Why labour market is heading for a crisis

On Labour Day, I got into an interesting discussion about the economics of minimum wage. My argument was that it has no economic sense because approximately 40 per cent of Kenyans live below the World Bank poverty line (less than $1 a day) and this population will actually be grateful to supply labour at $1 a day which is Sh3,000 a month just to put food on the table.

The opposing argument was that paying someone Sh3,000 is below anyone’s dignity and chances of our economy growing is much lower.

The problem with that normative argument is that its devoid of reality because as long as a country has a huge population living below the poverty line, they will always be willing to supply labour in the market at the subsistence living cost.

Also, employment economics demands that an economy should always absorb as many unemployed and underemployed people who live below subsistence living cost as possible. In the medium term subsistence living cost will thus move up pushing the overall wage rates up in the long run.

On the other hand, using state sponsored minimum wage to push wage rates up only price wages high making it hard for many low skilled workers to get a foot on the labour market.

For example, Kenya’s minimum wage of unskilled worker is now set at Sh6,737 which basically means two jobs that would have gone to the more than four million live below the poverty line have been combined and given to one person.

The structural effect of this is that dependency levels then goes up since the person earning than Sh6,737 will be forced to support relatives or friends who have no job or lives below poverty line.

This has actually been confirmed by the recently released Kenya Integrated Household Budget Survey (KIHBS) Labour Force Basic report that Kenya’s dependency level since 2009 has been rising. Second question will be, is Kenya creating enough jobs to reduce dependency levels?

Truth is, Kenyan economy is creating low-value jobs that have little positive effect to the economy and we can assess this by looking at the employment levels for the cohort age of 20-24 years, which is the entry level at the job market.

According to the same report, the largest unemployment rate is actually recorded in the 20-24 age cohort between 2009 and 2016 confirming that the economy is only creating jobs that have little positive effect on GDP per capita.

More strangely, the highest employment increment was actually recorded at the opposite end of 55–59 age cohort, exposing another structural problem in our labour market

Lastly, does Kenya possess quality labour making it competitive? Now, for an emerging economy like Kenya, vocational or secondary level of education has to be the lowest qualification.

But according to the same report, 48.1 per cent of economically active persons have primary level of education as the highest reached whilst another 9.9 per cent have never completed any level of education, meaning only 42 per cent of Kenyan employees have secondary education and above.

A look further at the informal sector which employs 84.3 per cent of Kenyans, the highest level of education is primary level with 93.5 per cent at unlicensed MSME establishment whilst 48.2 per cent for licensed establishments.

Those with secondary level education as the highest reached accounted for 38.2 per cent and three per cent of employees in licensed and unlicensed respectively. Only three per cent of employees in licensed MSME’s sector have a degree as their highest educational qualification.

On the economically inactive population, 86.8 per cent have pre-primary, primary, post-primary, vocational or secondary level of education as the highest level reached.

In short, Kenya’s labour workforce semi-competitive mostly comprised of pre-primary and primary qualification.

In conclusion, Kenya’s labour market is headed for a crisis unless it addresses its current structural problems. Three-quarters of its population will be eligible to work (aged between 18-55 years) in the next 15-20 years and there will be no jobs.