR 7: PROMOTING EMPLOYMENT PROGRAMS 62. We derive two main conclusions from the analysis proposed in this study. The first is that the active employment promotion programs in Senegal have only a limited impact on the search for employment by the working-age population. This finding is not surprising since these programs mobilize less than one percent of the Government budget and have hardly received any attention from development partners, with the exception of AGETIP or when they are the subject of highly targeted interventions notably by the International Labor Office. The second conclusion is that their mixed impact on employment is explained by their weak management and governance as well as from lack of monitoring of their actions and results over time. There are also exemptions stemming from special schemes : Exemption of training and apprenticeship allowances from all taxes borne by the employer or the beneficiary. However, the only items targeted are the benefits and allowances paid under the "Training and Apprenticeship" component, whose content and modalities are presented in Articles 5 and 19 of the Government/Private Employer Convention to Promote Employment of the Young of April 25, 2000. Benefits provided during the operational phase of new businesses, with a CFCE exemption for five years on jobs created under the investment program, if more than 200 jobs are created, or if at least 90% of the jobs created are located outside the Dakar area; this exemption is extended up to eight years. Project extension schemes are exempted from the CFCE for five years if more than 100 additional jobs are created, or if at least 90% of the jobs created are located outside Dakar. This exemption is also extended up to eight years. Deduction from the tax base of all payroll taxes borne during a fiscal year Also, exemption in the form of the so-called job creation subsidy equal to the amount of taxes levied on employee's wages. But this subsidy varies depending on whether it is a small and medium company or other business Exemption from the CFCE and deduction of operational charges borne by free zone export companies 114For further details on the role played by transfers, cf. Q. Wodon, XXXX, World Bank, 2006. 110 Box 0.10: Alternative social coverage for road transporters The prevailing situation in the road sector exposes the workers to high risk in terms of jobs and related incomes. These workers are not covered by a formal insurance even though the risks of accidents are relatively high. The target population is estimated at about 400 000 workers, including their families The feasibility study showed that: (i) The workers in the sector are classified in different groups whose common characteristic is the application of the principle of solidarity; (ii) The development of mutual assistance practices is generalized but these are not appropriate to address emergency situations; (iii) These practices are based on different tax or contribution collection principles but their levels of development vary according to the groups; (iv) A clear interest has been expressed for the establishment of a formal and centralized health insurance scheme; (v) Few workers in the sector benefit from health insurance coverage through community mutual assistance funds for instance; (vi) In case of illness, the workers' or employers' mutual assistance funds do not cover the families; and (vii) The interest community of the groups is extended to the jobless and retired persons, thus modifying the definition of the target population Consequently, the initiative is to propose a health insurance scheme based on the structure of mutual assistance organization networks around a federation of mutual assistance organizations. Such a structured grouping will allow the circumvention of the problem of modest individual contribution capacity and the high number of individual families, while increasing coverage. An innovative mechanism for the funding of contributions is proposed thus: (i) The mutual assistance organization will rely on the existing practices of mutual assistance to collect funds which will cover part of member's contributions; and (ii) employers participate in the financing of part of the contributions. Ultimately, an automatic membership system will be put in place through which members of the grouped structures shall automatically become members of the mutual organization. To extend the coverage of this system, a local network of grassroots mutual organizations will be created to facilitate the attainment and mobilization of the greatest number of workers in the sector. 63. In this context, the first objective of the Senegalese Government is to make their efforts credible and to show that the programs can achieve concrete results before soliciting supplementary funding, including from development partners. Consequently, we suggest that this approach focus on the following three lines of actions. 64. The first recommendation is to improve program management and governance (Recommendation 29). As stated earlier, there is a lack of program control and monitoring both with regard to financial programming and their impact on the ground. The institutions concerned should put in place effective internal control and monitoring mechanisms, as recently proposed in the FNPJ, by setting up project accreditation and monitoring units (CDCSP) at the level of each department. This effort should facilitate the examination of the documents presented, the certification and selection of projects and the monitoring of those that have been retained. At the same time, it will be necessary to support these measures with independent external controls, for instance, through the Audit Court or other Government mechanisms, including the State Inspector General. As with all controls, a precise schedule should be drawn up to avoid slipovers and delays which could accumulate over the years. 