Report No.

57652-MG

LABOR MARKETS CONDITIONS IN MADAGASCAR

RESEARCH PROGRAM SYNTHESIS REPORT October 18, 2010

Human Development Department Social Protection Unit Africa Region

Document of the World Bank

This report is for restricted distribution. Recipients may use it only in the performance of their official duties. Its content may not be released without authorization of the World Bank.

Contents
Acknowledgements ...................................................................................................................................................... iv Executive Summary ....................................................................................................................................................... v 1. Introduction ..........................................................................................................................................................1 1.1. Understanding labor markets in Madagascar A research program ..........................................................1

Raising labor earnings is key to poverty reduction ...............................................................................................1 Lack of information on labor market developments prompted a broad research program ................................2 1.2. Summary of main messages.........................................................................................................................3

Key findings ...........................................................................................................................................................3 Policy recommendations ......................................................................................................................................4 1.3. 2. Organization of the report ...........................................................................................................................5

The Madagascar Economy ....................................................................................................................................6 2.1. 2.2. 2.3. Country context ...........................................................................................................................................6 Recent economic developments ..................................................................................................................8 Madagascars Challenges ...........................................................................................................................11

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Labor markets structure and dynamics ..............................................................................................................13 3.1. Key facts and figures .................................................................................................................................. 13

High access to jobs, low access to good jobs ......................................................................................................13 Rural labor markets accounting for 80 percent of the jobs .............................................................................18 Urban labor markets ...........................................................................................................................................18 Higher earning jobs and how and where to get them ........................................................................................19 3.2. 4. Trends 2001-2005: Growth, employment and poverty and the links between the two ...........................23

Job creation and income protection ...................................................................................................................31 4.1. 4.2. Labor demand in the formal sector and the business environment ..........................................................31 Quality of jobs in the informal sector ........................................................................................................33

Increasing productivity in agriculture ................................................................................................................. 34 Promoting off farm activities ..............................................................................................................................36 4.3. Policies to improve productivity and income for the poor ........................................................................39

Education and skills .............................................................................................................................................39 Strengthening Public Work Programs for income protection.............................................................................41 5. Improving labor market outcomes for the poor in Madagascar ........................................................................45

Annexes Annex 1: List of reports and authors ..........................................................................................................................50 Annex 2: DATA COMPARABILITY ISSUES ..........................................................................................................51 Annex 3: . WB doing business labor market regulations. .........................................................................................53 Annex 4: Non-Farm Enterprises in Madagascar .........................................................................................................54 Annex 5: Determinants of daily earnings for adults (15-64) .......................................................................................55 Boxes Box 1-1: Employment in the Madagascar Action Plan (MAP)........................................................................................1 Box 1-2: Background Reports for the Labor Market Research Program ......................................................................3 Box 4-1: Rural non farm activities in developing countries ........................................................................................37 Box 4-2: Apprenticeships and skills development in Ghana .......................................................................................41 Box 4-3: Public Works Programs Elements Required for Reaching the Poor...........................................................44 Figures Figure 2-1: Increasing growth, important setback, and recovery .................................................................................9 Figure 2-2: Important producer price rises in 2004 .................................................................................................... 10 Figure 2-3: Net population increase per year (thousands) by age group ...................................................................11 Figure 2-4: External flows FDI, tourism, and aid what impact of the crises? ........................................................12 Figure 3-1: Distribution of employment by economic sector .....................................................................................16 Figure 3-2: Education levels by gender and sector of work (2005). ...........................................................................17 Figure 3-3: Percentage of workers in agriculture whose household produces the specific crop ...............................18 Figure 3-4: Employment structure differs especially in large cities where non-agricultural and wage activities dominate. ....................................................................................................................................................................19 Figure 3-5: Earnings are higher in large cities, and higher in nonagricultural, formal activities ................................20 Figure 3-6: Earnings increase with education levels, with particularly important differences in the formal sector and the informal nonwage sector. ..............................................................................................................................20 Figure 3-7: Female earnings are lower than men, and they have less access to good jobs sectors. ..........................22 Figure 3-8: Earnings developments between 2001-2005 ...........................................................................................25 Figure 3-9: Employment-to-population rates as well as unemployment rates increased for the non-poor..............26 Figure 3-10: Poverty changes reductions for the largest groups of workers. ..........................................................27 Figure 3-11: Changes in the share of income by major source and by expenditure quintile, 2001-2005. ................28 Figure 3-12: Hourly earnings increased for the poor, and fell for the non-poor. .......................................................29 Figure 4-1: Labor regulations are not considered a major obstacle compared to other issues in Madagascars Investment Climate Assessment. ................................................................................................................................32 Figure 4-2: Doing Business in Madagascar (greater numbers indicate less flexibility) ...............................................33 Figure 4-3: Density functions: Per capita income and period of drought season (soudure) for CF and non CF households. .................................................................................................................................................................36 Figure 4-4: Non-farm opportunities are negatively associated with poverty .............................................................38 Figure 4-5: Over 1.3 million children out of school. ................................................................................................... 40 Figure 4-6: Poor targeting of PW programs .................................................................................................................43 Tables Table 2-1: Table 2-2: Table 2-3: Table 3-1: Table 3-2: Table 3-3: Key social indicators for Madagascar ..........................................................................................................7 The role of agriculture in Madagascar .........................................................................................................8 Crisis and recovery .....................................................................................................................................10 Basic labor market indicators for Madagascar, 2001-2005 .......................................................................14 Employment* - Working age population ..............................................................................................15 Madagascar and comparator African countries ........................................................................................17 ii

Table 3-4: Returns to education (basic wage equation) .............................................................................................21 Table 3-5: Higher employment, especially among women, ........................................................................................23 Table 3-6: Output and employment, shares of total, 2001 and 2005 .........................................................................24 Table 3-7: Inequality fell in the non-agricultural sectors but increased in agriculture. ..............................................30 Table 4-1: Doing Business Rankings, by topic .............................................................................................................31 Table 4-2: Convergence in crops structure .................................................................................................................35 Table 4-3: Better job creation in the non farm sector (rural Madagascar, 2001) ....................................................39

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Acknowledgements
The Labor Market multi-year programmatic work for Madagascar was initiated by Stefano Paternostro (AFTH 3, TTL) in 2007 and the core bank Team included Margo Hoftiijzer (AFTH3, PRMPR). Various country Team members have been engaged at various stages of the work in their respective area of competence. Key authors of various background papers are: Prof. David Stifel, Lafayette College and manager of the IDRC funding; F.H. Rakotomanan, INSTAT; Barrett C. Cornell University; Bellemare M. Duke University; Celada E. AFTH3; .D. van der Mensbrugghe, DECPG; R. Ravelosoa, INSTAT; JC Randrianarisoa, INSTAT; G. Pierre, AFTH3; C. Del Ninno, HDNSP; D. Filmer, DECRG; N. Francken, AFTH3; A. Kolev (AFD); C. Nordman, DIAL; and A. Robilliard, DIAL. In addition counterparts in the collaborating institutions are as follows: Mr. Rakotomalala Andriamampianina, General Director of INSTAT, the local statistical office; Claire Harasty, ILO; and Diane Coury, UNICEF. Each background paper was individually peer reviewed and disseminated as a self-standing product during 2008 and 2009. Peer reviewers for the background papers included: Alderman H.(AFTHD); Bardasi E. (PRMGE); Dayton-Johnson J (OECD); Lanjouw P. (DECRG); Kanbur R. (Cornell University); Mwabu: J. (University of Nairobi); Temple J. (University of Bristol); and Unni G. Gujarat (Institute of Development, National Commission for Enterprises in the Unorganized Sector, India). This synthesis report builds mainly on the background reports and policy briefs that were prepared during 2007 and 2009 and which focused on a wide range of issues, such as the links between employment and poverty reduction, rural labor demand, commercial farming, gender issues and the institutional framework for job creation. This synthesis report was prepared by Sara Johansson de Silva, consultant, and Setareh Razmara, Lead Social Protection Specialist, AFTSP. As peer reviewers for this synthesis report, Milan Vodopivec (Sector Leader, AFTSP) and David Robalino (Senior Economist, HDNSP) provided constructive comments. In addition valuable suggestions were provided by Maureen Lewis (Economic Adviser, AFTHD). The identification of the themes and, within each of them, the identification of the specific topics to be investigated, has been developed in consultation and/or collaboration with Government officials, relevant Bank units, and external partners. To this end the background papers were prepared focusing on the following four themes: (i) labor diagnostics and macroeconomic issues; (ii) the rural economy and labor market arrangements; (iii) the formal economy: labor demand and regulations; and (iv)topics of relevance that have emerged during consultations with Government and partners. The unifying theme among the series of reports that make up the main outputs of this multi-year programmatic approach is how labor markets and labor earnings can facilitate poverty reduction and growth in Madagascar. A workshop was organized together with Government in June 2008 in Antananarivo to present and discuss all the outputs produced at that date. Furthermore, the background papers were discussed with the Government and development partners and disseminated in various workshops during 2009. In addition, key messages of the background papers have been included in the CEM (2009) and the collection of policy notes (2010). To build on the results of this multi-year programmatic work, and as suggested by this synthesis report, more analytical work is needed to generate the underpinnings for solid policy advice on labor markets and poverty reduction strategies in Madagascar. The upcoming AAA on safety nets, starting in FY11, is expected to address some of the issues that need further investigation.

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Executive Summary
A. Building knowledge about labor market conditions in Madagascar
1. Understanding employment and earnings conditions is essential to understanding poverty because the poor depend almost entirely on labor earning. Seven in ten Malagasies were poor in 2005. They were poor because they did not have access to a source of income or a job with earnings that permitted covering basic household needs. Improving labor opportunities and earnings for the poor, by helping them access jobs with higher earnings, is the most important and most sustainable means of reducing poverty in Madagascar. 2. Against this background, in 2007, the World Bank launched a comprehensive work program to provide policy relevant and updated information on labor market conditions in Madagascar. This report provides a synthesis of the background papers produced for this research program. The program addressed a wide range of important issues such as the links between employment and poverty reduction, rural labor demand, commercial farming, gender issues and the institutional framework for job creation. Some of the analytical work drew on relatively new sources of micro-data. The present report summarizes the main findings of the work program, synthesizes the policy conclusions, and proposes a way forward in terms of policy and complementary analytical work. 3. Madagascar faces significant policy challenges in the short and medium term: Diversifying production and employment. Madagascar remains dependent on aid flows and foreign direct investment, both of which are vulnerable to political and economic instability. A majority of the population works in subsistence agriculture. Shifting workers into more productive employment requires both high economic growth, high labor demand in growing sectors, and mobile workers. Meeting demographic pressures. Child dependency rates will remain relatively high for the foreseeable future, putting additional pressure on the earnings of working household members. Moreover, the capacity of education systems will be stretched by growing cohorts of school age children a key issue, given the lack of skills in Madagascar and the role of education for building international competitiveness and increasing productivity and earnings. Crucially, rapidly growing cohorts of new labor market entrants will put substantial pressure on the economy to create jobs in agriculture and nonagricultural sectors. However, to reduce poverty, these cohorts need to find jobs which provide earnings beyond what subsistence agriculture can offer (such as shifting out of agriculture subsistence and low productivity agriculture into the informal non-farm sector as well as higher productivity in agricultural activities). Stabilizing macroeconomic and political confidence and reinitiate economic growth after the second severe political crisis in a decade. In 2001, Madagascar was hit by a severe political and ensuing macroeconomic crisis. However, the economy recovered and between 2003 and 2009, Madagascar experienced much higher growth rates than in previous decades. In particular, foreign direct investment and tourism revenues increased. The positive momentum was dramatically halted and partly reversed as a second and similar political upheaval began in early 2009. During the previous crisis, the second and tertiary sectors were badly affected by economic volatility and urban poverty increased, while agriculture provided something of a
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buffer because of its capacity to provide subsistence for households and because of higher international prices for rice which positively affected earnings. Whether the primary sector retains the capacity to act as a safety net is not clear. Rebuilding internal and external confidence in the economy and reversing the negative employment, earnings and poverty effects is a necessary but difficult task for Madagascar. 4. It is hence critical to understand: (i) the current structure of the Malagasy labor market and the links with poverty; (ii) the job creation and poverty reduction links in response to the 2001 crisis; (iii) the constraints to job creation in higher earning sectors; and (iv) how to improve labor earnings for the poor, by raising agricultural productivity, and by facilitating earnings growth for the poor. The report is organized around these themes.

B. Labor markets conditions in Madagascar in 2005

5. Employment rates are high and unemployment rates are low: Access to a job is not the problem. In 2005, 86 percent of the adult population (ages 15-64) was employed. Unemployment rates reached a mere 2.6 percent nationally, although it was significantly higher in the large cities (the regional capitals). In rural areas, as many as nine in ten adults held a job, men and women alike, and largely on the farm. 6. But access to a job with higher productivity and earnings is very limited. Only about 15 percent of the jobs were waged jobs, which offer the higher earnings. Instead, four out of five workers, and nearly nine in ten of the poor workers, were in the agricultural sector, which accounted for only one third of GDP, and where earnings were about one third of non-farm waged work. Almost all of the remaining workers were in the tertiary sector, while the secondary sector accounted only for 3 percent of all jobs. Overall, this structure points to plenty of low productivity employment with very limited earnings opportunities. Tellingly, the poverty rate was actually significantly higher among the employed than the unemployed workers. 7. The work force was and remains largely uneducated. Reflecting the high proportion of low productivity work, the Madagascar adult population (and, consequently, work force) was largely without formal education: 54 percent had not completed primary, twenty-eight percent had primary level diplomas, and only eighteen percent had post primary qualifications. Female workers, and workers in agriculture, had the highest shares of unqualified workers. 8. Rural labor markets are characterized by subsistence farming and high vulnerability. Few households are producing higher value added products like fruits, cash crops, or other vegetables. A vast majority of Malagasy households are thus economically undiversified and exposed to climatic variations, be they predictable (the soudure, or dry season) or unpredictable (floods and droughts). 9. Urban labor markets, in contrast, are characterized by lower employment rates, larger differences between men and womens participation rates, and higher unemployment rates. The differences between small urban centers and large urban centers are more significant than between the former and rural areas, however. Unpaid family work dominates the employment structure in small urban areas, while informal non wage work dominates the employment structure in larger cities. 10. Earnings are highest in the urban public wage sector and lowest in agriculture. Earnings increase significantly with education. The returns to higher levels of education are higher in the public wage sector than for wage workers in the formal private sector. However, positive returns to education

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are not limited to formal sectors: education in the informal nonwage sector shows rapidly increasing returns. 11. A triple gender gap exists in Madagascar. Median earnings for women in nonagricultural employment reach only two thirds of that of men. The differences are partly explained by differences in levels of education, but women with similar characteristics as men are paid comparatively less. The gender wage gap is highest in the informal private non agricultural sector, and this appears to be largely linked to firm size and other characteristics. Women thus appear to face difficulties and possibly discrimination in at least three areas: access to education, access to higher paying jobs and same pay in those jobs, and access to financial capital and other institutions that favor firm growth.

C. Growth and employment dynamics in response to the 2001 economic and political crisis
12. Between 2001 and 2005, employment rates increased, but poverty rates stagnated and labor productivity fell. The period between 2001 and 2005 (for which there is comparable household-level data) covers a sharp crisis (end- 2001 and 2002) and significant recovery (2003-2005). In response to the crisis, affecting in particular activity in urban areas, employment rates increased, reflecting an inflow of workers into activities of subsistence character rather than real new job and earnings opportunities. As a result, labor productivity fell by eleven percent and the overall poverty rate remained virtually unchanged at nearly 70 percent. 13. The shift into agriculture accounts for the employment increase and the labor productivity contraction. The manufacturing sector collapsed in the wake of the crisis, shifting out nearly 300,000 workers, and the tertiary sector saw no new net job creation. However, over one million additional jobs were created in agriculture on a net basis. This shift into lower productivity activities lowered overall labor productivity. 14. However, earnings growth was pro-poor, favoring the very poorest quintiles. Because the crisis affected urban areas, which are more affluent, and therefore the non-poor, it resulted in some earnings convergence. Earning fell in urban areas, but increased in rural areas; they almost doubled for the poorest quintile, and fell only for the richest quintile. With the exception of finance, agricultural earnings increased the most, possibly as a result of increase in the price and production of rice combined with a sharp depreciation of the currency. 15. The cost of the crisis in urban areas, and on the non-poor is visible in a more significant increase in adult and child employment rates for the non-poor (child labor rates of poor children actually fell) and in the dramatically increased unemployment rates in large cities and secondary urban areas, where they tripled and doubled respectively. In 2005, the non-poor households had a higher share of agricultural income than in 2001, and poorer households had a slightly lower share of agricultural income. Earnings inequality increased in agriculture (because of an increase of higher earnings farming) but fell in the non-agricultural sectors. Again it is not possible to say whether agricultural households became less poor and urban households poorer, or whether poor and non-poor workers shifted into new activities.

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D. Constraints to labor demand in the non-agricultural sector.

