Small firms, structural change and labor productivity growth in Africa: Evidence from Tanzania

Abstract

At roughly 4 percent per annum, labor productivity in Tanzania grew more rapidly between 2002 and 2012 than at any other time in recent history. Roughly 80 percent of this productivity growth is accounted for by structural change as employment shares in agriculture declined while employment shares in services and manufacturing rose. Although employment in the formal sector has increased, the bulk of employment growth is accounted for by firms in the informal sector; these informal firms contributed more than one percentage point to economywide labor productivity growth. However, 94% of this labor productivity growth came from a very small subset of informal firms that belong to the in-between sector – a term meant to capture the idea that some of the firms in the informal sector share characteristics with firms in formal sector. An argument is made for targeting these firms for financial and other business services as a means of generating sustained and inclusive labor productivity growth in Tanzania’s manufacturing and services sectors.