65. The second recommendation is to increase the public financial resources allocated to these programs (Recommendation 30). This recommendation should follow (and not precede) 111 the implementation of control and monitoring mechanisms, and remains crucial for two key reasons. The first is that the existing financial resources are limited (proportionally six times lower than in Sweden) while the employment issues are certainly more important in Senegal as is highlighted by the impressive numbers of unemployed and underemployed workers. The second reason is that the possibility to attract more financial resources would also provide additional incentives for making them operate more efficiently. This effort should be supported by donors, which have neglected those programs in their assistance in Senegal. 66. The Government must improve coordination of active employment programs by implementing two complementary actions. First, a stable institutional framework should be put in place, a clear departure from the recent past which was characterized by frequent changes at the ministerial level (five Ministers in charge of Labor in four years) and at the level of institutions which witnessed their staff constantly change at the whim of policy decision makers (Recommendation 31). With the presidential and legislative elections behind them, the Senegalese authorities should guarantee the institutional stability of those programs (as is the case, for instance, at the Ministry of Economy and Finance). 67. Secondly, better coordination could be achieved by developing integrated programs which, according to international experience, seem to be the most efficient (Recommendation 32). In general, this involves supporting financial measures with training and information activities. This approach has been used in Latin America (as the Entra 21 program), in industrialized countries and also in Sub-Saharan Africa (see the example of Uganda in Box 11). The Senegalese authorities could learn from these initiatives, notably by integrating FNPJ and ANEJ (and FNE) so as to offer a wide range of services to Senegalese youths seeking employment, including the sharing of information and advice, developing training (in partnership with the private sector) and the financial support necessary for the emergence of new projects and new entrepreneurs. This integration would also lead to the generation of economies of scale and to the reduction of the operating costs of the numerous programs existing in Senegal today. 112 Box 0.11: Integrated programs The Promotion of Children and Youth (PCY) Program in Uganda was launched between 2003 and 2006 in the context of an integrated approach. It aims to promote employment among the young disadvantaged who are unemployed or underemployed, in particular in rural areas, by offering a range of services, such as (i) promotion of social work; (ii) information and advice; (iii) support for entrepreneurship and for self-employment, and (iv) development of local skills (traditional medicine, prevention of AIDS, etc).. The program also offers assistance to refugees. The program is underpinned by collaboration between several agencies and ministries, including the Ministries of Labor, of Youth, and of Education, so as to develop synergies and to promote its alignment with the national youth employment strategy. The first evaluation in 2004 showed that the income of participants was, on average, 26% higher than that of members of other communities. Furthermore, the main sources of income among the young were salaries (23%) and the activities of the group (38.5%), whereas in other communities these were from subsistence farming (38.5%). Finally, the program strengthened the human, institutional, and methodological capacities of the Government and of the other participants in their efforts to assist the young. Philippines: The objective of the Foundation for Youth Development in the Philippines (FYDP) is to promote employment for young people in rural areas. The program targets youths between fifteen and twenty-four and offers specialized training and management training as well as activities such as international exchanges and internships through its collaboration with the Department of Agriculture, Livestock Farming, and Fisheries. It has also put in place financial support for micro-businesses and small projects Between 1989 and 1992, the program offered training to a total of 2,436 women and credits to more than 156 micro-businesses in seventy-eight provinces. The Entra 21 program is an initiative developed in Latin America by the International Youth Foundation to find employment in the area of information and new technologies for youths aged sixteen to twenty-nine. It was implemented as of 2002 by central Governments, local communities, NGOs, and private companies with the goal of training more than 12,000 youths over a three-year period and finding a job for at least 40% of them. The training programs combine specialized courses with internships as well as monitoring by mentors and financial assistance for program beneficiaries. The training lasts an average of two years and targets students who have completed the secondary cycle, while ensuring equity in terms of gender and minorities. Evaluations have shown the unquestionable contribution of the Entra 21 program to youth employment. The placement rate for youths varies between 68% in Peru and 41% in Paraguay, with favorable evaluations for the companies as well as for youths. The rates were lower for women, notably in Panama, where only 34% of participating women found jobs, compared with 64% of men. However, no discrimination was reported in Sao Paulo in Brazil. With respect to income, the evaluations found that the monthly gains were at least equal to the legal minimum in Peru, Bolivia, Dominican Republic, Panama, Paraguay. and Brazil. The majority of youths benefited from a certain degree of social protection such as paid vacation days and medical coverage. Source: Pezzullo (2005) et Betcherman et al. (2007). 