16. A high earning job with adequate social protection in Madagascar is found in the waged and formal sector. To promote job creation in the formal sector, the employment strategy must be based on multi-sectoral reforms that create a favorable environment for job creation in the private sector. Jobs are created when new firms are created and existing firms expand. This requires a multi-sectoral strategy that is based on macroeconomic stability, encourages investment, allows for the mobility of workers from declining to growing sectors, creates a highly skilled and flexible work force, and provides support for workers while creating incentives to find employment. Therefore, removing the constraints to private sector development and job creation in the formal sector is necessarily a priority. 17. The policies that might increase higher earning jobs in Madagascar span much beyond labor market policies and include policies to maintain macroeconomic balances and encourage private investment, regulatory policies for other markets (finance, products), and policies for education and skills development. In fact, firms in Madagascar identify labor regulations among the less important concerns in conducting business. Nonetheless, Madagascars employment regulations compare unfavorably with other similar countries. A ban on temporary contracts for permanent jobs and a relatively high minimum wage complicates hiring and complex and numerous exemptions in the regulatory framework complicate the application of law, limit transparency, and increase unpredictability of the business environment. 18. The above regulations may influence the size of the informal sector (as firms opt out of formality) but will by the same token not affect the functioning of informal sector work where the vast majority of Madagascars work force is employed. Issues that affect labor demand in informal nonfarm enterprises, although they offer lower earnings, may therefore also need a lot of attention. Given the link between education and earnings as well as possible skills shortages, skills development in the informal sector is one such area to look at. Hence, while labor regulations are possibly constraining formal activity, other policy areas including general framework for doing business - are likely to be more important obstacles to private sector led growth and job creation in Madagascar. 19. However, if Madagascar succeeds in expanding higher productivity and formal sector activity, cumbersome regulations may in fact become a binding constraint. A complex and unpredictable overall regulatory framework for business is also likely to lower the employment creation of firms with higher overall growth potential in the formal or informal sector. Labor regulations need to be reviewed in the context of creating more, more productive, and higher earning jobs. 20. Public works programs, seen as a means of encouraging labor demand in the low skill end, reducing household vulnerability and combat underemployment or seasonal unemployment, have become more frequent in recent years. International experience shows that well designed and well implemented PW programs can simultaneously mitigate household income shocks, reduce poverty, and provide infrastructure cost effectively. Thus, public works programs in Madagascar could potentially help reduce household vulnerability during the soudure, and assist those households that cannot resort to farming when other options disappear including poor in urban areas, and landless in rural areas. Even with high overall economic growth, many households will be subject to income shortfalls due to seasonal variation in agriculture or other shocks. 21. However, programs are currently not functioning adequately either as safety nets or as infrastructure programs. An evaluation of several PW programs in Madagascar over the period 20052007 shows that (i) PW programs need to be harmonized and coordinated across different agencies

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(ii) much better monitoring and evaluation needs to be in place to ensure cost effectiveness and (iii) technical competence strengthened to ensure output quality. 22. Most importantly, targeting needs to be improved. Normally, poor households select into programs because they offer earnings opportunities. However, if the wages are set above market wages, as is the case in many programs in Madagascar, also non-poor will choose to work in the programs, crowding out job creation for the poor and diluting the safety net functioning. In addition, projects appear not have been directed at the poorer regions (where both income and infrastructure needs would be greatest).

E. Raising earnings potential and lowering vulnerability in the informal sector

23. Formal sector job creation will not suffice for Madagascar. First, the formal sector is simply too small to be able to expand sufficiently to absorb even new entrants on the labor market, let alone all of the existing informal workers even over the medium term. And second, the poor may not be able to access jobs, even with rapidly expanding labor demand: the poor live in rural areas and are largely unskilled, while high earning jobs are urban and require skills. And finally, the low earnings sectors can act as an important safety net when the formal sector is subject to shocks as inflows into the agricultural sector after the crisis in 2001 illustrate. 24. Efforts must therefore also center on increasing productivity and earnings and minimizing risk in the low earnings jobs sectors. First, by increasing agricultural productivity and earnings, food consumption would increase and households would also have the free labor and resources to diversify into other types of activities. Second, the rural non farm sector could potentially provide both higher and less volatile income and generate more jobs in rural areas. 25. More commercial farming and higher technology content increases agricultural productivity, but also raises demand for unskilled labor, and lowers poverty and food insecurity. A majority of the population will remain in agriculture over the foreseeable future. The agricultural sector is essentially non-commercial and characterized by low productivity and high volatility, which in turn is linked to high poverty levels. Food security margins are very small, and malnutrition and mortality increases visibly during the dry season. Non-poor households have higher productivity, are more likely to sell their products on the market. A study of contract farming suggest that households that can tap into larger international firms see higher and less volatile income, build more assets, and experience shorter lean periods during the dry agricultural season. Policy must therefore focus on raising labor productivity which will indirectly result in the creation of higher earning jobs outside the agriculture subsistence sector. 26. The rural non-farm sector is associated with higher earnings and lower household poverty, and education levels of firm owners have strong leverage effects on job creation and earnings for workers in the firms. Only 30 percent of rural households are involved in non-agricultural activities, their firms are generally small and informal, and dependent on unpaid family labor. Even at this rudimentary level the non-farm sector offers better opportunities than subsistence farming, and leads to higher earnings and lower poverty risk for households. Higher education of firm owners results in larger firms, more equipment, more creation of paid jobs, and higher earnings for those jobs. Revenues paid to hired labor increase many-fold with education levels of the owners.

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27. Improved access to education, capital, and markets is likely to help further non-farm activity and job creation. Importantly, public goods in the form of security, lower transportation costs, and greater access to broadcast media are also associated with higher labor demand.

F. Conclusions: Improving labor market outcomes for the poor

28. Efforts to sustainably reduce poverty should center on improving earnings for the poor. This implies a broad agenda: (i) restoring macroeconomic and political stability, improving the investment climate more broadly and removing constraints to labor demand in sectors that can offer higher earnings (ii) removing obstacles that prevent workers in low earning sectors from shifting into higher earning sectors (iii) help increase productivity in low earnings sectors agriculture, household enterprises, urban informal sector - where most of the poor work. 29. A weak investment climate is hampering activity and employment growth in both the formal and informal sector. While labor regulations do not appear to be a major binding constraint for business operation, there is some evidence that formal sector hiring is relatively expensive. Evidence from elsewhere suggests that it is at once more efficient and equitable to concentrate on protecting workers (e.g. through means of income support during unemployment) than jobs (through cumbersome hiring and firing regulations.) 30. Public work programs need to become better targeted safety nets and more efficient. Within the area of social protection, well designed public sector work programs could reduce vulnerable households exposure to earnings short falls and at the same time contribute to much needed improvements in infrastructure. However, programs need to be much better targeted to the poor, by setting wages below market level to encourage self selection, and by using poverty mapping for better geographical coverage. They need to be coordinated across different agencies, and accompanied by appropriate monitoring and evaluation systems. Finally, the technical quality of the infrastructure produced needs to be assured by strengthening capacity among implementing agencies, concentrating implementation responsibility in agencies which posses the capacity, or ensuring external support. 31. Earnings growth in the informal rural sector and urban sector is the most likely route out of poverty. Most of Madagascars poor depend on subsistence agriculture. While the formal urban sector is small, higher productivity agriculture, rural non-farm activities, and the informal urban sector offers higher and more stable earnings than subsistence farming. Policy needs to focus on how to improve productivity in these sectors, and help the poor shift into those sectors by increasing their education and skills in childhood, youth and throughout their working life, by increasing their physical mobility, and by improving access to capital and markets through improved financial markets and infrastructure. 32. More knowledge is needed. The research program has centered on rural labor markets, where most of the population lives, and on understanding the basic functioning of the labor market and the characteristics of workers. As such, it fills an important knowledge gap, but more analytical work is needed to generate the underpinnings for solid policy advice on labor markets and poverty reduction strategies. Some key areas of analytical and policy focus that require additional work are: Informal sector activities and labor markets in urban areas. The urban informal sector is the main employer of rural immigrants and of the incumbent poor in urban areas. As such, it can have a critical impact on poverty reduction. At the same time, political, macroeconomic and externally imposed crises often have a stronger impact on urban than rural labor markets. However, while it is clear that urban labor markets suffered greatly during the political crisis of 2001, there is still a
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knowledge gap as to how labor markets work in urban areas, who are the most vulnerable, what the defining characteristics are of more successful firms, occupations and workers, and the extent and consequences of rural-urban migration. Vulnerable groups and mobility constraints. Generally, new labor market entrants, both youth and immigrated workers from rural areas, face higher risks and worse prospects in terms of accessing a job, especially with some decent level of earnings; the evidence suggests that women face considerable discrimination in Madagascan labor markets. At the moment, while we know that mobility is limited, it is not yet fully clear why this is the case, although discrimination and education appear to be important factors. The causes, consequences and remedies for the limited mobility need to be identified. Income protection. Public works is only one of several possible options that can work in combination to protect and preserve income for the most vulnerable in the population and as discussed, in the past, PWs have not served a safety net function. Following upon the existing knowledge of poverty and labor markets, a next step is to improve the efficiency and coverage of the existing social protection system with a view to ensure adequate coverage, efficiency, relevance and financial sustainability of the system. As large parts of the population are at significant risks for chronic or seasonal food insecurity, a well functioning safety nets system in particular is critical. Other means of providing safety nets beyond public works/cash-for-works therefore need to be explored. The recent review of the Social Protection system in Madagascar (Social Protection: Helping households manage risks and protect assets current, May 2010) provides valuable suggestions to develop a coherent system, strengthen institutional set-ups, expand successful programs and pilot appropriate new programs. Education and skills development. The formal sector is still embryonic and the informal sector provides employment for a vast majority of the population. Therefore interventions to improve education and skills development need to be balanced with interventions in economic and labor market policies to promote a favorable climate for private investment and job creation. Since education and skills development are influencing wages and earnings directly by raising the productivity of the worker and indirectly by promoting entry into more lucrative forms of employment, Government needs to continue improving the quality of basic education while opening access to post-basic education and improving articulation between formal education and training programs. In other African countries, the returns to skills in the informal sector have been shown to be on the increase. Skills development in the context of informal sector work is thus critical for raising productivity and earnings potentials in this sector while at the same time preparing workers for shifting into formal sector activities as these gain importance. Drawing on the knowledge base that is being created by the World Bank in the Africa region, further work is needed to better understand how workers in Madagascar are prepared with skills for informal sector employment and how government can encourage further investments in skills alongside a menu of other interventions that would raise productivity and earnings in the sector. It will be therefore necessary to look closely at the unique character of skills development in the informal sector and the roles played by schools and employers as providers of skills. Updating the labor market overview. The reports in the work program were using data from 2005 as their latest observation. An update of this information is now much overdue, and at a minimum a basic estimate of employment rates, unemployment rates, the sector structure of employment and earnings developments is needed. As is discussed in Annex 2, the analytical underpinnings of policy advice could be much stronger with improvements in survey methods and data.

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Labor market institutions. Finally, the investigations suggest that labor markets are segmented in Madagascar, with high preferences for public sector jobs, to which the poor cannot get access, with a very limited formal sector, and with as mentioned - a gender divide in earnings. A review is needed of the institutional constraints that cause segmentation and limit mobility between different segments. For example, the wage setting mechanisms and the role of different labor market institutions in maintaining the public wage premia need to be reviewed, as well as the role of economical and social constraints to women participating on equal terms in the work life.

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1. Introduction
1.1. Understanding labor markets in Madagascar A research program
Raising labor earnings is key to poverty reduction 33. A majority of Madagascars population is poor. Their main source of income is earnings from their own, largely unskilled labor. Understanding employment and earnings conditions is therefore essential to understanding the causes and cures of poverty. Improving earnings for the poor, by helping them access jobs with higher earnings, is the most important and most sustainable means of reducing poverty in Madagascar as indeed in any country. 34. To address the challenges of growth and poverty, the previous Government of Madagascar initiated a bold development strategy for 2007-2012the Madagascar Action Plan. The MAP, a second-generation Poverty Reduction Strategy, was prepared in a participatory way and outlines eight strategic commitments: (1) responsible governance; (2) connected infrastructure; (3) educational transformation; (4) rural development and a green revolution; (5) better health, family planning, and the fight against HIV/AIDS; (6) a high-growth economy: (7) a cherished environment; and (8) national solidarity. As part of the high-growth commitment, the government recognized the goal of full employment as a key challenge (Box 1-1).

Box 1-1: Employment in the Madagascar Action Plan (MAP)

In the MAPs commitment to a high-growth economy the sixth strategic commitment - full employment has been identified as one key challenge. In this policy area, the governments goals have been identified as follows; 1 A well qualified labor force that is able to respond to the needs of the economy 2. Substantially higher labor productivity 3. Move towards full employment The strategy to achieve these goals is four-pronged: 1. Stimulate job-generating sectors. 2. Reform labor laws 3. Develop a National Manpower Plan to align labor to the needs of the economy. 4. Provide vocational training to support the priority industries that contribute to the high growth economy. 5. Shift mindset to support efficient economic activity. Source: Government of Madagascar

Lack of information on labor market developments prompted a broad research program 35. Recent and hitherto unused data are available to better understand labor markets, growth and poverty links. Until recently, labor market diagnostics in Madagascar were largely outdated, with the last overview of labor markets dating from 1993, or focused exclusively on the formal sector in urban areas which involves only a small part of the labor force and virtually none of the poor. Yet, Madagascar has recently developed sources of micro-data which are well suited to looking at how labor markets and poverty interact. 36. In view of this lacuna in knowledge, and of the data and tools now available to fill the gap, the World Bank launched a comprehensive research program on the functioning of the labor market in Madagascar in 2007. Focused policy incentives require updated analysis to understand which interventions will be most effective. The research program, hence, was intended to support the policy agenda by providing relevant and updated information on the labor market conditions. The proposed analytical program aimed at closing the large knowledge gap on labor market conditions, and supported the policy debate currently surrounding the implementation of the Government MAP. Accordingly, the analytical work program intended to provide output along four themes: A. labor diagnostics and macroeconomic issues; providing an up to date labor market diagnostic and an analysis of the role of employment for shared growth; B. The rural economy and labor market arrangements, more particular non-farm enterprises; C. The formal economy: and constraints to labor demand. In addition a fourth cluster -D. Selected issues- focused on topics of relevance that emerged during consultations with the government and partners, including the efficiency of public works and gender issues in the labor market. 37. This report synthesizes the main messages from the research program and proposes a way forward in terms of both policy and complementary analytical work. The report builds mainly on several reports and policy briefs which focused on a wide range of issues: such as the links between employment and poverty reduction, rural labor demand, commercial farming, gender issues and the institutional framework for job creation (listed in Box 1-2). For context, the report also brings in recent economic work, notably the Country Economic Memorandum prepared in 2009 and associated policy briefs as well as a report on Post-Basic Education. The purpose of this report is (i) summarize the various outputs of the labor market analytical work program that was prepared during 2007-2009 (ii) develop a story-line around these components, and (iii) identify gaps that need to be addressed in further analysis. It should be noted that thorough labor market diagnostics for 2001 and 2005 are provided in two of the main outputs of the program: Stifel (2007), and Hoftijzer and Paci (2008). Rather than repeating in detail the diagnostic exercise, the synthesis report has focused on bringing in additional components of the work program into the story line so as to provide value-added to the World Banks knowledge of labor markets and poverty in Madagascar. Moreover, in spite of the breadth of the research program, there are still many outstanding issues for understanding the interaction between labor markets and poverty in Madagascar, and the report points to some avenues for further work.

Box 1-2: Background Reports for the Labor Market Research Program
1. Labor market diagnostics (i) Making Work Pay in Madagascar: Employment, Growth, and Poverty Reduction (ii) Gender Disparities in the Malagasy Labour Market, (iii) Evaluation des Conditions du March du Travail Madagascar, 2001-2005 (iv) Marchs de Main doeuvre, Economie non agricole et Stratgies de Moyens dExistence des Mnages en milieu rural Madagascar (v) The Demand for Hired Labor in Rural Madagascar 2. Agriculture (i) Contrats de production agricole Madagascar : Vue densemble (ii) Contrats de production agricole Madagascar : Les dterminants de la participation (iii) Contrats de production agricole Madagascar : Effets sur le bien-tre des mnages contractants (iv) Contrats de production agricole Madagascar :Effets sur la productivit rizicole des mnages contractants 3. Enabling framework (i) Deploying the Financial Sector for Employment Creation and Poverty Reduction in Madagascar (ii) Madagascar Employment Institutions and Policies: A Background document (iii) Madagascar: De jure labor regulations and actual investment climate constraints 4. Safety nets (i) Travaux publics haute intensit de main duvre (HIMO) pour la protection sociale Madagascar : problmes et options de politique Source : Annex 1

38. The onset of a severe political crisis in Madagascar complicates the forward looking policy agenda. The timing of this report presents challenges. The economic and political setting underwent dramatic changes in early 2009, which are not reflected in the data, and which are likely to significantly affect both policy priorities and economic conditions. However, since the work program covers the years after the 2001 crisis, the report may be particularly timely in providing a good understanding of what the potential effects of the crisis may be on poverty and labor markets.

