Many African countries grapple with high unemployment, particularly among their young people. This column explains how the provision of reliable electricity could play a key role in creating jobs in the region. Investing in the power sector would boost entrepreneurship, productivity, firms’ export competitiveness and the demand for high-skilled workers.
Many African countries grapple with high unemployment, particularly among their young people. High population growth and increasing educational attainment have led to an expansion of the labor force. But employment opportunities have not kept pace.
The consequences of high unemployment could be dire. Rising youth unemployment and inequality are potential drivers of social unrest, as evidenced in Tunisia and other African countries. Unemployment is also a major driver of migration, as witnessed in the recent wave of migrants undertaking the perilous journey across the Mediterranean with hopes of a better life in Europe.
These experiences suggest an urgent need for policy-makers in Africa to address the issue of unemployment. One central focus of their attention should be the provision of reliable electricity, which is the bloodline of most modern economies.
Without electricity, firms and households struggle to operate effectively as it plays a key role in the production of goods and services. But the reality is that even though more than 600 million people in Africa lack access to electricity, the quality of supply even to connected households and firms is precarious. Electricity outages have become prevalent in many African countries. Households and firms endure several episodes of outages, often on unplanned schedules (see Figure 1).
Figure 1. Access to reliable electricity, by firms and households
Source: The World Bank
Despite the prevalence of electricity outages in Africa and the developing world more generally, little is known about the employment consequences of unreliable electricity provision. Researchers have documented the negative effects of electricity outages on firms’ performance, as it reduces their investment and productivity. There is also evidence of a negative spillover effect on tax compliance attitudes and tax revenue mobilization. But empirical evidence on the effects of outages on employment is lacking.
In a recent study, I explore how unreliable electricity provision in Africa contributes to unemployment in the region. I argue that electricity and labor are complementary inputs in production, which suggests that the unreliable provision of the former will limit the extent to which firms demand the latter.
To this end, the research combines recent household and firm-level survey data from more than 20 African countries with electricity infrastructure data to analyze the effects of outages on employment. The analysis also seeks to identify the channels through which outages affect employment.
The main findings are as follows: first, electricity outages have a substantial negative impact on employment. In other words, communities or regions with persistent outages have a higher probability of unemployment. The impact falls particularly heavily on employment in non-agriculture sectors, which rely on electricity for their activities.
Second, electricity outages have negative implications for high-skilled employment relative to unskilled or low-skilled employment. High-skilled jobs play a key role in economic transformation, as they increase productivity. But such jobs require modern technology that is powered by electricity. Unreliable provision of electricity constrains the expansion of the high-tech, high-skilled sector and hence leads to low employment rates in the sector.
The research also provides evidence on three main pathways through which unreliable electricity provision affects employment.
First, outages have a negative impact on entrepreneurship. The effects are particularly damaging to entrepreneurship in the non-agricultural sector, which typically requires uninterrupted access to electricity in the production process or service delivery.
Persistent electricity outages signal high production costs and uncertainties in the business climate, thereby reducing the incentives of potential entrepreneurs to establish new businesses. This has implications for firm entry into the industrial and service sectors. As African countries seek to attract foreign direct investment, indicators of business uncertainty and high production costs induced by outages may reduce the attractiveness of African economies to investors.
The second pathway is that outages damage the performance of existing firms through lower productivity and revenue. Since electricity is an important factor of production, the unreliable provision of such a key input constrains the production process. This compels firms either to shut down production or to rely on their generators with the associated high costs that entails. Such actions limit the ability of firms to operate efficiently, resulting in lower productivity. As a consequence, firms respond by reducing their demand for labor, particularly for high-skilled workers.
Third, electricity outages reduce the export competitiveness of African firms. Reliance on self-generated electricity increases the costs of production, which translates into high output prices. For firms that do not generate their electricity, outages may limit their ability to meet supply schedules on time. The inability of local firms to compete favorably in international markets has obvious implications for job creation.
Overall, my research provides ample evidence to suggest that the provision of reliable electricity will play a key role in creating jobs and reducing the high unemployment rates in many African countries.
To this end, investing in the power sector is crucial to the sustainability of most economies in the region. While expanding access is important, this should not be achieved at the expense of quality. Reforms aimed at reducing the inefficiencies in the power sector will also play a key role in enhancing the quality of electricity provision. To create jobs, electricity must be available to support productive uses.
Justice Tei Mensah is an Economist at the International Finance Corporation, The World Bank Group, in Washington DC. He is also a non-residential Research Fellow at the Department of Economics, Swedish University of Agricultural Sciences in Uppsala-Sweden.
The views expressed in this blog are solely the author’s and do not necessarily represent the views of the World Bank Group/IFC, and its affiliated organizations or those of the Executive Directors of the World Bank Group/IFC or the governments they represent.