68. The third and last recommendation is to focus Government intervention on the most disadvantaged groups (Recommendation 33). As we have seen, active labor market programs are expensive, even for an initiative like AGETIP, which is deemed positive because of its efficiency in creating jobs. Consequently, in the context of budgetary constraints, we recommend the targeting of groups that are most vulnerable in terms of employment ­ youths and women, 113 notably in the rural world. The risks are, of course, higher, but the benefits are also potentially higher since these groups are most exposed to the weaknesses of the job market. In contrast, the labor service and the subsidies granted to companies that employ graduates should be phased out by the authorities because they are costly, not very effective, and do not help address the most serious problems facing the Senegalese labor market. To support formal employment, we recommend the development of training programs in partnerships with private firms and organizations (see Pillar 1). 69. To assist these vulnerable groups, we suggest that emphasis be laid on two kinds of programs which have already proven their worth: (i) infrastructure (or public utility) programs; and (i) self-employment and micro -enterprise support programs. With respect to infrastructure programs, the approach adopted by AGETIP could be extended to the Government's major projects, which, given their size, could generate large numbers of jobs (concurrently with the training programs proposed earlier). It could also be supported by the implementation of decentralized initiatives that would propose (very) small projects such as the building of a new class room, managed by local communities, for which informal businesses could qualify. The benefit would be to diversify job sources in rural areas thus integrating the companies that are on the borderline of formality. 70. (Micro) credit programs are the ideal instrument to support self-e employment and the development of small enterprises. International experience, as illustrated in Box 12, shows that their success is closely linked to (i) specific targeting of potential beneficiaries; (ii) adequate risk sharing between the beneficiary and the agency through the use of supporting measures (for example, training); and (iii) implementation of solid monitoring and evaluation mechanisms to prevent abuse and political interference. These lessons should be incorporated into the existing programs in Senegal, such as the FNPJ and FNAE (which should be coordinated as we suggested earlier). 114 Box 0.12: Targeting groups disadvantaged by micro-credits Kenya: The Baobab Project is a program managed by an NGO, and is aimed at teaching young people still in secondary school skills to help them achieve economic independence, in partnership with secondary schools. It targets the young, primarily women located in rural areas and is articulated around the following three elements: · General skills: Training introduced during the 2nd and 3rd years of secondary school, aimed at promoting communication, information and self-confidence · Entrepreneurial skills: Class introduced during the 4th year of secondary school to teach business and project management skills, including the organization of internships and practical activities · Financial support: Participants may submit projects to a committee comprising private sector representatives to obtain micro-credits and thus launch an activity. In addition, each year, three or four 100-dollar prices are awarded as a bonus to the best candidates. The evaluation of this program showed that 50% of the financial support obtained was used to develop activities with net gains, even if about 20% of the other activities ended in failure. India. Micro-credit for young people. The initiative implemented in India known as the Commonwealth Youth Credit Initiative (CYCI) proposes micro-credits by specifically targeting potential beneficiaries. It targets the young unemployed and also offers support measures such as training and technical assistance. The objective is to create employment opportunities at a lesser cost by promoting self-employment and small businesses while promoting the growth of the young and of organizations. The credits are offered at subsidized rates in partnership with NGOs and with providers of training and assistance to companies. The program is implemented in three successive phases: (i) pre-credit (targeting and pre-selection); (ii) training program (course, technical assistance, etc.); (iii) financial contribution (credit, financial program, course, and monitoring and evaluation). In India, the CYCI started with a 3-year pilot project, under which 82% of beneficiaries succeeded in launching and establishing a sustainable activity. Women's participation exceeded 75% of the total, which involved 2,500 young people. As a result of this success, the program was expanded to several countries in Asia and in Latin America. In Africa, it was initiated in Ghana in 2005, and contacts have been made with the authorities in Cameroon, Mozambique, the Seychelles, and Sierra Leone. Sources: www.thecommonwealth.org and www.icecd.org, Johnson and Adams (2004) et www.sdc- seco.ba;www.yesweb.org/gkr/project_factsheet.html?pid=107;www.unescap.org/esid/hds/youth/youth_philippines.p df; www.projectbaobab.org 115