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Poverty and labour market response to reforms in Uganda

Francis Nathan Okurut, Sarah N. Ssewanyana, Asaf Adebua

September 2006

SARPN acknowledges the African Economic Research Consortium (AERC) as the source of this document:
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Since the mid-1980s Uganda has been implementing International Monetary Fund (IMF)/World Bank sponsored reforms including liberalization of agricultural output marketing, financial sector liberalization, privatization of state enterprises, decentralization, and civil service reforms (see Appendix 1). The reforms were adopted so as to eliminate the distortions in the factor and product markets so as to enhance the market mechanisms in the mobilization and allocation of resources to promote sustainable economic growth. One of the expected outcomes of economic growth was a reduction in poverty.

Recent studies in Uganda have investigated the relationship between economic growth, poverty and income inequality over the structural adjustment period. Deininger & Okidi (2003) noted that income growth and poverty reduction were significantly influenced by agricultural output (coffee) prices, access to basic education, and health care. The implication was that there was a benefit from liberalization of agricultural prices.

A decomposition of poverty into growth and inequality components (over the period 1992/93 and 2002/03) suggested that annual per capita consumption which increased by about 5 percent was accompanied by an annual reduction in the headcount poverty index of approximately 6.6 percent (Okidi et al. 2005). On the other hand, income inequality, as measured by the Gini coefficient, has been increasing over time from 0.36 in 1992/93 to 0.43 in 2002/03. Income inequality was observed to be significantly influenced by community level characteristics and educational attainment, implying that service delivery and quality are critical to attain growth re-distribution (Ssewanyana et al., 2005).

According to Lawson et al. (2003), the probability of being non-poor is positively and significantly influenced by education level and being employed in a non-agricultural sector. However, the probability of being non-poor is negatively and significantly influenced by household size and regional location. Okidi & Mckay (2003) argued that chronic poverty is not only location specific, but also depends on initial household characteristics (such as, human capital and asset endowments). The conclusion from this study suggested that the market oriented development policies that explain the success of Uganda’s macroeconomic performance seem not to have been translated into significant benefits for the chronically poor.

Empirical evidence from other developing countries on the effect of economic reforms on employment and wages seem to vary by country. For instance, reforms led to increased unemployment (Marquette, 1997 on Zimbabwe); created more informal private sector employment opportunities (Wells & Wall, 2003 on Kenya & Tanzania; Daniels, 1999 on Kenya); structural shift in labour away from agriculture; a rise in private sector real wage (Dercon et al., 2005 on Ethiopia); a fall in real private sector wages (Teal, 2000a on Ghana; Appleton et al., 1999 on Kenya; Riveros & Sanchez, 1990 on Argentina); increase in female participation (Lanot & Muller, 1997 on Cameroon; Appleton et al, 1999 on Kenya).

The limited empirical research on the link between economic reforms, labour markets, and poverty reduction in Uganda provided the motivation for this study. While Bigsten & Kayizzi-Mugerwa (1999) investigated the effect of reforms on labour market outcomes in Uganda (in terms of labour market participation and wages), the analysis was based on a small random sample of households limited to the districts of Masaka and Kampala. With the benefit of the 1992/93, 1999/00 and 2002/03 nationally representative household surveys, we are able to extend Bigsten & Kayizzi-Mugerwa (1999) study on Uganda. Thus, adding value in terms of empirical evidence both in the national context and changes over time. Specifically, this study sought to answer the following questions. How have economic reforms influenced the labour market outcomes in Uganda? More specifically, how are these labour market outcomes linked to poverty? To what extent have these reforms generated employment opportunities in the various sectors? Have the factors influencing employment choice changed through the economic reform period? How about the factors influencing wages in paid employment in private and public sectors? What explains the wage differentials between these sectors? The findings do provide insights into how the economic reforms have been transmitted to household welfare through the labour markets.

The remainder of the report is structured as follows. In the next section we present an overview of Uganda’s economic performance and the reforms implemented with a specific focus on their potential implications on the labour market and poverty. Section 3 examines the theoretical framework of the relationship between economic reforms, labour markets and poverty outcomes. Basically this section highlights the channels through which the reforms are transmitted to household welfare through the market mechanism. This section also presents the empirical evidence from other sub-Saharan African countries on the impact of economic reforms on the labour market and poverty. Section 4 presents data sources and their limitations. Characterization of the labour market, employment and poverty is the subject of section 5. The employment choice results are presented and discussed in section 6 prior to wage determination in section 7. Using the results of the wage determination in section 7 we proceed to present and discuss the wage decomposition results in section 8. Section 9 is conclusions and implications for policy.

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