The Role of Unit Labor Costs in African Manufacturing Investment and Export Performance

>> Read paper published in Review of Development Economics

Abstract

Several studies have pointed out that manufacturing wages are relatively higher in African countries than in other countries at similar levels of development, and that this contributes to the continent’s lower levels of manufacturing competitiveness. This paper derives unit labor costs (ULCs)—average wages relative to productivity—for two-digit manufacturing sectors across a sample of 79 developed and developing countries, including 13 African countries, over the 1990–2015 period. We benchmark the ULCs to China and estimate the relationship between relative ULCs and manufacturing sector investment rates and export performance. We find that relative ULCs have a smaller association with exports in Africa relative to other developing regions. There is some evidence that investment responds to changes in relative ULCs in Africa; however, the estimated effects are smaller than in the full sample. Further, we find that for Africa, the level of labor productivity has a quantitatively stronger and more robust association with manufacturing performance than the level of real wages. The results have important implications for industrial policy in African countries.