Report: How Kenya's weak labour market hurts economy

Kenya Institute for Public Policy Research and Analysis (KIPPRA) Executive Director Dr Rose Ngugi speaks during the launch of a mentorship programme for university and technical and vocational training institutes at Meru University of Science and Technology. She said the programme was mean to nurture young professionals for national development. [Phares Mutembei, Standard]

As an employee, if you wake up tomorrow and your contract is terminated, your first instinct is to go into business.

It is the same instinct that has employees operating side hustles to supplement their main income.

These side hustles are not big but small businesses that are meant to either sell a service or resale and product and would rarely produce. If they do produce, it is not at scale as the owner is not at the level of industrialists Narendra Raval or Manu Chandaria.

A majority of them are also unregistered and operating informally. It could be a home bakery, an online clothing store supplied by Gikomba or a briefcase car broker or importer.

While these businesses, which fall in the services sector, do make an impact, a major one in some cases, on the financial health of those who own them, there are concerns that they could be the reason why manufacturing and agricultural sectors in the country are struggling to grow.

At the launch of the Kenya Economic Report 2024 authored by the Kenya Institute for Public Policy Research and Analysis (Kippra), a State-backed think tank, this issue was raised by the institute’s executive director Dr Rose Ngugi.

Dr Ngugi said the growth of the services sector has to some extent denied agriculture and manufacturing the much-needed labour. As a result, agriculture is still dominated by first-level skilled workers, who are mainly made up of primary education.

“The skills in agriculture are the first-level skills which mean we are dealing with primary schools and below the level of education,” she explained. “And for this education level, instilling new skills also becomes a challenge. We need to move along the line to the third and fourth levels.”

She explained that the reason behind this phenomenon is the youth, who are more educated and tech-savvy but have instead flocked to the services sector which is dominated by wholesale and retail businesses.

“In the composition of labour in agriculture, there is a significant decline in the proportion of youth. It has moved from 58 per cent in 1990 to 28 per cent in 2020 yet we know that it is the youth that also bring in innovation,” she said.

The Kenya Economic Report states that agriculture is a labour-intensive sector and would therefore require targeted interventions to make it more productive.

New perspectives

One of these interventions is the involvement of youth which the report says is important for two reasons: they bring new perspectives such as technology and it offers them employment opportunities which is a problem in the country.

Kippra says youth are more likely to adopt sustainable farming practices and technology, so a country can harness resilience in food systems.

“Evidence shows that the participation of the youth in agriculture has been declining over time. Youth labour in agriculture as a per cent of total youth declined from 58.88 per cent in 1990 to 28.47 per cent in 2020, a more than 50 per cent decrease. The same is true for the youth labour force in agriculture as a percentage of the total youth labour force,” the report says.

When it comes to the services sector, unlike the agriculture sector where 76 per cent of the labour force is first skill level, the report says the skills demographic is evenly distributed. “The services sector, including areas such as hospitality, finance, and healthcare, exhibits a relatively even distribution of skill levels, which reflects the skills composition within the services sector, with most of the workforce possessing skills at the first and second skills levels. This sector relies on a mix of basic, intermediate, and advanced skills,” the report says. The report explains that the second skill level refers to secondary school education, the third refers to vocational education while fourth is higher education.

For the services sector, 41 per cent, a majority of the labour force, fall into the primary education level. This means that while seven in 10 workers in the agriculture sector have primary level education, the number is four in 10 of those in the services sector.

Dr Ngugi pointed this out saying the majority of the country’s labour is in the wholesale and retail sectors. “On one side, is a good thing because you have something to earn your income. On the other hand, it is not good news because our services sector is poor. It is a poor sector because the kind of transactions done there are not of high value,” she said.

High technology

She said this reflects what’s going on in agriculture and manufacturing, noting that the services sector exists only as complementary to other key sectors namely manufacturing and agriculture hence more emphasis should be on the latter two. “Without high technology products in manufacturing, there is no way you can up your game in the services sector. What we are transacting (in the services sector as wholesale and retail) is not what you would expect a transformational agenda to be,” she said.

It explains why Kenya has a total of 7.4 million micro, small and medium enterprises (MSMEs) according to the Kenya National Bureau of Statistics (KNBS). These 7.4 million businesses are responsible for 14.4 million jobs.

However, estimations from the State Department for MSME Development indicate that there are about 18 million small businesses. It is here where the services sector thrives.

Kippra documents that the wholesale and retail trade sector contributed about 7.0 per cent of GDP in 2023. “This dynamic sector includes diverse entities, ranging from large corporations to Micro, Small, and Medium Enterprises (MSMEs). MSMEs account for over 80 per cent of employment generated (238,500 people). Additionally, it contributes a huge share of GDP (7.4 per cent in 2022),” the report says.

Other subsectors under services include transport, construction, furniture, hotels and restaurants. Agriculture is the sector that contributes the most to the country’s GDP at 21.8 per cent in 2023 according to the latest KNBS Economic Survey. KNBS Economic Survey considers the services sector critical.

“Kenya’s economy is projected to remain resilient in 2024, mainly supported by a robust services sector, strong performance in agriculture aided by anticipated adequate rainfall and a decline in global commodity prices that is expected to reduce the cost of production,” reads the KNBS Economic Survey report.

National Treasury and Economic Planning Cabinet Secretary John Mbadi noted that in 2023, the economy grew at 5.6 per cent catapulted by the rebound of agriculture. “But that economic growth is not creating jobs as we would want because a lot of the growth is in the informal sector - agriculture, which is largely informal, and also services sector,” he said in a separate insurance industry function.

He said there is a need to look at agriculture from a different perspective, not as an end to in itself but as a means to an end. “We need to have to have agriculture to support manufacturing then we would create more employment opportunities. That is the trajectory and vision of the government and my ministry,” he said.

According to the KNBS Economic Survey report, manufacturing, which is largely dependent on agriculture through the food industry, contributed 7.6 per cent to the GDP in the same period.

The Kippra report says that manufacturing is concentrated in low-technology, labour-intensive industries, including agro-processing and fabricated metals.

It adds that labour productivity is, however, low because of insufficient investment in research for development that restricts the ability of manufacturing industries to innovate, develop new products, and improve processes that are essential for enhancing productivity and competitiveness.

“Manufacturing firms rely mostly on employees with first and second level skills, which limits their ability to perform basic operation of machinery. As a result, the concentration on lower skill levels directly constrains labour productivity in the sector,” the report says.

Some of the policy recommendations in the Kippra report is improving this state of labour include upskilling employees with primary and secondary school education through the Industrial Training Levy Fund managed by the National Industrial Training Institute (NITA) and equipping and upgrading existing County Industrial Development Centres so that there can be an innovative culture for micro and small enterprises.

“I think it is important we enhance the level of expenditure that goes into research and development. Our commitment is at two per cent and we are yet to get there. We are slightly less than one per cent,” said Dr Ngugi.

National Treasury and Economic Planning Cabinet Secretary John Mbadi noted that in 2023, the economy grew at 5.6 per cent catapulted by the rebound of agriculture.

“But that economic growth is not creating jobs as we would want because a lot of the growth is in the informal sector - agriculture, which is largely informal, and also services sector,” he said in a separate insurance industry function.

He said there is a need to look at agriculture from a different perspective, not as an end to in itself but as a means to an end. “We need to have to have agriculture to support manufacturing then we would create more employment opportunities. That is the trajectory and vision of the government and my ministry,” he said.