1.2. Summary of main messages

Key findings 39. Madagascar is not lacking jobs, but most of the labor force is working in jobs which offer inadequate pay. A vast majority of poor adults are working. Most of them are in subsistence farming, and virtually all non-farm activities are in the informal sector. Subsistence farming is the least productive of all sectors and offers the lowest earnings. The high earning and low risk jobs in Madagascar, in contrast, are in the formal private or public sector. 40. Over the short and medium term, the majority of the poor would only increase their earnings through earnings improvements in the agricultural sectors or in the informal non-agricultural sector.
3

The formal private sector is predominantly high skill focused, while the poor overwhelmingly lack education. Since the private and public sectors are small relative to the size of subsistence farming and informal sector activities, they would also have to expand at unreasonable rates to absorb even a small share of the poor workers in Madagascar. The public sector, further, could not reasonably be expected to account for a majority of employment creation over the medium or longer term. Access to better paying jobs in the informal non-farm sector as well as higher productivity in agricultural activities is the best bet for Madagascars rural and urban poor. 41. Agriculture will retain a key role for a majority of the population for the foreseeable future. Seventy percent of the population lives in rural areas, where almost everybody of working age is employed, and a vast majority of workers are in agriculture. As a consequence, agriculture will retain a main role for the rural population for years to come. In addition, agriculture took on an important role as a safety net also for people in smaller urban agglomerations at the outset of the political crisis in 2001 when secondary and tertiary activity collapsed. Increasing agricultural productivity would help increase earnings for this large share of workers, but would also free labor resources for off farm activities and increase rural local demand. 42. Non-farm activities offer better jobs than farm activities for the rural poor. For agricultural families who face both predictable variations (seasonal) and unpredictable variations (unforeseen weather shocks), non-farm enterprise (NFE) work provides a pathway out of extreme poverty as it provides both higher earnings and diversifies income sources vis--vis more vulnerable farm income. However, at the moment NFE, work remains limited in Madagascar: only one in three rural households is involved in a non-farm activity. 43. Lack of skills in the work force and complex and rigid regulations for hiring may be binding constraints for formal job creation. De jure labor market regulations in Madagascar are rigid and complex by international comparison. Although these constraints are not likely to be de facto binding for the overwhelming majority of informal firms in urban or rural areas, they may constrain the creation of higher earnings jobs (and as such contribute to a shift into informal job creation instead). Lack of skills remains one of the key constraints to private sector development. 44. Level of education and gender determine earnings and access to higher earning occupations. There is a significant gender gap in earnings in Madagascar. Womens earnings in informal nonagricultural activities are much lower than that of men; they have lower education levels but in addition their returns to education are lower and they are more often confined to low paying occupations. Equal access to schooling is an obvious first step towards closing this gap. Since a majority of informal nonagricultural work is nonwage, i.e. self-employed, womens earnings relative to men may also be constrained by lack of access to credit.

Policy recommendations 45. Moving forward, the Madagascar government needs to take a comprehensive approach to job creation, including actions to restore confidence and economic stability, improve the investment climate, enhance worker mobility, and improve safety nets. The first and foremost task of the government is to restore political and macroeconomic confidence in the Madagascar economy. Beyond this, policy needs to simultaneously encourage the expansion of higher labor productivity jobs which will underpin higher earnings, help the poor shift out of low earning sectors and focus on improving earnings potentials in low earnings sectors.

 Given the important role of non-agricultural activities in both raising and stabilize the earnings potentials, a careful review of best practice in supporting interventions, ranging from skills development to the role of credit and better infrastructure, is needed. The high poverty and vulnerability among Madagascars working population points to the importance of adequate safety nets, including public works programs that provide a cost effective safety net for poor workers facing income shortfalls during the soudure or other times of important income insecurity. Design and implementation of the current PW programs could be improved as follows: (i) the wage-setting mechanisms need to be readjusted and geographical targeting improved to avoid leakage to non-poor workers (ii) approaches need to be harmonized and coordinated among agencies (iii) the technical capacity of implementing agencies needs to be improved to ensure that the quality of infrastructure meets minimum standards and (iv) monitoring and evaluation systems need to be put in place to ensure cost effective interventions and development of best practice. But other types of interventions to sustain income for the poor and vulnerable need to be examined as well, requiring a review of the social protection system in its entirety. While most of the population will remain dependent on farming, ways to increase agricultural productivity, including ways to move to higher value crops, remain critical in Madagascar. Little is still known about e.g. the nature and potential of the urban informal sector as a provider of earnings for the poor, or the causes of the segmentation present in Madagascars labor market. Additional work could usefully fill the knowledge gap.

1.3. Organization of the report

46. The report is organized as follows. The second chapter provides an overview of the Madagascar economy and the main challenges in the short and medium term. The third chapter describes the labor market structure in Madagascar, recent trends in employment, growth and poverty, and the role of NFE activities. The fourth chapter addresses job creation and productivity. It looks at constraints to formal job creation, as well as issues in terms of increasing productivity and incomes in the informal and agricultural sectors. It also looks at options for improving productivity, income opportunities and income security of the poor, namely through increases in skills that pay off in the labor market, and through public works as a safety net strategy. The fifth chapter, finally, concludes by providing a summary of the main policy conclusions for the short and medium term and outstanding issues that should be addressed in future analysis.

2. The Madagascar Economy

47. Madagascar is a very poor, rural and agricultural country, facing significant challenges in terms of high pressures for job creation emanating from a rapidly growing working age population, an undiversified economic structure, and a largely unskilled population. Although economic growth increased in recent years, with promising development in various new sectors, overall progress has suffered important setbacks due to two very political crises with important economic consequences in 2001 as well as in 2009. This chapter provides an overview of the overall economic context for job creation. It describes the main features of the economic structure, level of economic development, and recent trends which are important to understand labor markets developments. It outlines the main challenges facing Madagascar in terms of poverty reduction and economic development more generally.

2.1. Country context

48. Madagascar is one of the poorest countries in the world: in 2007, only ten countries were poorer. Gross per capita annual income (GNI) reached 340 US$, well below the average Sub-Saharan country or non-African low income country. The undiversified economic structure with a large dependence on agriculture is both evidence and cause of sluggish economic growth, and has also proven vulnerable to shocks be they related to climate (droughts) , political events (e.g. the crises in 2001 and 2009), or external funds (exports, investment, tourism and foreign aid). 49. The population is largely rural and dependent on subsistence farming. Seven in ten persons live in rural areas, and the largest city, the capital Antananarivo, is host to less than ten percent of the population. Rural families are largely dependent on subsistence agriculture as four in five workers are in agriculture, and unpaid family workers make up the vast majority - 86 percent of rural workers. 50. Young populations imply high dependency burdens. High population growth is reflected in high age dependency ratios. Over two in five persons around 43 percent of the population are children under the age of 15. Each working adult working must consequently earn enough to provide for almost one extra person. Alternatively, children have to enter the labor market to become family providers as well. 51. Seven in ten Madagascans are poor, and the poor are largely rural. Although the share of poor in the population fell from 71.3 percent in 1999, a high 68.7 percent were still living below the national poverty line in 2005. And although urban and rural poverty converged as rural poverty fell and urban poverty increased, poverty was still significantly higher in rural than in urban areas, at 74 compared to 52 percent. Primary sector activities accounted for 92 percent of all jobs for the poorest twenty percent of the population in 2005. 52. Madagascar has made important progress on non-consumption measures of welfare. Life expectancy has increased by 8 years since 1990 and is higher than the Sub-Saharan average, child mortality is lower, and access to schooling has improved considerably. Yet, also in international comparison, Madagascar remains one of the poorest countries in the world, with more than two thirds of the population living on less than 1.25 dollars per day, compared to the Sub-Saharan and other low income country averages of 50 and 36 percent (Table 2-1).

Table 2-1: Key social indicators for Madagascar

Madagascar 1990 2008* 230 420 45 2.9 76 5.2 51 168 6 -72 43 2.6 71 3.8 59 112 9 71 68 SSA 1659 42 2 62 4.0 53 127 8 63 51 Low Income** 648 35 1.6 70 3.2 63 77 9 70 36

GNI per capita, Atlas method (current US$) Population ages 0-14 (% of total) Population growth (annual %) Rural population (% of total ) Urban population growth (annual %) Life expectancy at birth Child mortality rate Expected years of schooling (girls) Adult literacy rate Poverty headcount ratio at $1.25 a day (PPP) (% of population)

* Or earliest and latest available. ** Excluding SSA. Source: World Bank (2009).

53. Agriculture retains a key economic role. Roughly half of national value added originates in the broad services sector (54 percent), followed by the agricultural sector (34 percent), while the industrial sector remains small at 13 percent (Table 2-2). As is characteristic for a low income country, agriculture and livestock farming are the two main sub-sectors, followed by services, trade, and transports. The secondary sector remains fragmented with many small industries, including food and beverages and export processing zones (EPZ). Madagascars main sources of growth in recent years have been agricultural products, including vanilla (Madagascar supplies half of the worlds total vanilla supply), clothing from the EPZs, mining, and tourism. Rice is the main agricultural crop, although Madagascar remains a net importer.

Table 2-2: The role of agriculture in Madagascar

Subsectoral output shares, 2006 (%) Madagascar SSA Agriculture, fisheries, forestry Agriculture Cattle farming and fisheries Other Industry Food Beverages Other Services Services Trade Transports Other 34 16 15 3 13 2 2 8 54 13 11 11 19 12 Low Income 25

33

28

55

47

Source: Hoftijzer and Paci (2008), World Bank (2010)

2.2. Recent economic developments

54. Madagascars poor income levels are the result of low but volatile economic growth, further eroded by high and steady population growth in the past (Figure 2-1a). Indeed, had Madagascar been able to sustain GDP growth rates of about 5 percent over the past decades, per capita income levels would now be nearing those of middle income countries like Thailand or Tunisia (Morrisset, 2009). 55. Recent years saw an increase in trend growth, however. Between 2000 and 2007, GDP increased by 3.6 percent on average, much above the rates registered in previous decades (Figure 2-1b). The fact that Madagascars performance remained below the average of low income countries and SubSaharan countries, is entirely due to the devastating and long lasting economic and social repercussions of the short-lived political crisis towards the end of 2001. Foreign capital flows dried up, exports faltered, infrastructure was destroyed, and economic activity severely disrupted. Although economic activity was quick to rebound, recovery was nonetheless arduous because the contraction had been so massive. It is estimated that in real terms, it took six years for GDP per capita to return to pre-crisis levels (Figure 2-1c). Excluding the crisis and recovery years, i.e. 2002, in which the economy contracted by 13 percent, and 2003, in which it rebounded by 10 percent, economic growth would have averaged 5.3 percent between 2000 and 2007, however. 56. The political crisis of 2001, which erupted after the presidential elections, affected primarily stability in urban areas. The tertiary and secondary sectors therefore bore the brunt of the economic contraction, and urban workers were most seriously affected. The primary sector instead acted as a safety net for large parts of the population, including those living in urban areas. However, it is worth noting that the agricultural value added has increased slower than the rural population, resulting in lower per capita agricultural income (Figure 2-1 d).

Figure 2-1: Increasing growth, important setback, and recovery

Population and GDP growth (actual and trend) GDP growth, Madagascar and comparators

GDP per capita, constant 2000 USD

Agriculture output (in constant USD) and agricultural value added per rural habitant

Source: World Bank (2009). Mdg no crisis refers to average growth rates excluding the crisis year (2002) and the rebound year (2003).

57. The economy rebounded quickly as political stability returned. Between 2003 and 2006, value added growth averaged 2.3 percent for the primary sector, and 7.2 percent for the secondary and tertiary sectors, which had been most affected seriously by the down turn (Table 2-3). The fastest Table 2 sectors to recover were the EPZ (picking up from a free fall in growth in 2002) and th public works the sectors, largely reflecting the substantial boost in investments in an ambitious road habilitation and management program. By 2006, output in EPZ and Public Works had increased by respectively 25 and 100 % relative to 2001. The tourism sector, which had gained importance since the 1990s, also picked up sector, rapidly as the political crisis subsided, as did foreign direct investment, notably in the mining sector. Meanwhile the government agenda centered on promoting the so called integrated growth poles which focused on tourism, mining and manufacturing sectors.

Table 2-3: Crisis and recovery

Average annual output growth, sub-periods (%) 1999-2001 Agriculture etc. Agriculture Cattle farming and fisheries Industry etc. Beverages industry Food industry EPZ Energy Services sector Services Trade Transports Administration Public works 2.9 2.9 1.1 2002 -1.3 0.8 2.6 2003-2006 2.3 3.3 2.5 Crisis-recovery: output relative to 2001 (%) 2006 107.9 114.8 113.3 104.3 107.5 109.7 125.4 85.0 112.2 106.2 109.5 107.8 115.6 201.4

6.3 10.7 1.4 28.3 1.2 5.5 10.4 3.6 2.9 0.6 10.9

-20.7 -13.2 -10.3 -40.0 -31.1 -15.0 -19.3 -7.4 -21.1 2.0 -15.1

7.2 5.6 5.3 24.0 5.4 7.2 7.1 4.3 8.2 3.2 24.2

Source: Adapted from Hoftijzer and Paci (2008)

58. The agricultural sector provided a critical safety net during and after the 2001 crisis. The agricultural sector stagnated in 2002, but did not contract unlike the rest of the economy, and grew moderately between 2003 and 2006. In effect, farming acted as a significant subsistence buffer during and after the crisis. First, it provided possibilities for Figure 2-2: Important producer price rises in 2004 subsistence farming as other Producer price grow th (%) Production grow th (%) earnings opportunities in the second and tertiary sectors 20 15 withered. Second, rising world 10 10 prices for food rice prices made it more profitable to be 5 % 0 in the agricultural sector. This 1999 2000 2001 2002 2003 2004 2005 -10 0 is witnessed in an increase in rice production in particular in -20 -5 2004 and 2005 (Figure 2-2). 59. Due to the 2001 crisis, poverty levels in Madagascar fell only marginally between 1999 and 2005. Between 1999 and 2001, rural poverty stagnated at 77 percent, while urban poverty was reduced from 52 to 44 percent of the population in 2 years only. However, these achievements were wiped out with the 2001 crisis, and by 2005, urban poverty had returned to 1999 levels. The overall small reduction in poverty, from 70 to 68 percent of the population, was thus due to a fall in poverty among the rural population, from 77 to 73 percent in 2005.
Source: Hoftijzer and Paci (2008)

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2.3. Madagascars Challenges

60. Madagascar is rich in natural resources and possesses abundant and comparatively cheap labor. Mining opportunities, international tourist inflows, and handicraft skills have garnered strong nternational interest in Madagascar by foreign investors. Although consumption and non consumption indicators of non-consumption welfare indicate the pervasiveness of poverty, important progress has been made in e.g. schooling and health indicators. But in spite of both assets and achievements, Madagascar is faced with substantial challenges to reduce poverty and ensure sustained growth over both the short, medium and long term. 61. Demographic pressures will remain high over the foreseeable future. Population growth has . been falling since the 1990s when it peaked at 3 percent, but still reached 2.6 percent in 2007. Demographic pressures will remain intense, with three important repercussions (Figure 2-3), Figure 2 First, youth age dependency rates will fall but slowly: UN population estimates suggest that the number of young dependents (under 15) will increase by 140,000 per year between 2010 and 2020, accounting for nearly 25 percent of total population growth. Although the working age Although population is increasing more rapidly than the dependents, the continued rapid growth in the child population still requires three working persons to provide for themselves and two additional dependents in the population by 2030. Second and related, the cohort of 5 14 years, approximately the school age cohort, will alone ond 5-14 increase each year on a net basis by 90,000 children, which will put considerable pressure on education systems to accommodate this high inflow with quality educatio education. Third, and critical from the point of view of this study, the group of young workers aged 15-24 will increase by 125,000 persons each year, accounting for 22 percent of all of the increase in the population and 30 percent of all of the increase in the working age population. Creating sufficiently good jobs for this group of hitherto unskilled and certainly inexperienced workers, with earnings that permit a reduction of poverty for them and their families, will put substantial pressure on the economy to create jobs in agriculture and nonagricultural sectors which offer productivity growth and earnings increases. Figure 2-3: Net population increase per year (thousands) by age group

Source: UN (2009)

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62. The economic structure remains undiversified, employment is concentrated in agriculture, and he domestic savings and investment levels are low. As a result, public finances are dependent on fluctuating external capital flows in the form of aid and foreign direct investment. These flows are highly direct vulnerable to events external to Madagascar but also to economic and political stability. 63. The most immediate challenge facing Madagascar, however, is to mitigate the economic and poverty impact of the political crisis that is currently unfolding and which threatens to seriously undermine the economic and social achievements since 2001 From a pre-crisis projection of economic 2001. crisis growth of 7.5 percent in 2009, current assessments point to negative growth rates. Although th crisis this bears many of the characteristics of those of the 2001 crisis, it is not clear whether it will have worse or less repercussions at this stage. Although no data exist for 2002 and 2003, it is likely that poverty in fact increased quite considerably for a short time, especially in urban areas, where no farm activity could y replace other earnings. On the one hand, agriculture remains more sensitive to climatic than to political crisis, and given that seventy percent of the population live from farming most of it subsistence farming - they are not strongly affected by the crisis. On the other hand, agriculture offers little escape out of poverty. Moreover, unless the inflows into agricultural employment have reversed since 2005, the absorptive capacity of agriculture must have reached its limits. y 64. And importantly, while foreign donors, foreign investors and international tourists were prepared to return after the stabilization of the country in 2002 although tourists, in fact, waited until 2007 and 2008 - this second rupture may have seriously damaged international confidence. If the crisis were to affect FDI and tourism arrivals proportionally as the political crisis did in 2002, both flows would withdraw to levels registered in the 1990s (Figure 2-4). Coupled with a withholding of external aid, . external resources would be seriously reduced. And urban poverty is likely to increase further, as secondary and tertiary sectors are most seriously affected by the crisis. Figure 2-4: External flows FDI, tourism, and aid what impact of the crises?
FDI in million USD (columns) and tourism arrivals in thousands (line) Aid per capita (current US$)

Source: World Bank (2009)

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3. Labor markets structure and dynamics

65. Madagascars labor markets bear the marks of low income countries: almost everybody is working, because they are obliged to, but they earn little from their work. This implies that participation rates and employment to population ratios are high, especially in rural areas, and for women as well as for men, while virtually nobody can afford to be unemployed. However, wage work, which usually offers better conditions than self-employment and unpaid family work, is limited, one out of five children is obliged to work to support their families, and poverty rates among workers are high. This chapter provides an overview of the key labor market indicators in Madagascar and the links between jobs, earnings and poverty. It also discussed labor demand from the perspective of the investment climate, as well as the role of public works in creating and sustaining labor demand and protecting earnings.

