Given the high urban unemployment rate in Ethiopia, it is crucial to understand the impact of the pension reform on the private sector’s ability to create better quality jobs as well as its implications on productivity and wages.
Admasu Shiferaw (College of William and Mary), Måns Söderbom (University of Gothenburg), Arjun Bedi (Erasmus University Rotterdam and IZA), and Getnet Alemu (Addis Ababa University) use worker-level panel data to examine the wage-shifting effects of a social security reform in Ethiopia. By relying on differences across firms in the existence of pre-reform provident funds, voluntary schemes that provide lump sum payouts to workers upon separation, the authors test whether employers have shifted to workers’ wages the cost of social security contributions. They find no evidence of such shifting as wages continued to rise significantly after the reform. However, they find that wage growth was substantially slower among employees of firms without provident funds after controlling for standard wage determinants. They also find that this reduction in wage growth affected only less-educated workers with no effect on more-educated workers. It also shows rising wage inequality at the lower-end of the distribution driven primarily by rising lower-tail inequality among employees of firms without provident funds.
A non-technical summary of GLM|LIC Working Paper No. 45 “Wage Growth and Social Security Reform” is now available here.