3.1. Key facts and figures

High access to jobs, low access to good jobs 66. Access to job is not an issue: in 2005, 86 percent of the adult population held a job. A high 88 percent of the population aged between 15 and 64 was active in the labor market, and almost all of them were working (Table 3-1). Unemployment rates reached a mere 2.6 percent. 67. Higher earning jobs are scarce, however, and the adult poor are predominantly employed in low earning jobs. The key determinant of living standards is therefore not whether a person holds a job or not, but what kind of job he/she holds. Wage work where median earnings are more than twice as high as in the nonwage sector - made up only 15 percent of total employment, meaning that the majority of workers were confined to occupations with lower and more volatile earnings. Tellingly, poverty rates were more than 20 percentage points higher among the group of employed (65 percent), than in the small group of unemployed (42 percent); overall poverty among the employed increased between 2001 and 2005 while unemployment rates fell. In Madagascar, with its predominantly rural character, working on the farm to obtain food or otherwise holding any job is necessary to secure subsistence minimum. Because of the precarity of the situation for most families, one in five children aged 6-14 years is at work. Only those with sufficient resources can afford the opportunity cost of not holding any form of job while looking for a better one.

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Table 3-1: Basic labor market indicators for Madagascar, 2001-2005

Indicator Employment and unemployment Labor Force Employment-to-population ratio* Unemployment rate Child labor rate Women's Employment Rate Poverty rate among unemployed Wage and salaried workers Median monthly earnings** Poverty rate Non Wage workers Median monthly earnings** Poverty rate All workers Median monthly earnings** Poverty rate Level 2001 83.5 82.5 1.2 24.3 77.8 44 88.1 33 25.3 77 30.8 69 2005 88.1 85.8 2.6 18.8 83.2 42 71.5 47 71.5 69 35.3 65 Change Absolute Percent 4.6 3.3 1.4 -5.5 5.4 -1.5 -16.6 14.0 46.2 -8.3 4.5 -4.0 6% 4% 113% -23% 7% -3% -19% 42% 182% -11% 15% -6%

* The individual is employed if he has a permenent job or he has worked at least one hour in the week prior to the survey ** Earnings levels for 2001 are expressed in thousands of MGA and divided by 0.6476 (= 197,720 / 305,300 = 2001 poverty line / 2005 poverty line) in order to make comparison between 2005 and 2001. Source: Stifel (2007)

68. The predominance of low quality jobs is evident in the high employment-to-population ratios in rural areas where poverty is higher and where 80 percent of the population lives. Nine in ten persons in the adult population was employed in 2005, women to the same extent as men. These jobs, however, largely consist of work on the family farm 86 percent of the population in rural areas were family workers. In urban areas, employment rates were lower but still at 72 percent and there were more significant gender differences in employment rates, as two in three women worked, compared to four in five of men. Although the incidence of wage work was higher in urban areas than in rural areas, 60 percent of the employed population worked as self employed or family workers.

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Group

Table 3-2: Employment* - Working age population Employment-to-population ratio Group share among employed workers Level Level 2005 2001 Change 2005 2001 Change (in%) (in%) (in %points) (in%) (in%) (in %points)

National 85.8 82.5 3.3 100.0 100.0 100.0 Gender Female 83.2 77.8 5.4 50.0 48.8 1.2 Male 88.6 87.5 1.1 50.0 51.2 -1.2 Urban 72.3 65.9 6.4 20.1 19.8 0.3 Gender Female 65.3 57.2 8.1 47.4 47.1 0.2 Male 80.0 76.3 3.7 52.7 52.9 -0.2 Rural 90.0 87.9 2.1 80.0 80.3 -0.3 Gender Female 88.9 85.0 3.8 50.7 49.2 1.5 Male 91.2 90.9 0.3 49.3 50.8 -1.5 * The individual is employed if he has a permenent job or he has worked at least one hour in the week prior to the survey. Source: Stifel (2007)

69. Agriculture is the by far most important income source, but also the one with the lowest productivity. The role of agriculture cannot be overstated. In rural areas, where 80 percent of the jobs are, nine in ten persons work in the primary sector (Figure 3-1). In secondary urban centers, which absorb an additional 12 percent of workers, three in four jobs are also in agriculture. Only in the largest cities does the service sector dominate the job market four in five jobs are in the services sector, and the industrial sector is virtually concentrated in large cities as well. Almost nine in ten of the poor are working in agriculture, but even among the non-poor, two in three workers are in agriculture. However, agriculture accounts for about one third of GDP only, implying that a vast majority of the workers are captured in the sector with the lowest productivity levels, and the lowest potential for earnings.

15

Figure 3-1: Distribution of employment by economic sector

Source: Hoftijzer and Paci (2008) and Stifel (2007)

70. The Madagascar work force is largely uneducated. More than half of the working adults have . received no education at all, only 20 percent have post primary levels, and only three percent in total post-primary have university education (Figure 3 . Unsurprisingly, education levels are consistently lower in the Figure 3-2). primary sector where only one in ten workers has post primary qualifications. The industrial sector has post-primary the highest skills intensity; still, only 56 percent industrial workers have secondary level degrees or more. Overall, women have lower levels of e education nearly 60 percent have no education, compared to fifty percent of males.

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Figure 3-2: Education levels by gender and sector of work (2005).

Source: Stifel (2007)

71. How does Madagascar compare with other countries at similar income levels? Table 3.3 levels presents three important labor market indicators for eight African countries with similar levels of income. As seen, high employment ratios and moderate unemployment ratios are common though not universal among the poor low income countries. Compared with these countries, Madagascar has high l employment to pop ratios, low unemployment, and lower share of wage workers. It compares, in fact, compares with Uganda and Rwanda in terms of high employment ratios, low unemployment rates, and low shares unemployment of wage work. Table 3-3: Madagascar and comparator African countries
GNI per capita, USD Ghana Mali Sierra Leone Zambia Rwanda Uganda Ethiopia Average Madagascar 630 580 440 440 420 320 280 444 420 Employment to population ratio, 15+(%)* 65 47 65 61 79 83 81 69 86 Unemployment rate (15+)* 10.4 8.8 3.4 12.9 0.3 3.2 17.0 8.0 2.6 Wage workers (% of all empl) 18 14 8 19 23 15 46 20 15

Source: Stifel, World Bank (2010). *For Rwanda and Madagascar, refers to 15-64. orld 64.

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Rural labor markets accounting for 80 percent of the jobs 72. Because a majority of the population is rural, and almost all of them are in the agricultural sector, labor markets in Madagascar are largely about agriculture, especially for the poor. About 93 agriculture, poor percent of the rural population is involved in primary activities in a first or second job; 89 percent have agricultural work as their primary job, nearly all of which is non non-wage work on the family farm. The vast va majority is thus subject to varying degree to climatic conditions and the plight of the soudure, the season with no agricultural activity and when food shortages are likely to occur. The main crops activity, crop produced are rice and tubers, mostly for self d self-consumption. A majority of agricultural workers live in a ption. household producing rice or tubers (86 and 75 percent, respectively), compared to only 20 percent for cash crops like vanilla, coffee, and cloves (Figure 3-3). Figure 3-3: Percentage of workers in agriculture whose household produces the specific crop

Source: Bellamare and Stifel (2008)

73. Poverty largely manifests a lack of opportunities outside subsistence farming. As will be discussed in more detail in section 4 below, subsistence farming provides little earnings and no income diversification. As a result, families locked into low productivity activities are much more likely to be poor than others.

Urban labor markets 74. Urban labor markets differ from rural labor markets in employment intensity and structure. Labor markets in urban areas account for only 20 percent of workers. Overall, urban areas are characterized by lower employment rates, around 70 percent, especially in the largest cities of especially Antananarivo and Toamasina. Gender differences in employment are also more pronounced than in rural areas (Figure 3-4 a). 75. There are important differences between large urban areas compared to secondary urban areas. The latter approach rural areas in sector composition and dynamics, while the former have a er much higher share of formal, waged, and nonagricultural jobs (Figure 3-4 b). Indeed, the large urban .
18

centers are the only areas with a significant portion of formal work, and even so, the share of formal and jobs amount to only 20 percent of the population, meaning that informality is nearly universal in the rest of the country.1 Importantly, unemployment rates are much higher 12 percent of the active population in the largest cities are unemployed, meaning that 40 percent of the pool of unemployed resides in these cities. This seems logical on two accounts. First, the population in larger cities is more affluent and so can afford to forego labor earnings while searching for a job i.e. they can bear the cost of being unemployed. Second, certainly in contrast to rural areas and perhaps also in contrast to smaller urban centers, larger cities may not offer the option of farming as an alternative job. Thus, as job opportunities disappear in the tertiary and secondary sector, they have no option but to look for another one and cannot be employed in the agricultural sector from one day to the next. Figure 3-4: Employment structure differs especially in large cities where non-agricultural and wage re agricultural activities dominate.
a. Employment-to-population ratio on urban zones population (Rural included for comparison) b. Distribution of jobs by occupation

Source: Stifel (2007)

Higher earning jobs and how and where to get them obs 76. Jobs with high earnings are concentrated in the non agricultural sector, especially in the non-agricultural formal private and in the public sector (Figure 3-5). The formal sector holds two important advantages: first, higher earnings, and second, better protection, since the formal sector here is defined to be the sector which offers some form of social protection to its workers. Median earnings are generally highest for workers in larger cities. There are big differences in median earnings for the formal sector in earnings different locations, with the largest cities paying higher salaries.

Includes those informally employed (e.g. without contract, or benefits) in the formal or informal sector, and those working as own account workers in the informal (e.g. unregistered) sector. 19

Figure 3-5: Earnings are higher in large cities, and higher in nonagricultural, formal activities
Monthly earnings, wage workers ings, Monthly earnings, nonwage workers

Source: Stifel (2007)

77. Education is key to accessing better jobs. Earnings increase progressively with education levels, outside the agricultural sector and as seen above, education may be the key to accessing nonagricultural jobs in the first place, given that a majority of the workers in agriculture have no education (Figure 3-6). The premium to tertiary levels of education is present everywhere, and . particularly strong in the formal non non-wage sector. Figure 3-6 Earnings increase with education levels, 6: with particularly important differences in the formal sector and the informal nonwage sector. rly
Monthly earnings, wage workers ('000 Ariary) Monthly earnings, nonwage workers ('000 Ariary)

Source: Stifel (2007)

20

78. A more formal investigation confirms the role of education in accessing higher earnings.2 The probability of escaping agricultural low paying jobs is first and foremost decided by educational attainments, regardless of gender, or area of residence. For women in rural areas, estimates suggest that even primary education can open up a path into the non-agricultural sectors. The effects are considerably stronger for higher levels of education. And the impact on education for sector of work appears even stronger for men. Similarly, the probability of being employed in the formal sector increases substantially with higher levels of education. 79. Returns to education are high and increase exponentially with schooling. Earnings also increase with education levels, together with experience (see Annex 5). Returns are higher in the wage sector than in the non-wage sector, at all levels. They also increase exponentially with a high premium on having reached upper secondary or post secondary levels of education. Importantly, however, returns to education have fallen since 2005, at all levels. (Table 3-4).

Table 3-4: Returns to education (basic wage equation)

Primary education Lower secondary education Upper secondary education Post secondary education Wage, non-ag 0.232 0.480 0.693 1.054 Non wage, non-ag 0.116 0.260 0.428 0.715 Ag 0.084 0.218 0.438 0.877

Source: Stifel (2007), see Annex 5

80. Gender differences are partly, but not fully explained by differences in education or experience, however. Median earnings for women in nonagricultural employment whether nonwage or wage are 32 percent below those of men. As seen in Figure 3-7 a below, the female earnings curve (the distribution of female earnings) in the non-agricultural sector is skewed more to the left than the male one, especially in the informal, non regulated sector. Overall, women also have less access to higher earning sectors, such as nonwage self employment and non-agricultural wage work (Figure 3-7: Female earnings are lower than men, and they have less access to good jobs sectors. Figure 3-7:b). These differences are partly explained by differences in levels of education and experience between women and men, partly by differences in returns to education and experience (which would suggest some form of discrimination or at least segmentation), and partly unexplained. Differences in return for workers with otherwise identical characteristics hints at segmentation of the labor market, for various possible reasons barriers to labor mobility, e.g. due to geographical distance, or excess demand for certain preferential jobs which then are rationed. (Differences in characteristics like schooling can of course also be evidence of discrimination, but not in the labor market.).

It should be noted that estimates of returns to education are very sensitive to specification issues. The estimates reported here relate to a basic wage equation that did not include interaction terms (age, economic sector, etc.) and should therefore be interpreted with caution. 21

Figure 3-7: Female earnings are lower than men, and they have less access to good jobs sectors.
a. Madagascar: Density Estimates of Daily Non NonAgricultural Wage Earnings, Men and Women by Formality Status b. Percentage rural and female workers by occupational occup status

Source: Hoftijzer and Paci (2008), Stifel (2007).

81. Returns to (higher levels of) education are higher in the public wage sector than for formal private sector workers. Segmented markets imply that some institutional constraints are in place (artificially favorable terms in public sectors, very high minimum wages, discrimination on ethnic/gender ly grounds) that lead to non-competitive wage setting in one sector and excessive demand for jobs in this competitive sector. Thus, while many people have the skills and other productivity-related characteristics to allow related them to get a job in the preferred sector, there are not enough such jobs, and the jobs are consequently rationed. Although segmentation cannot be formally established, estimates suggest that returns to education from secondary education especially, but also postsecondary education, are higher in the on public sector than in the formal private sector. Workers with similar characteristics thus earn very different incomes, because they have different access to certai sectors. certain 82. The gender gap in wages is highest in the informal private non agricultural sector Estimates sector. also suggest that differences in earnings between s women and men in self-employed non-agricultural employed occupations which may be the first pathway out of poverty for agricultural workers are to some extent explained by differences in human capital, but even more so by differences in firm characteristics. Access to self-employment on different terms, including less access to financial capital employment which permits women firms to grow, may therefore be a potential and hitherto overlooked source of discrimination.

22

3.2. Trends 2001-2005: Growth, employment and poverty and the links between the two
83. In tracking poverty and labor market changes in Madagascar, data for two points in time are available: the year 2001, and 2005.3 Changes in this period are affected by two events: first, the short but severe crisis in 2001 that primarily affected urban incomes, and second, increases in world rice prices that primarily affected rural incomes but also secondary urban areas. Given the economic crisis it must be remembered that the changes witnessed by 2005 may reflect extraordinary adjustments to that crisis as well as longer term structural changes, and the two need not work in the same direction. 84. Employment increased. The employment and poverty trends between 2001 and 2005 are not immediately intuitive, given the sharp dip in output and then recovery. First, employment rates increased, from 82.5 to 85.8 percent. In a poor country like Madagascar, and given the high initial rates, this is likely to reflect an increase in subsistence employment and inflows of inactive workers into employment as a household crisis management strategy. Unemployment rates increased but remained very small, touching about 2.6 percent of the population. Womens employment rates increased more than those of men while, encouragingly, the share of children at work fell at the same time (Table 3-5). 85. Poverty rates stagnated and labor productivity fell, however. In all likelihood this stagnation in poverty is hiding more substantial dynamics in between the years, with an increase in poverty in 2002 and 2003, and a recovery thereafter. Although no data are available, simulations suggest that poverty may have increased from 70 to 73 percent in 2002. Table 3-5: Higher employment, especially among women,
but stagnating poverty and labor productivity. 2001 Employment-to-population ratio* 82.5 Unemployment rate 1.2 Women's Employment Rate 77.8 Child labor rate 24.3 Labor productivity (2001=100) Poverty rate among employed Overall poverty rate 100.0 69.0 69.7 2005 85.8 2.6 83.2 18.8 0.89 65.0 68.7

Source: Hoftijzer and Paci (2008)

86. Wealthier households responded to the crisis by increasing labor supply. The increase in employment rates was due to non-poor households putting more workers on the labor market in order to provide for their families. For poorer families, the sole factor responsible for the rise in labor income was the increase in average hourly earnings. In contrast, the household employment rates and the hours worked fell for the poor. For the better off households the decline in income is attributed to a fall in hourly earnings. This appears to have been mitigated by increasing the number of household members who work.

Although survey data exist for 1999, data are generally inconsistent with 2001 and 2005 surveys and will therefore not be presented here. 23

87. The primary sector accounted for the employment increase. A closer look at sectoral developments shows that the primary sector, which through its subsistence and rural character was shielded from the predominantly urban crisis, accounted for all of the increase in employment, with the tertiary and secondary sector especially shedding labor (Table 3-6). As a result, there was an inflow of workers to the least productive sector, in particular in secondary urban areas, but also in rural areas, where the share of agricultural activities was already very high. 88. However, the poorest quintiles saw a shift out of agriculture and into tertiary sector activities. In Madagascar, almost everybody is poor and poverty rates thus refer to income changes in the fourth expenditure quintile of the population, i.e. the second richest quintile. In fact, the very poorest workers shifted out of agriculture and into tertiary sector activities. As a result of these shifts, the number of working poor fell in primary activities, but increased in tertiary activities. The manufacturing sector, in contrast, was reduced by more than half as nearly 300,000 workers left the sector on a net basis between 2001 and 2005. It is worth noting the increase in public works, from 0.6 to 1.4 percent of all employment during this period. 89. Poverty rates also fell in the primary sector and increased in the tertiary sector. Poverty fell quite significantly in primary activities although the sector remains the by far poorest, poverty rates fell from over 83 percent to 72 percent. At the same time, poverty rates increased significantly in the tertiary sector, most likely reflecting worsening situations in the urban areas in the aftermath of the economic and political crisis. Table 3-6: Output and employment, shares of total, 2001 and 2005
Output 2001 Agriculture Industry Services Public works Administration Other tertiary 34.0 13.4 52.6 2.1 4.8 45.7 2005 34.3 12.7 53.0 3.3 5.2 44.5 Employment, total 2001 2005 73.9 6.8 19.3 0.6 2.9 15.8 80.1 2.5 17.4 1.4 2.4 13.6 Employment, poorest quintile 2001 2005 95.1 1.7 3.2 ---92.0 0.7 7.3 ---Employed poor (% of all workers) 2001 2005 82.7 71.5 34.2 30.9 ---30.6 42.4 ----

Source: Hoftijzer and Paci (2008)

90. Earnings growth was pro-poor. The increase in earnings between 2001 and 2005 was clearly pro-poor and favoring rural areas, where most of the poor lived, and where activities went untouched by the political crisis (Figure 3-8 a). Agricultural earnings, which account for a vast majority of household income for the poor, increased the most (with the exception of the high earning finance, insurance and real estate sector (Figure 3-8: Earnings developments between 2001-2005 b). 91. The earnings compression that took place was driven by an increase in non-wage agricultural earnings (Figure 3-8 c) and by a small shift out of agriculture and into non-agricultural sectors. Importantly, even if earnings in those sectors fell as the chart below suggests, they still offered higher earnings than the agricultural sector. It is not clear what accounts for the increase in agricultural earnings (especially since overall labor productivity fell at the same time) but it is assumed to have been drive to a large extent by an increase in the price and production of rice combined with a sharp depreciation of the currency. As seen below, the non-poor shifted into rice, grains and tubers

24

(basic staples) to a more significant extent than the poor, who already depended on these staples (Figure 3-8 d). Figure 3-8: Earnings developments between 2001-2005 :
a. Earnings growth, by location and quintile b. Earnings growth, by sector.

Median earnings, 2001 and 2005

Change (in percentage points) in agricultural households producing crops between 2001-2005 2001

Source: Panel a and b: estimates based on household surveys, panel c and d: Bellamare and Stifel (2008)

92. Employment developments point to the impact of the crisis on the urban and the non poor (Figure 3-9). For example, adult employment rates, unemployment rates, and child labor rates, all employment increased for the non-poor, and employment rates increased more significantly in urban areas than in poor, rural areas (although, as seen above, this increase reflected an increase in agricultural acti activities). Moreover, urban unemployment rates increased significantly, especially in large cities. And while adult employment rates did not fall for the poor, child labor rates were significantly reduced. For the two poorest quintiles (not shown here) child labor rates in fact fell by one third.

25

Figure 3-9: Employment-to-population rates as well as unemployment rates increased for the non population nonpoor.
Employment to population rates, 2001 2001-2005 Open unemployment rates, 2001-20005 s, 2001

Source: Stifel (2007)

93. Poverty rates fell for the self employed in rural and secondary urban areas, but increased for self-employed informal wage workers in all urban areas, and for informal firms in the largest cities Developments in cities. rural and secondary urban areas are remarkably similar, pointing to the rural nature of these smaller urban centers. In rural and secondary urban areas, the self employed in the agricultural sectors and in self-employed the informal non-agricultural sectors, experienced poverty reductions (shown below as points below the ors, 45 degree line). This is an important result, given that these workers together account for 82 percent of the employed in Madagascar. Poverty increased, however, for informal workers in urban areas, and for urban the informally self-employed in largest cities (Figure 3-10). employed

26

Figure 3-10: Poverty changes reductions for the largest groups of workers.

Ag wage=agricultural wage workers. Nonag Wage Inf = Wage workers in the non agricultural, informal sector. Nonag wage non-agricultural, form Wage workers in the non-agricultural, formal sector. Ag nonwage = Agricultural self employed/enterprise. NFE inf = agricultural, self-employed/enterprise. Informal non-farm enterprise. NFE form =Formal non m non-farm enterprise. Source: Estimates based on Stifel (2007)

94. The share of relatively better off workers in agriculture increased while the share of the poorest workers in informal nonfarm sectors increased. Figure 3-11 below shows the importance of considering the spectrum of earnings and expenditures below the poverty line. As seen, poverty rates below became higher for workers in the informal non non-farm sector. Since non-agricultural sectors offer better agricultural earnings, on the whole, than agriculture, the shift out of agriculture is consistent with earnings n improvements for the poorest. In contrast, the relatively better off households (many of them still below the poverty line) increased agricultural income shares. Thus, a small share of the very poorest is likely to have shifted out of subsistence, low productivity agriculture and into non-farm activities. In contrast, the richer quintiles are likely to have shifted into both subsistence farming and more high productivity agriculture, offered by e.g. increasing rice prices. fered

27

Figure 3-11: Changes in the share of income by major source and by expenditure quintile, 2001 2001-2005.

Source: Estimates based on Stifel (2007)

95. Poor households income increased largely because of higher compensation per hour. Finally, e a decomposition of the forces of change in household labor income shows that for the rural poor (largely positive) were due to higher hourly earnings and to a smaller extent higher participation. In contrast, they could reduce the number of hours worked (Figure 3-12). For the urban poor, hourly . earnings increased and more workers were put on the labor market, but overall labor income was hampered by lower access to job markets (shorter working weeks and higher unemployment). For the rural and urban non-poor, in contrast, hourly earnings fell and they worked less; the only positive factor poor, came from increasing labor supply of the households.

28

Figure 3-12: Hourly earnings increased for the poor, and fell for the non-poor.
Sources of change in weekly household per capita labor income in rural and urban areas for the poor (top), and the non-poor (bottom) (2001-2005, percent)
Rural Urban
Hourly earnings Weekly hours Unemployment Participation

-250

-150

-50

50

150

250

Rural

Urban
Hourly earnings Weekly hours Unemployment Participation

-250

-150

-50

50

150

250

Source: Hoftijzer and Paci (2008)

96. Earnings inequality increased in the agricultural sector, but fell in the non-agricultural sectors and occupations. As a result of these shifts between and within sectors, income distribution was compressed in the non-agricultural sector, but widened in the agricultural sector. For example, the Gini coefficient increased by 74 and 44 percent among the agricultural self-employed and family workers, but fell by 16 and 25 percent among the non-agricultural corresponding groups (Table 3-7).

29

Table 3-7: Inequality fell in the non-agricultural sectors but increased in agriculture.
Gini coefficient 2001 2005 67 69 50 51 63 52 69 68 43 37 53 72 40 35 33 54 39 36 44 49 change 2 22 -12 -28 -18 -16 -29 -7 6 -5 Theil index 2001 2005 123 225 48 57 104 51 122 180 33 29 58 280 30 22 18 61 30 24 49 42 change 101 232 -27 -81 -33 -61 -150 -9 20 -16

Total By sector Agriculture & fishing Manufacturing Electricity and utilities Construction Commerce Transportation & communication Financial etc. Public administration Other services By occupation Agriculture Wage workers Self-employed work Unpaid family Non-Agriculture Wage workers Self-employed work Unpaid family

60 52 46 48 68 77

36 90 66 43 57 58

-24 38 20 -5 -11 -19

72 48 38 50 104 183

27 367 229 40 72 67

-45 319 191 -10 -32 -116

Source: Estimates based on household data from 2001 and 2005

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4. Job creation and income protection

97. Madagascars labor market bears all the marks of a low income country: extremely high dependence on agriculture and informal non-agricultural activities, especially for the poor. Focusing only on formal job creation is therefore insufficient the formal sector cannot absorb all of the informal and agricultural workers, and even if it could, many of the poor workers may not possess the skills necessary to work in more formal occupations. Thus, an inclusive approach to employment creation must also consider how to help increase worker productivity and earnings in the informal and agricultural sectors, and how to improve mobility from lower to higher earnings jobs, from agricultural to informal nonagricultural, within the informal non-agricultural sector, and into the formal sector.

4.1. Labor demand in the formal sector and the business environment
98. The formal economy is very small. Even with a generous definition, the formal economy in Madagascar accounts for only 43 percent of all non-agricultural employment, and only in larger cities is there a sizeable formal private sector. Informality is associated with lower productivity, smaller turnover, and lack of investment as well as an incentive to remain small. Hence, ensuring that of regulations, including labor regulations, are suitable and not overly restrictive and thereby encouraging informality, will be an important policy area for consideration. 99. Madagascars investment climate is generally comparable with other African and low income countries, but is significantly worse in some areas, notably labor regulations. According to the World Banks Doing Business Indicators, Madagascars overall investment climate ranks just above the average for Sub-Saharan Africa and for low income countries (African and non-African). The most striking example is that Madagascar ranks among the worlds easiest countries for starting a business (number 12, in fact) but the worst of all 183 countries in closing a business. But it does appear that it is more costly and complicated to employ workers in Madagascar than in comparable countries (Table 4-1). Table 4-1: Doing Business Rankings, by topic
Economy TOTAL Ease of Doing Business Rank Starting a Business Dealing with Construction Permits Employing Workers Registering Property Getting Credit Protecting Investors Paying Taxes Trading Across Borders Enforcing Contracts Closing a Business SSA Average 139 126 117 119 123 120 113 112 137 117 127 Low income Average 141 118 124 114 118 123 115 120 141 113 135 Madagascar 134 12 108 152 152 167 57 74 111 155 183

Source: World Bank Doing Business Indicators, 2010

31

100. Labor market regulations appear not to be a binding constraint for more than the formal sector. The policies that might increase higher earning jobs in Madagascar span much beyond labor market policies and include policies to maintain macroeconomic balances and encourage private investment, regulatory policies for other markets (finance, products), and policies for skills formation. In fact, firms in Madagascar identify labor regulations among the less important concerns in conducting business (Figure 4-1). Nonetheless, labor regulations may affect certain types of firms disproportionately and in fact encourage informality under some circumstances. Small firms complain as much as larger firms about labor regulations but are, unlike larger firms, able to operate informally. Figure 4-1: Labor regulations are not considered a major obstacle compared to other issues in Madagascars Investment Climate Assessment.
Proportion of firms reporting obstacle as major/very severe
Cost of financing Macro instability Access to financing Corruption Anti_competitive informal practice Tax rates Tax admin Eco_reg policy uncertainty Electricity Crime theft disorder Legal system Customs reg Skills and educ Access to land Telecommunications Transportation Labor reg Business licensing 0% 10% 20% 30% 40% 50% 60% 70% 80%

Source: Gaelle (2008)

101. Madagascar has strict hiring regulations and comparatively high minimum wages. Madagascars labor market regulations are intended to raise the quality of jobs. Under certain circumstances, however, too stringent regulations may lead to a reduction in such jobs because firms choose to operate in the informal sector altogether, employ more capital intensive techniques to avoid labor costs, or are constrained from growth (value added and employment) altogether. Madagascars employment regulations score a relatively high 63 out of 100 in the Doing business indicators (Figure 4-2). The most important areas are the difficulty of hiring people, both relating to the ban on temporary contracts for permanent jobs, and a relatively high minimum wage relative to value added per worker and median earnings. In contrast, firing regulations are quite flexible, and non-wage benefits are within international standards. 102. Complex and numerous exemptions may increase transactions costs for firms. Madagascars regulatory framework contains many sector/case by case exceptions. This results in complications in applying the law, as well as a lack of transparency. Tax exemptions favor only formal firms and do not affect the large portion of informal firms whose lack of resources (human and other) may pose significant obstacles to their development.

32

Figure 4-2: Doing Business in Madagascar (greater numbers indicate less flexibility)
80

70

60

50

40

30

20

10

0 difficulty of hiring index rigidity of hours index difficulty of firing index rigidity of employment nonwage labor cost of index salary Madagascar Francophone Africa firing costs weeks of wages

Sub-Saharan Africa

Source: Pierre (2008)

103. The above regulations may influence the size of the informal sector (as firms opt out of formality) but will by the same token not affect the functioning of informal sector work where the vast majority of Madagascars work force is employed. Issues that affect labor demand in informal nonfarm enterprises, although they offer lower earnings, may therefore also need a lot of attention. Given the link between education and earnings as well as possible skills shortages, skills development in the informal sector is one such area to look at. Hence, while labor regulations are possibly constraining formal activity, other policy areas including general framework for doing business - are likely to be more important obstacles to private sector led growth and job creation in Madagascar.

4.2. Quality of jobs in the informal sector

104. Poverty reduction cannot rely on formal job creation only: the poor may not be able to access those jobs. A good, high earning job with adequate social protection in Madagascar is found in the waged and formal sector. Removing the constraints to job creation in the formal sector is therefore necessarily a priority. However, the poor may have little chance of accessing such jobs in the short and medium term, for two reasons. High earning jobs tend to be concentrated in the urban areas, and perhaps even more importantly, require certain levels of education (whether as a rationing/sorting mechanism, signaling device or essential for the job requirements). Madagascars poor live predominantly in rural areas and have little or no schooling. 105. Moreover, the formal waged jobs sector is too small to be able to expand sufficiently to absorb all of the poor workers. The waged nonagricultural sector, even including informal employment, encompassed only 12 percent of all employment in Madagascar in 2005, while almost eighty percent,
33

over six million people, of the employed population were unpaid household enterprise (family) workers in the agricultural sector. Even ignoring working age population growth, creating six million new jobs in the waged sector would imply a six-fold expansion. Such shifts are not realistic even over the medium term, and would require unrealistic growth levels in the formal sectors. 106. Efforts must therefore also center on increasing earnings in the low earnings jobs sectors. While removing constraints to formal job creation are important, there must consequently also be a broader development agenda for increasing productivity and earnings opportunities across low earning sectors and reduce household income vulnerability. Moreover, as the 2001 crisis showed, low earnings sectors can act as important safety nets when formal activity is hit by serious shocks. The following sections explore three areas: agricultural productivity and earnings, the informal non farm sector, and government public works programs to provide income security.

Increasing productivity in agriculture 107. A majority of the poor are in fact likely to remain in the agricultural sector for the foreseeable future. As mentioned earlier, the agricultural sector accounts for four fifths of all employment in 2005. In fact, these numbers represented an increase in both relative and absolute terms: between 2001 and 2005, agriculture share in total employment increased from 73 to 80 percent, equivalent to an increase by over one million workers in agriculture. This large inflow of workers was not accompanied by high income growth, however, and as a result, labor productivity fell in the sector. 108. The agricultural sector also appears to effectively have acted as a safety net during the 2001 crisis. As discussed above, the political crisis had severe effects on economic activity in urban areas, but left agricultural output virtually unscathed. As a result, the agricultural share of income in non-poor families those in the fourth and fifth expenditure quintile increased by 14 and 24 percent respectively. 109. The agricultural sector is still a volatile sector, characterized by rudimentary production systems, little investment, and dominated by subsistence farming. Although the agricultural sector may provide some cushion for food security during non-agricultural shocks, it remains vulnerable to climatic conditions and the duration of the soudure. In spite of some important agricultural exports of cash crops (vanilla being the primary example) agricultural production is characterized by very low levels of commercial farming. Farming is focused on subsistence and the margins for falling below subsistence minimum are small. Overall caloric consumption, malnutrition and child mortality has been shown to vary systematically with the dry season (Dostie et al, 2000). 110. The poor and the non-poor produce similar crops. As shown in Table 4-2: below, the differences in crops structure between poor and non-poor households is almost insignificant. In response to the crisis, predominantly non-poor workers shifted into agriculture, most likely partly to ensure food consumption, and partly in response to higher rice prices.4 The differences in crops structure between poor and non-poor households is quite small and has if anything converged between 2001 and 2005, especially for more basic food staples such as grains and tubers. This seems consistent with the suggestion that agriculture played a role to guarantee food security for the non-poor households, keeping them above the poverty line.

The overall impact of price changes in agriculture is complex, as it will affect net buyers, net sellers, and workers differently. 34

111. Poverty is related to lack of opportunities outside subsistence farming. However, although crops structures have become more similar, non-poor households are more likely to sell their products on the market. Indeed, while the percent of poor farmers selling products fell, that of non-poor farmers selling rice and tubers rose between 2001 and 2005, from 49.7 percent to 54.4 percent for rice, and 54.7 percent to 61.7 percent. Table 4-2: Convergence in crops structure
* Percent of working age adults (15-64) employed in agriculture whose household produces each crop. Cash Rice Grains Tubers Beans Legumes Fruit crops* National 2005 85.9 36.0 75.3 44.1 26.5 18.4 21.1 2001 83.5 28.6 63.8 22.9 7.6 10.8 24.4 %-point change 2.4 7.4 11.5 21.2 18.9 7.6 -3.2 Non-Poor 2005 88.3 37.6 72.1 46.3 28.8 17.0 17.8 2001 83.5 23.7 55.0 25.3 12.3 11.6 20.3 %-point change 4.8 13.9 17.1 21.0 16.5 5.5 -2.6 Poor 2005 84.9 35.3 76.6 43.2 25.5 19.0 22.5 2001 83.5 29.6 65.7 22.4 6.6 10.7 25.2 %-point change 1.4 5.7 11.0 20.8 18.9 8.4 -2.7 Urban 2005 79.9 34.8 73.3 39.5 25.4 13.1 17.7 2001 77.5 23.1 47.2 24.7 7.8 7.1 13.0 %-point change 2.4 11.7 26.0 14.8 17.7 6.0 4.8 Rural 2005 86.7 36.1 75.6 44.7 26.6 19.1 21.6 2001 84.1 29.2 65.5 22.7 7.5 11.2 25.6 %-point change 2.5 7.0 10.1 22.0 19.0 7.9 -4.0
* "Cash crops" include vanilla, coffee, cloves, etc.. Source: Stifel et al. (2007).

112. Contract farming is correlated with higher and less vulnerable incomes. The opportunities for higher yielding agriculture - converting households to net sellers on the market - are thus essential to the rural population. Indeed, a study of contract farming (CF), which refers to the case when a larger producer contracts out cultivation to small scale producers, shows systematic differences between households with access to such contracts and others (Figure 4-3). CF households were richer, had more assets, and experienced fewer liquidity constraints, and also experienced shorter period of soudure. Although causality is difficult to establish, one reason for this link may be the higher and less variable productivity of CF farms compared to others, which in turn can be linked to resources, and to the fact that they can tap into the technology and know-how of larger firms.

35

Figure 4-3: Density functions: Per capita income and period of drought season (soudure) for CF and non CF households.

Source: Bellamare and Stifel (2008)

113. While the 2001 crisis provides something of a special case, inflows of workers into agriculture is normally not likely to be connected with poverty reduction. Instead, such inflows generally reflect lack of opportunities elsewhere, and is consequently related with lower labor productivity, increased underemployment and unpaid work. Given the prevailing low labor productivity in agriculture, poverty reduction policies are best aimed at increasing productivity, or yield per workers, rather than employment per se, in the agricultural sector. 114. Adoption of better technology increases yields and raises demand for unskilled agricultural labor and improved agricultural technologies and, consequently, higher crop yields, are associated with lower food prices, higher real wages for unskilled workers, and better welfare indicators overall, including lower poverty and food insecurity (Bartett and Minten, 2008).

Promoting off farm activities 115. Agricultural productivity can also have positive spill-over effects for the non-farm sector in rural areas. Higher agricultural productivity can release labor for work in non-farm sectors, create the income and local demand for non-farm activities, and potentially the resources (both time and money) needed for investment in non-farm activities. More productive and commercial products can also create the linkages to non-farm activities including agro-processing and other services needed for commercialization and/or transformation of agricultural products. 116. The non farm sector is often associated with lower poverty and better risk management in rural areas in developing countries (Box 4-1:). Thus, the second avenue for improving earnings, is to encourage shifts of labor from agriculture to off farm activities. Again, because of the very limited size of the formal sector, it is unlikely that these will be formal jobs. Indeed, the vast majority of jobs are likely to remain in the informal sector. However, they still offer better earnings opportunities and crucially, better risk management.

36

Box 4-1: Rural non farm activities in developing countries

- Are associated with lower poverty and income risk: There is an empirical regular abd positive relationship between nonfarm activity on the one hand and higher welfare and lower poverty in developing countries. In the absence of well functioning asset markets, non farm activities fill an important income diversification purpose for households subject to high climatic and/or price variability. - Are linked to better earnings: Outside of agriculture, the nonfarm sector is often seen as an important pathway out of poverty (Lanjouw, 2001). Indeed, although agriculture is dominant, nearly 20 percent of active adults in rural areas are employed in some form of nonfarm activities in Madagascar. The nonfarm sector may in fact provide an important pathway out of poverty for rural households: nonfarm workers in rural areas are less likely to be poor, and have higher earnings than agricultural activities. Households that have been able to diversify income sources and therefore rely on some nonfarm employment are generally better off than those that rely on agriculture only. - Are often linked to higher agricultural productivity: The more dynamic and successful processes of rural industrialization (parts of China, Vietnam, Taiwan) have been linked to increases in agricultural productivity which has increased rural income for investment and for consumption of non-farm goods. - Have a dual character: However, they are also often of a dual character, incorporating both high productivity activities and low productivity (residual) activities which act largely as a safety net, often for the poorest, during seasonal agricultural inactivity. The dynamics of employment in these sectors in response to agricultural productivity growth may not be the same and they also interact with one another. Higher agricultural productivity may, for example, result in inflows of workers from residual low productivity non farm activities into agriculture as well as into higher productivity non farm activities, tightening rural labor markets overall - Are the focus of economic policy in many countries and an evaluation of best practices is needed: The past decades have seen a strong recognition of the important role of the non farm economy and with it a multiplication of initiatives to support it. A review of such initiatives is sorely needed. However, it is clear that the earnings potential in non farm enterprises would be helped by access to better economic infrastructure, skills development, information and financial services. Source: Barrett et al (2001), Feder and Lanjouw (2001), Johansson and Ronnas (1993), Lanjouw and Lanjouw (2001), van Adams (2008), Fox and Sekkel Gaal (2008)

117. The non-farm enterprise sector in rural Madagascar is still limited in size and consists of very small enterprises. While the non-farm sector provides an avenue to very dynamic income generation patters in rural areas, this is clearly not yet the case in Madagascar. Only 30 percent of household are in anyway involved in non-agricultural activities in rural Madagascar. Average earnings are small, firms largely operate informally, and some of them are seasonal. They are dominated by agribusiness and trade, and four in five workers come from the family and are thus not paid an explicit wage. Four in five firms are headed by a man, with women headed enterprises being smaller, more likely to be informal, etc. Owners are largely uneducated but less so than the average rural worker. 118. Yet, the non-farm sector offers better earnings potential than the agricultural sector. Even at its very rudimentary level, the non farm sector does offer better jobs than the farm sector does. This is clear from the strategies pursued by households. Among better off households livelihood strategies are much more likely to depend on non-farm income, entirely or in combination with farm work. Only two percent of the poorest 20 percent depend exclusively on non-farm activities compared to 13 for the richest quintile. For the same reason, poverty rates are considerably lower for those who have some opportunity for non-farm activities (Figure 4-4).

37

Figure 4-4: Non-farm opportunities are negatively associated with poverty

Percentage of households by livelihood strategy and consumption quintile (Rural areas, 2005)
100 90 80 70 60 50 40 30 20 10 0 Poorest Q2 Q3 Q4 Richest Non-labor income Non-farm only Family farm & non-farm Family farm only Any farm wage

Poverty headcount index rates and poverty depth, by household livelihood strategies (Rural areas, 2005)
90

80 Headcount index Depth

70

60

50

40

30

20

10

0 Any farm wage Family farm only Family farm & non-farm Non-farm only

Source: Adapted from Stifel et al., 2007

119. This negative association between NFEs and poverty is due to the higher earnings they offer. Estimates suggest that even for unskilled self-employed, the earnings per months in the non-farm enterprises are almost three times as high as in farming (Table 4-3). 120. There are important effects of education on job creation. More educated owners are more likely to run larger firms than uneducated ones, and to invest in equipment. As a result, they are also much more likely to employ hired labor from outside the family. And importantly, revenues paid to hired labor increase many-fold with education levels of the owner (percentage wise more rapidly than
38

those of the owner, in fact). The firms of especially well-educated owners are therefore likely to offer jobs with higher (if not high) earnings that Madagascars rural poor could benefit from. Table 4-3: Better job creation in the non farm sector (rural Madagascar, 2001)
None Nonfarm enterprises % owners by education level Earnings per month labor (MGFx1000) Family labor months per year Hired labor months per year Av wage paid for hired labor (MGFx1000) Farming % owners by education level Crop revenue per month labor (MGFx1000) Family labor months per year Hired labor months per year 79 68 29 4
Source: Randrianarisoa et al., 2009.

Primary

Secondary

Postsecondary 7 734 13 7 332 2 29 32 9

61 200 13 3 23

19 675 15 3 63 15 72 26 4

14 943 12 8 181 5 56 25 9

121. Improved access to public goods education, security, communications and credit is likely to stimulate job creation in rural areas. Estimates suggest that labor demand in NFEs is increasing with the education levels of the owner, and with the value of equipment owned by the enterprise. Capital both physical and human thus appears to be complementary to labor, and stimulating capital investment by smaller firms may unlock more job creation. But in the specific case of Madagascar, public goods can also play a role: physical security, lower transportation costs and greater access to broadcast media is also associated with higher labor demand. 122. The low skill levels of the population acts as a constraint to both individual earnings growth and country wide productivity improvements. Although access to basic education has expanded, the post primary levels remain largely unreformed and the follow-through to higher levels of education limited (World Bank, 2009). While no information is available on skills development for those who leave school (and most likely end up in the informal sector), evidence from elsewhere shows that different approaches, focusing both on raising quality at formal secondary and post secondary levels, and assisting in skills development on the job, in the informal sector, can pay off in terms of higher productivity.

4.3. Policies to improve productivity and income for the poor

Education and skills5 123. Improving Madagascars low levels of education will be critical on two accounts: for improving productivity, international competitiveness and economic growth, as well as broadening access to higher income opportunities for the vulnerable parts of the population. The challenges are huge. The
5

This section draws heavily on World Bank (2008). 39

primary completion rate increased rapidly from below 35 percent in 2002-3, but in 2006-7, it was still under 60 percent. About half the children who enroll in grade 1 leave without completing the primary cycle. The gross enrollment ratio in senior secondary education (SSE) is just 10 percent, and enrolment in TVET and in tertiary education less than 3 percent - among the lowest performing countries in the world. Wastage is high with high drop-outs at all levels even in TVET and university, about one third and 40 percent of the students respectively leave their studies in the first year. Overall, education levels have fallen among the younger cohorts over time, pointing to the pervasive problems in the education system over time. Meanwhile, public resources are limited, especially at the post-primary level and government as well as donor funding are focused on ensuring universal primary completion. Analysis suggests that poor governance as well as financial inefficiency lie at the core of the problem. 124. Both enrolment and completion is marked by strong regional disparities and the poor fare much worse than the non-poor. In many districts, primary enrolment rates do not reach beyond 30 percent. Household data show that only 9 percent of children from the lowest income quintile reached lower secondary education, and only 1 percent reached senior secondary education in 2005. 125. The result is a major share of children out of school and young adolescents with low levels of education. Household data show that in 2005 about 850,000 youth aged 11 to 18 years had dropped out of school after receiving some education and another 500,000 had never been to school. 126. These children and youth need a targeted and differentiated approach with alternative, flexible and age-appropriate learning opportunities, depending on their needs. For those children without any education, literacy programs may be necessary. Those who have not completed primary education could be targeted for completion; for the older groups, youth could be offered a combination of training for labor market skills and primary completion courses. Figure 4-5: Over 1.3 million children out of school.
800000

700000

Primary completion Never in school

Incomplete primary

600000

500000

400000

300000

200000

100000

0 11-15 years 16-18 year olds

Source: World Bank (2008) 127. A broadening of skills to develop non-cognitive and generic skills is needed to support Madagascars growth and labor market outcomes. There are three areas in which reform is required: (i) educational content (structure, curriculum, teaching, and process) and linkages with the economy; (ii)
40

cost-effective increases in coverage; and (iii) the enabling framework for reform (finance, governance, and sub-sector management). With respect to labor market and productivity, a stronger focus on transversal skills will be needed. Madagascars existing system is highly academic, in the case of SSE and higher education, or narrowly specialized and trade/occupation oriented, in the case of TVET. In order to link education with labor markets, productivity and income opportunities, a focus on skills for the labor market many of them non-cognitive, non-technical, and transversal across jobs need to be developed in the education system. This includes for example the development of communication and teamwork skills, of resourcefulness, of IT literacy, of problem solving and personal drive and responsibility, and capacity for future learning in different contexts. 128. Experience elsewhere suggests that careful expansion of post-basic education, focusing on improving quality and relevance, is the soundest approach for improving real learning. Thus, a majority of youth will still have to develop their life and working skills on-the-job, most likely in the informal sector. In countries with large informal sectors, apprenticeships can be a major form of skills provision in the informal sector. In order to assist both employers and employees in upgrading skills, initiatives can and should be targeted also to this sector (Box 4-2).

Box 4-2: Apprenticeships and skills development in Ghana

The mere size of the apprenticeship system shows that it needs to be taken seriously it is the by far dominant source of technical and professional skills development in Ghana. In the beginning of the decade, the number of apprentices (as recorded by household data) was four times as high as the number of enrolled students in formal professional and technical training. It is also self-financed and self-regulated, and provide good prospects for post training employment as well as earnings. The practical and hands-on approach is a great asset in contexts where formal education tends to be overly focused on theory. But the potential of informal sector training to scale up and modernize is limited by (i) limited access to new technology (ii) the poor levels of education of the apprentices (iii) the lack of quality standards. The reforms should reach out to the informal sector to increase access to technology, assist in upgrading master craftsmen skills and pedagogy, and in the integration of apprenticeship into NQF for certification of skills

Strengthening Public Work Programs for income protection 129. High labor intensive public work programs (PW) have become increasingly frequent in Madagascar in recent years. As an example, in 2005 and 2006 alone, the total number of person-work days created by four agencies implementing PW programs amounted to 1.1 million. There is a need to consider alternative sources of income during the soudure, which lasts around 3-4 months and as long as seven months in some poorer areas. There is also a need to reduce the vulnerability of those households which cannot resort to farming when hit by an income shock. This group includes the landless in rural areas and the poor in larger and denser urban centers where farm land is not available. 130. Generally, PW programs are implemented either in response to a one time co-variate shock such as during economic crisis, or in respect to repeat shocks which hit specific groups disproportionally such as flooding in specific areas, or seasonal unemployment in agriculture. These programs provide temporary jobs for works with essentially two objectives (i) increasing income for workers and their families and/or help smooth their consumption through difficult times (ii) creation of public goods in the form of improved or new infrastructure. As safety nets, these programs differ from generic labor
41

intensive low skill focused infrastructure programs which do not target specific groups (del Ninno et al., 2009). 131. Experience shows that well designed and implemented PW programs can mitigate household income shocks and help relieve poverty. As safety nets, they can reach the poor families quickly through the self-selection mechanism (only those in need will enter) and may reduce the stigma of plain income transfers. As infrastructure projects they are also significantly cheaper than more capital intensive projects, create more jobs, use more local materials and require less foreign exchange. Indeed, a unit of road built with labor intensive methods in Madagascar costs one fifth of that of a capital intensive project, used more than twice as much labor, only two thirds of foreign exchange and twice as much local material. 132. PW programs could be powerful and effective policy tool to reduce vulnerability and provide public goods or services; however, a new approach is needed to establish program objectives and increase their efficiency. Given that many Malagasy households are poor or vulnerable to poverty and subject to a range of shocks and that infrastructure remains underdeveloped, PW programs can be an important public instrument. An evaluation of fifteen programs implemented during 2005-2007 by three different agencies suggested that the performance of PW programs in Madagascar remains below potential, however (Andrianjaka and Milazzo, 2008). In order to improve the outcomes of the PW programs Madagascar could fruitfully draw on the experiences of other countries to ensure that the PW programs fulfill their role as cost effective safety nets for the poor (Error! Reference source not found.). More specifically the evaluation in Madgascar shows that: 133. PW programs need to be harmonized across different funding and implementing agencies. PW programs have been implemented by several agencies, with different objectives and approaches. This implies that both social protection policy and to some extent infrastructure policy is uncoordinated and dispersed, and design, monitoring and evaluation is not harmonized. 134. The programs need to be better targeted to the poor. As shown in Figure 4-6 a below, poor households that face an income shock tend to work more. Living on subsistence minimum, they are unable to moderate their consumption much and are certainly less likely to do so than richer households. Instead, they need to find more income to pay for the most basic needs. However, the share of poor households which have access to PW programs is smaller than for richer households: in fact, the richest twenty percent of households have the highest probability of all of participating in the PW programs. Demand for jobs in the PW programs clearly exceeds the supply, non-poor households compete with poor households for jobs, and may be more successful in accessing one. 135. Wages need to be set low enough for the self-selection mechanism to work, and geographical targeting could be improved with more detailed poverty mapping. As safety nets, PW have the advantage that each poor household does not need to be identified ex ante, as the work should offer sufficiently attractive opportunities for them to choose to participate in the program. This mechanism requires that wages are not set above market wages however, as higher wages will attract also non-poor workers, and/or workers who hold a less paid job, thus crowding out other forms of employment rather than contributing to net job creation for the poor. As Figure 4-6 b shows, the PW programs in Madagascar have generally set the unskilled wage higher than the market wage. Thus, excess demand for PW employment has been created, and jobs have consequently been rationed and rotated in order to accommodate the excess demand. In turn, this rationing and rotation has meant that the duration of the work is too short to meaningfully reduce poverty or compensate for income shocks. In addition, projects have not always been directed at the poorest regions. The geographical targeting could be improved by a more detailed poverty mapping which would present clear risk profiles.

42

136. Design and implementation should ensure that the output of the PW project (infrastructure as a public good, environmental impact) is of sufficient quality. The evaluation suggests that the output of the project was below par in many instances, due to lack of capacity of implementing agencies or lack of planning. Well functioning infrastructure is an important factor for increased economic activity and higher value added growth, and can potentially have important trickle-down effects on poverty. To the extent that the projects do not fulfill their secondary objective, any positive second-round effects of PWs cannot be expected. Without the production of a useful public good, PW programs are a comparatively expensive mechanism for transferring public funds to the poor. Figure 4-6: Poor targeting of PW programs
a. Percentage of households who resorted to specific strategy to deal with an income shock
Worked more 50 45 40 35 30 25 20 15 10 5 0 Poorest Q2 Q3 Q4 Richest Reduced food cons PW 500% 400% 300%
100% 72%

b. PW wages as percentage of market wages

487% 146% 176% 103% 79% 83% 79% 83% 71% 174% 72% 291%

600%

Unskilled

Skilled

200% 100% 0%

Source: Adapted from Andrianjaka and Milazzo, 2008

137. Projects need to be closely monitored and a standardized system of evaluation put in place. Data are often not been available on financing, output, number of jobs etc. for many projects; many do not have a clear quantitative outcome which can be monitored, and information is not centralized. There is a need for survey forms to know the socio-economic profile of workers who are participating; for data related to project management (input, output, costs), and for linking with the general statistical system. Criteria for choosing implementing agencies do not appear to exist, but would be necessary to improve the outcomes.

43

Box 4-3: Public Works Programs Elements Required for Reaching the Poor
Self-targeting by setting the wage rate at an appropriate level. It is crucial to ensure the program wage is set in relation to the project goals. In a context where poverty targeting appears particularly challenging, and where financial and administrative capacities remain limited, relying on self-targeting is attractive. However, this will only be possible if the market wage is above the minimum wage. Indeed, the publicly funded program wage cannot be lower than the minimum wage and would hence be higher than the local wage for unskilled labor, thus likely to attract the non-poor to the public works program. So if the minimum wage is equal or above the market wage and restrictive employment laws prevent setting the wage below the minimum level, the possibility of using self-targeting is hindered and other targeting mechanisms need to be introduced. The use of pure self-selection might also be insufficient in reaching vulnerable groups in poor areas or when demand for participation is very large and some form of employment rationing is needed. The fact that youth are particularly vulnerable to unemployment may also suggest adopting targeting methods to reach these categories specifically. In addition, setting the program wage too low also presents the risk of excluding poor households that have higher opportunity costs of labor if the program wage is below the reservation wage or the risk of missing program objectives (e.g., nutrition objective if the program wage is far below the cost of the minimum basket). Provision of quality public goods is crucial. Based on international experience, public works should only be promoted as a social safety net instrument if the public goods generated have a positive impact on the community and are built at a cost similar to that charged using hired contracting procedures. It should not be introduced as strategies to provide social transfers to deserving poor. Public works projects may include traditional infrastructures or public environmental improvement projects (e.g., sanitation projects to roll back malaria, natural disaster risk reduction projects), but also social activities (e.g., South Africas home-based care workers and early childhood development workers) or economic activities (e.g., small businesses and cooperatives). The public goods produced if relevant, well executed, and maintained, could have an important role in alleviating constraints to higher returns for poor people, regardless of their participation in the program. Since 2004, the WFP has promoted synergies between food-for-work programs and school feeding and nutrition programs (e.g., building classrooms, storage rooms, latrines, etc.). Community projects benefiting 138. women are also given priority by the World Food Program. To address chronic poverty, public works programs should run throughout the year with varying degrees of intensity. A program run during agricultural slack seasons only, when the opportunity cost of labor is low, would provide consumption-smoothing for poor households but no assurance of finding a job whenever it is needed. A program operating throughout the year with varying degrees of intensity will provide both insurance and consumption-smoothing for poor households. In countries with widespread levels of unemployment and underemployment, standard short-term public works programs proved unable to lift the chronic poor out of poverty. Brazil, Argentina, India, and Bangladesh represent some good practice examples where the program served the functions of assurance, consumption-smoothing and poverty reduction. To ensure additional coverage, the number of days worked can be rationed and a rotation system applied. For instance, India provides a legal guarantee of 100 days of employment a year to any rural household willing to do public work for a statutory minimum wage, and Ethiopia assists over 7 million chronically food-insecure people about 10 percent of the population through its Productive Safety Net programs employment schemes and food or cash transfers. This being said, high labor intensive public works projects can also be effectively used in the aftermath of natural disasters for the rehabilitation and reconstruction of damaged or destroyed infrastructures. Source: Grosh et al., 2008; del Ninno et al., 2009.

44

5. Improving labor market outcomes for the poor in Madagascar

139. Seven in ten Malagasies are poor, and largely because adults cannot access productive employment. While most of them are obliged to work to survive, they do not have a job that offers sufficient earnings for them and their families to cover the most basic needs. A majority are locked into subsistence activities in agriculture. Their livelihoods remain extremely vulnerable to shocks in the form of natural disasters (floods, droughts) or political and security problems. Rural populations regularly face income and food insecurity during the soudure. Poor workers are more unskilled than other workers, and generally more remote from markets and information. They need a growth, employment and poverty strategy that encourages the creation of more productive and earnings generating jobs, and assists the poor in shifting out of activities with low and erratic earnings and into jobs with higher earnings. 140. The policy agenda to help reduce poverty through the labor market is broad: (i) restoring macroeconomic and political stability, improving the investment climate more broadly and removing constraints to labor demand in sectors that can offer higher earnings (ii) removing obstacles for workers in low earning sectors to shift into higher earning sectors (iii) help increase productivity in low earnings sectors agriculture, household enterprises, urban informal sector - where most of the poor work. Policy makers need to consider how to increase labor demand growth in sectors with higher productivity that offer higher earnings (essentially non-agricultural formal and informal sectors), to helping the poor equip themselves for higher productivity jobs that require higher skills development, and to assist those who remain in vulnerable occupations and face considerable income insecurity. More immediately, the question will be how to mitigate the impact of the prolonged political and economic crisis which began in 2009. 141. A weak investment climate is hampering activity and employment growth in both the formal and informal sector. The political and ensuing macro-economic instability is a major threat to a healthy private sector in Madagascar, and the potential for direct and indirect job creation from foreign direct investment and tourism revenues. While labor regulations do not appear to be a major binding constraint for business operation, there is some evidence that formal sector hiring is relatively expensive. A complex and unpredictable overall regulatory framework for business is also likely to lower the employment creation of firms with higher overall growth potential in the formal or informal sector. These features need to be reviewed in the context of creating more and better jobs for a majority of the population. The experience of other countries suggests that social protection measures wielded through the labor market are better directed at protecting workers (through adequate safety nets) than jobs to encourage flexibility and job creation and provide wide and well targeted coverage. 142. Public sector work programs need to become better targeted and more efficient. Within the area of social protection, well designed public sector work programs could reduce vulnerable households exposure to earnings short falls and at the same time contribute to much needed improvements in infrastructure. However, these programs need to be designed and evaluated as safety net programs rather than active labor market programs (as they are ineffective in creating sustainable employment). Thus programs need to be much better targeted to the poor, by setting wages below market level to encourage self selection, and by using poverty mapping for better geographical coverage. They need to be coordinated across different agencies, and accompanied by appropriate monitoring and evaluation systems. Finally, the technical quality of the infrastructure produced needs to

45

be assured by strengthening capacity among implementing agencies, concentrating implementation responsibility in agencies which posses the capacity, or ensuring external support. 143. The informal rural and urban sector will be the main provider of higher earnings. Most of Madagascars poor depend on subsistence agriculture. Even in the best of circumstances, few of them are likely to find their next job in the formal sector: it is too embryonic to absorb millions of informal and agricultural workers, and many of the poor may lack the necessary skills to work there. But compared to subsistence agriculture, higher productivity agriculture, rural non-farm activities, and the informal urban sector offers higher and more stable earnings even if these earnings do not qualify as high. Given the positive impact of contract farming and the importance of market access for earnings for rural farm households, policy should aim at improving technology, information, and physical access to markets. Job creation in rural non-farm enterprises thrives with improved access to public goods including security and transports and information communications. Given the multitude of NFE programs over the world, it would be useful to review the existing experience and distill best practice interventions in terms of impact and cost effectiveness. 144. Education systems need strengthening. A more productive work force is critical both to higher value added growth and to higher earnings over time. At the same time the returns to education are high in Madagascar. Access to basic education has improved over time. The investment in providing good quality education and training needs to remain a priority. In view of budgetary and capacity constraints, it would be advisable to focus first on increasing quality of the training offered at higher levels before setting quantitative goals and consider the options for continued training throughout the working life, in informal and formal systems. 145. More knowledge is needed. The research program has centered on rural labor markets, where most of the population lives, and on understanding the basic functionings of the labor market and the characteristics of workers. As such, it fills an important knowledge gap, but more analytical work is needed to generate the underpinnings for solid policy advice on labor markets and poverty reduction strategies. Some key areas of analytical and policy focus are: Informal sector activities and labor markets in urban areas. The urban informal sector is the main employer of rural immigrants and of the incumbent poor in urban areas. As such, it can have a critical impact on poverty reduction. At the same time, political, macroeconomic and externally imposed crises often have a stronger impact on urban than rural labor markets. However, while it is clear that urban labor markets suffered greatly during the political crisis of 2001, there is still a knowledge gap as to how labor markets work in urban areas, who are the most vulnerable, what the defining characteristics are of more successful firms, occupations and workers, and the extent and consequences of rural-urban migration. Vulnerable groups and mobility constraints. Generally, new labor market entrants, both youth and inmigrated workers from rural areas, face higher risks and worse prospects in terms of accessing a job, especially with some decent level of earnings; the evidence suggests that women face considerable discrimination in Madagascan labor markets. At the moment, while we know that mobility is limited, it is not yet fully clear why this is the case, although discrimination and education appear to be important factors. The causes, consequences and remedies for the limited mobility need to be identified. The group of youth, their needs and prospects need to be carefully examined. Income protection. Public works is only one of several possible options that can work in combination to protect and preserve income for the most vulnerable in the population and as discussed, in the past, PWs have not served a safety net function. Following upon the existing
46

knowledge of poverty and labor markets, a next step is to review the existing social protection system with a view to ensure adequate coverage, efficiency, relevance and financial sustainability of the system. As large parts of the population are at significant risks for chronic or seasonal food insecurity, a well functioning safety nets system in particular is critical. Other means of providing safety nets beyond public works/cash-for-works therefore need to be explored. The recent review of the Social Protection system in Madagascar (Social Protection: Helping households manage risks and protect assets current, May 2010) provides valuable suggestions to develop a coherent system, strengthen institutional set-ups, expand successful programs and pilot appropriate new programs. The World Bank is planning further work for helping the Government improving the efficiency and relevance of the safety nets programs. Education and Skills development. The formal sector is still embryonic and the informal sector provides employment for a vast majority of the population. In other African countries, the returns to skills in the informal sector have been shown to be on the increase. Skills development in the context of informal sector work is thus critical for raising productivity and earnings potentials in this sector while at the same time preparing workers for shifting into formal sector activities as these gain importance. Drawing on the knowledge base that is being created in the Africa region of the World Bank, the role of schools and employers as providers of skills, and the best avenue for government support should be looked at. Again, this is strongly related to the issue of vulnerable youth in the labor market. Updating the labor market overview. The reports in the work program were using data from 2005 as their latest observation. An update of this information is now much overdue, and at a minimum a basic estimate of employment rates, unemployment rates, the sector structure of employment and earnings developments is needed. As is discussed in Annex 2, the analytical underpinnings of policy advice could be much stronger with improvements in survey methods and data. Labor market institutions. Finally, the investigations suggest that labor markets are segmented in Madagascar, with high preferences for public sector jobs, to which the poor cannot get access, with a very limited formal sector, and with as mentioned - a gender divide in earnings. A review is needed of the institutional constraints that cause segmentation and limit mobility between different segments. For example, the wage setting mechanisms and the role of different labor market institutions in maintaining the public wage premia need to be reviewed, as well as the role of economical and social constraints to women participating on equal terms in the work life.

47

Bibliography
1. Reports prepared for the Instat/World Bank/IDRCWorkshop on Labor Markets in Madagascar, Antananarivo, Madagascar, June 2008 Stifel, D., Rakotomanana F.H. and Celada, E., 2008: Evaluation des Conditions du March du Travail Madagascar , 2001-2005 Stifel, D., 2007 : Marchs de Main doeuvre, Economie non agricole et Stratgies de Moyens dExistence des Mnages en milieu rural Madagascar Galle, P., 2008: Madagascar: De jure labor regulations and actual investment climate constraints Andrianjaka N. and Milazzo A., 2008: Highly Labor-Intensive Public Works in Madagascar: Issues and Policy Options, World Bank Social Protection Discussion Paper # 836, Randrianarisoa J-C., Barrett, C., and Stifel, D., 2008: The Demand for Hired Labor in Rural Madagascar Hoftijzer M. and Paci, P., 2007: Making Work Pay in Madagascar: Employment, Growth, and Poverty Reduction Marc F. Bellemare, M.F. and Stifel, D., 2008: Contract Farming in Madagascar: A Survey of Six Regions 2. Additional Bibliography Barrett, C.B. and Minten, B., 2008: Agricultural Technology, Productivity and Poverty in Madagascar, World Development, 36(5), 797-822. Barrett, C.B., Reardon, T. and Webb, P., 2001: Nonfarm Income Diversification and Household Livelihood Strategies in Rural Africa: Concepts, Dynamics and Policy Implications. Food Policy 26, 315-331. Lanjouw, J.O. and Lanjouw, P., 2001: "The rural non-farm sector: issues and evidence from developing countries," Agricultural Economics, vol. 26(1), 1-23. Lanjouw, P. and Feder, G., 2001: Rural Non-Farm Activities and Rural Development: From Experience Towards Strategy, Rural Development Strategy Background Paper #4, Washington, DC: World Bank. Adams, V. A., 2008: "Skills development in the informal sector", background paper for World Bank Africa Region Economic and Sector Work to Increase Earnings and Reduce Poverty in the Informal Sector in Africa. Dostie, B., Haggblade, S., and Randriamamonjy, J, 2000 : Seasonality of food consumption of poor households in Madagascar, Antananarivo: INSTAT. Del Ninno, C., Subbarao, K., Milazzo, A., 2009: How to Make Public Works Work: A Review of the Experiences, World Bank Social Protection Discussion Paper 906, Washington, DC: The World Bank. Fox, L., and Sekkel Gal, M., 2008: Working Out of Poverty: Job Creation and the Quality of Growth in Africa, Washington, DC: World Bank Johansson, S. and Ronnas, P., 1993: Rural Industrialization: A Review of Selected Asian Experiences, Stockholm School of Economics Working Paper in Economics and Finance # 46
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Morrisset, J., 2009: Promouvoir lEmploi : Au-Dela des Promesses pour une Strategie Active et Maitrisee , mimeo, World Bank Africa Region. United Nations, 2009a: World Population Prospects: The 2008 Revision, online database, New York: United Nations. http://esa.un.org/unup/ World Bank, 2008: Developing the Workforce, Shaping the Future: Transformation of Madagascars PostBasic Education. World Bank, 2008b, Ghana Job Creation and Skills Development World Bank, 2009: World Development Indicators 2009.

49

Annex 1: List of reports and authors

Reports prepared for the Instat/World Bank/IDRCWorkshop on Labor Markets in Madagascar, Antananarivo, Madagascar, June 2008 Gender Disparities in the Malagasy Labour Market Christope Nordman, Faly Hery Rakotomana, AnneSophie Robilliard Evaluation des Conditions du March du Travail Madagascar, David Stifel, Faly Hery Rakotomanana et Elena Celada 2001-2005 Marchs de Main doeuvre, Economie non agricole et Stratgies de David Stifel Moyens dExistence des Mnages en milieu rural Madagascar Deploying the Financial Sector for Employment Creation and Gerald Epstein, James Heintz, Leonce Ndikumana, Grace Poverty Reduction in Madagascar Chang and Seeraj Mohamed Madagascar Employment Institutions and Policies: A Background Andr Kirchberger document Madagascar: De jure labor regulations and actual investment Galle Pierre climate constraints Travaux publics haute intensit de main duvre (HIMO) pour la Nirina Haja Andrianjaka, Annamaria Milazzo protection sociale Madagascar : problmes et options de politique Developing the Workforce, Shaping the Future: Transformation of World Bank Report Madagascars Post-Basic Education The Demand for Hired Labor in Rural Madagascar Jean Claude Randrianarisoa, Christopher B. Barrett, David Stifel Making Work Pay in Madagascar: Employment, Growth, and Poverty Margo Hoftijzer and Pierella Paci Reduction Contract Farming in Madagascar: A Survey of Six Regions* Marc F. Bellemare and David Stifel POLICY BRIEFS The Impact on Labor and Poverty of Madagascars 2001 crisis Gender earnings gaps in the Malagasy Labor Market Reducing Poverty Through the Labor Market: What to Focus on in Madagascar Assessing Labor Market Conditions in Madagascar: 2001-2005 Rural Labor Markets and the Non-Farm Economy in Madagascar: 2001-2005 High Labor Intensive (HIMO) Public Works in Madagascar: Issues and Policy Options Education et conditions du march du travail Madagascar, 20012005 Diagnostics des entreprises et les contraintes sur la croissance de la demande de travail du secteur priv formel Madagascar Allocative inefficiencies, shadow wages, and demand for hired labor in the rural areas of Madagascar Contrats de production agricole Madagascar : Vue densemble Contrats de production agricole Madagascar : Les dterminants de la participation Contrats de production agricole Madagascar : Effets sur le bientre des mnages contractants Contrats de production agricole Madagascar :Effets sur la productivit rizicole des mnages contractants Margo Hoftijzer Christophe J. Nordman and Anne-Sophie Robilliard Margo Hoftijzer David Stifel David Stifel Annamaria Milazzo

INSTAT INSTAT Marc F. Bellemare and David Stifel Marc F. Bellemare and David Stifel Marc F. Bellemare and David Stifel Marc F. Bellemare and David Stifel

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Annex 2: DATA COMPARABILITY ISSUES

This study is based primarily on an analysis of the 2001 and 2005 Enqute Periodique auprs des Mnages (EPM). The EPM are nationally representative integrated household surveys of 5,080 and 11,781 households in 2001 and 2005, respectively. The data were collected in single rounds during the months of September through December. The multi-purpose questionnaires include sections on education, health, housing, agriculture, household expenditure, assets, non-farm enterprises and employment. Employment and earnings information are available in the employment, non-farm enterprise and agriculture sections. For a measure of household wellbeing, this analysis uses the estimated household-level consumption aggregate constructed by the Institut National de la Statistique (INSTAT). The following are issues encountered in assuring comparability of the indicators used. 1. Sampling: 13 strata in 2001, 45 strata in 2005. Sampling weights should make the appropriate adjustments for comparability of summary statistics. Affected by the number of sampling units in the large urban centers, the effect is that, while the sample is representative of large urban centers at the national level, it is not so at the province level. Because of this issue, for example, the data suggest that the population in the city of Antsiranana fell by half. 2. Education: 2001 has a filter question Have you gone to school? while the first question in 2005 is: Can you read?. Note: INSTAT uses literacy questions to classify individuals as having primary education in the 2005 data. Since we cannot do this with the 2001 data, consequently, we see a large increase in primary education and a huge drop in no education in the INSTAT reports. 3. Deflation: Regional deflators for 2005 had to be adjusted to account for the differing number of strata. Instead of using the regional deflator supplied by INSTAT which had different values for the 45 strata, we took the weighted average of these deflators within the 13 strata used in 2001. Thus regional deflation was comparable across the surveys at 13 strata each. Note on temporal deflation: The ratio of the poverty lines (Ar 305,300 in 2005 and Ar 197,720 in 2001) was used to inflate the 2001 monetary values to 2005 Ariary. 4. Employment: a. Labor force definition In 2005, toujours was added to the list of responses to the question When did you look for a job? b. Temporary/Seasonal employment The number of months for such work was available in 2001, but not in 2005. This does not affect the estimates of monthly earnings for wage & salaried workers (earnings are provided in months). It does however affect i. ii. Low earnings estimates for wage & salaried workers, because an individual is determined to have low earnings if his/her annual labor earnings fall below the poverty line. Estimates of agricultural earnings, because agricultural earnings are calculated as the residual between household consumption and the sum of non-farm enterprise earnings, fishery earnings, net transfers and wage earnings, all divided by the number of household members who report agriculture as their primary or secondary form of employment. As these are all in annual terms, the annual wage earnings for temporary workers (months times monthly earnings) must be subtracted from household consumption. This is addressed by taking the average number of months estimated using the 2001 data to determine annual earnings for temporary employees in both the 2001 and 2005 data.

6. Non-farm enterprise earnings: The 2005 survey asks for profits net of taxes (it also asks a separate question about the magnitude of these taxes), whereas the 2001 does not specifically state that profits should be net of taxes. The question on total taxes is used to subtract taxes from the NFE earnings in the 2001 data. Further, the recall period for non-farm enterprise earnings in the 2001 survey was one month, whereas it was one year in the 2005 survey. Although the 2005 earnings were scaled down by the number of months of operation to make them comparable to those in the 2001 survey, there are still likely to be comparability issues. For example, the literature on household expenditure indicates that the longer the recall period, the more expenditures are underreported (Scott and Amenuvegbe, 1990). Similar factors may explain some of the fall in NFE reported earnings between 2001 and 2005. 51

7. Multiple jobs: Both surveys only collect information on the primary and secondary income earning activities. Analysis of the 2004 EPM indicates that 97 percent of the employed have at most two jobs. Thus the 2001 and 2005 surveys do not capture full information on employment for three percent of the workforce who hold three or more jobs in one year. 8. Revenues for non-wage workers from fishing activities: Revenues from fishing activities are reported in Section 6 (non farm enterprise) of the 2001 EPM. These are calculated as the sum of wages paid to household members, profits and auto consumption, less taxes. For 2005, revenues from fishing are reported in Section 12e (Fisheries) and are calculated as revenues from fish sold plus autoconsumption. A question concerning the cost of inputs is included in the questionnaire but the answer is not included in the dataset. As such, revenues from fishing activities are not comparable between the two years. Nonetheless, those employed in this sector represent about 1% of non-wage workers in both 2001 and 2005. 9. Formality status of secondary job using the 2001 data: The questions on formality status (pension and social security) for the second job are missing in the 2001 EPM. The assumption is that the second job is informal for 2001 which should be reasonable given that 98.3% of second jobs in the 2005 data were informal. However, the statistics on formality status are not affected because they are calculated based just on only the primary job.

52

Annex 3: . WB doing business labor market regulations.

Employing Workers Indicators (WB Doing Business Indicators) RIGIDITY OF EMPLOYMENT INDEX Difficulty of Hiring Index Are fixed-term contracts prohibited for permanent tasks? What is the maximum duration of fixed-term contracts (including renewals)? (in months) What is the ratio of mandated minimum wage to the average value added per worker? Rigidity of Hours Index Can the workweek extend to 50 hours (including overtime) for 2 months per year to respond to a seasonal increase in production? What is the maximum number of working days per week? Are there restrictions on night work? Are there restrictions on "weekly holiday" work? What is the paid annual vacation (in working days) for an employee with 20 years of service? Difficulty of Firing Index Is the termination of workers due to redundancy legally authorized? Must the employer notify a third party before terminating one redundant worker? Does the employer need the approval of a third party to terminate one redundant worker? Must the employer notify a third party before terminating a group of 25 redundant workers? Does the employer need the approval of a third party to terminate a group of 25 redundant workers? Is there a retraining or reassignment obligation before an employer can make a worker redundant? Are there priority rules applying to redundancies? Are there priority rules applying to re-employment? Firing costs (weeks of salary) What is the notice period for redundancy dismissal after 20 years of continuous employment? (weeks of salary) What is the severance pay for redundancy dismissal after 20 years of employment? (weeks of salary) What is the legally mandated penalty for redundancy dismissal? (weeks of salary) Memo: Overall rank in Doing Business Answer Score 63 89 1 1 0.67 60 0 0 1 1 1 40 0 0 0 1 1 0 1 1 30.3 4.3 26 0 134

Yes 24 0.65

Yes 6 Yes Yes 24 Yes No No Yes Yes No Yes Yes

--

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Annex 4: Non-Farm Enterprises in Madagascar

2005 Large Natio nal Percent of households with a NFE individuals in a HH with a NFE Months of Operation in a Year Average months Percent with 3 or fewer months year round Size Average number of workers Percent with 2 or fewer workers 3 to 5 workers 6 or more workers Percent with hired workers 26.6 27.3 Cities 35.7 38.4 2nd Cities 31.5 32.8 Rural 24.5 25.1 2001 Large Natio nal Cities 23.0 22.7 33.1 34.0 2nd Cities 26.3 26.9 Rural 20.8 20.4 Natio nal 3.6 4.7 Difference Large 2nd Cities 2.6 4.4 Cities 5.3 5.8 Rural 3.7 4.7

9.5 9.0 57.8

10.6 6.6 74.0

9.6 9.4 59.3

9.3 9.3 54.2

9.5 9.0 53.9

10.7 4.4 70.4

10.1 5.1 62.7

9.1 10.9 48.0

0.0 0.0 3.9

-0.1 2.2 3.6

-0.5 4.3 -3.4

0.2 -1.5 6.2

1.5 88.2 11.2 1.5 9.2

1.6 87.8 10.9 1.3 10.4

1.7 86.2 12.2 1.6 10.8

1.5 88.7 11.1 0.2 8.6

1.7 82.6 15.3 1.7 26.1

1.7 86.9 11.6 1.5 33.6

1.9 83.9 13.6 2.5 29.8

1.7 81.3 16.6 2.1 23.6

-0.2 5.6 -4.1 -0.2 -16.9

-0.1 1.0 -0.7 -0.2 -23.2

-0.2 2.3 -1.4 -0.9 -19.0

-0.2 7.4 -5.5 -1.8 -14.9

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Annex 5: Determinants of daily earnings for adults (15-64)

Table A: By occupational status
Variable dpendante = log (revenus journaliers ) Ec hantillon: adultes (15 64 ans ) Salari (no n-ag rico le) Heures de travail par jour Ex prienc e Ex prienc e au c arr Educ ation Sim ulation, d. prim aire Sim ulation, 1er c yc le s econdaire Sim ulation, 2nd c yc le s econdaire Sim ulation, post sec ondaire Simulation femm es Cons tante Nb d'observations R Entrepr ise non agr ic. (no n-salari) Heures de travail par jour Ex prienc e Ex prienc e au c arr Educ ation Sim ulation, d. prim aire Sim ulation, 1er c yc le s econdaire Sim ulation, 2nd c yc le s econdaire Sim ulation, post sec ondaire Simulation femm es Cons tante Nb d'observations R A gricultu re Heures de travail par jour Ex prienc e Ex prienc e au c arr Educ ation Sim ulation, d. prim aire Sim ulation, 1er c yc le s econdaire Sim ulation, 2nd c yc le s econdaire Sim ulation, post sec ondaire Simulation femm es Cons tante Nb d'observations R
D o nn es : EP M 20 0 1 & 20 0 5 N o te: L e s s im u la tion s de s r g ion s so n t incl us e s, m ais n e s o nt p a s m on tre s N o te: e s tim a tion s corrig e s p o ur la s le ctio n (Bo u rg u ign o n, F o urn ier e t Gurg an d , 20 0 7)

2005 Coef. Valeur T 0,027 0,035 0,000 0,232 0,480 0,693 1,054 -0,320 7,572 2 993 0,29 5,32 ** 5,70 ** -4,05 ** 5,65 11,03 14,23 21,18 ** ** ** **

2001 Coef. Valeur T 0,017 0,017 0,000 0,280 0,591 0,720 1,170 -0,285 7,799 2 558 0,32 3,53 * * 2,60 * * -0,95 5,94 11,59 13,20 21,44 ** ** ** **

Diffrenc e Coef. Valeur T 0,011 0,019 0,000 -0,049 -0,111 -0,026 -0,115 -0,035 -0,227 1,51 2,08 * -2,02 * -0,78 -1,66 + -0,36 -1,56 -0,84 -0,49

-10,89 ** 22,31 **

-9,77 * * 24,41 * *

0,025 0,012 -0,0003 0,116 0,260 0,428 0,715 -0,323 7,370 2 432 0,09

2,73 ** 1,26 -1,86 + 2,02 3,83 4,71 5,29 * ** ** **

0,034 -0,001 0,0000 0,200 0,255 0,579 0,758 -0,313 8,142 1 229 0,17

3,71 * * -0,08 -0,12 2,55 2,78 5,33 5,75 * ** ** **

-0,009 0,013 0,000 -0,084 0,005 -0,151 -0,043 -0,009 -0,771

-0,70 0,78 -0,92 -0,87 0,04 -1,07 -0,23 -0,12 -1,05

-6,77 ** 18,50 **

-5,35 * * 13,19 * *

0,002 -0,009 0,000 0,084 0,218 0,438 0,877 -0,023 7,932 17 266 0,09

0,54 -2,69 ** 3,39 ** 5,60 8,70 8,75 10,64 ** ** ** **

0,053 -0,017 0,000 0,251 0,371 0,674 1,114 0,002 6,942 5 077 0,18

9,18 * * -3,11 * * 2,79 * * 9,39 7,23 8,24 8,24 ** ** ** **

-0,051 0,008 0,000 -0,167 -0,153 -0,236 -0,237 -0,025 0,990

-7,61 ** 1,19 -0,59 -5,45 ** -2,69 ** -2,46 * -1,50 -0,99 6,90 **

-1,78 + 101,57 **

0,08 57,64 * *

Source: Stifel (2007) 55

Table B. By salariaux Table au 5.16: Dterminants des revenus Gender. quotidiens par ge nre 2005 Variable dpendante = log (revenus journaliers) Echantillon: adultes (15 64 ans) Hommes Femmes Diffrence Coef. Valeur T Coef. Valeur T Coef. Valeur T
Heures de travail par jour Exprience Exprience au carr Education Simulation, d. primaire Simulation, 1er cycle secondaire Simulation, 2nd cycle secondaire Simulation, post secondaire Constante Nb d'observations R
Donnes : EPM 2005 Note: Les s imulations des provinces s ont inclus es, m ais ne s ont pas m ontres Note: es timations corriges pour la slection (Bourguignon, Fournier et Gurgand, 2007)

0,026 0,025 -0,0002 0,306 0,514 0,713 1,072 7,857 2 325 0,31

4,63 ** 3,63 ** -1,96 * 7,33 11,32 14,04 20,81 ** ** ** **

0,039 0,055 -0,0008 0,167 0,485 0,833 1,264 6,257 1 453 0,30

4,69 ** 6,56 ** -5,52 ** 3,21 8,52 11,86 18,20 ** ** ** **

0,013 0,030 -0,0006 -0,139 -0,029 0,120 0,192 -1,600

1,32 2,78 ** -3,03 ** -2,08 * -0,40 1,38 2,22 * -3,70 **

27,21 **

19,49 **

Source: Stifel, 2007

56