Understanding the labour market in Kenya

Paul Collier and Deepak Lal, Labour and Poverty in Kenya 1900-1980, Clarendon Press, Oxford, 1986, 296 pp., £27.50.

This book is part of a series of case studies on labour markets in developing countries. It supplies an enormous amount of historical and economic information on the labour market in Kenya, and at the same time applies a methodology to labour market analysis in developing countries with the aim of testing the neoclassical approach.

The first three chapters are on the historical development of the labour market in Kenya, which the authors divide into three different periods: coercion (1800-1948), compassion (1948- 1968), and competition (1968-1980).

During the coercion period Kenyan society was stratified along racial lines. The whites monopolized the export of agricultural commodities and the most important posts in the administration: the Asians were employed in the internal commerce and secondary roles in administration; and the Africans served as the unskilled labour both urban and rural.

The compassion period was characterized by the recognition of trade unions and the introduction of minimum wage laws and a protective labour code. In other words, the labour market was brought under institutional control, and a deliberate wage policy to modify income distribution was implemented.

The most recent period, competition, occurred during a period of rapid but uneven economic growth. Institutional control over the labour market was not abandoned, but the formal apparatus of regulation "gradually became a validation of market forces rather than a constraint upon them".

The historical background outlined, it is argued, not only allows a comparison to be made between different periods (i.e., comparative statistics), but also accounts for the dynamic forces relating one period to another. As followers of Sir John Hicks in methodology, the authors declare that their interest in economic history is confined to its implications for economic analysis.

The model presented starts from two assumptions about the "vital" processes for the development of Kenya. According to the authors, development is, first, connected to the efficient growth of smallholder agriculture, linked to investment and innovation rates. Second, it is connected to the efficient skill formation of the urban labour force. However, these two processes have been "attenuated" because of the wage policy implemented during the compassionate period. Wage policy has increased the urban-rural differentials, creating two main effects. While it has somewhat distorted urban wage structures, especially by reducing seniority premiums, it has also increased rural-urban migration.

While other studies on the Kenya labour market stress that this migration process involved an increase of urban poverty and unemployment, the authors underline that its main effect was to provide rural smallholders with the financial means to undertake the development process. Urban workers, thanks to the income shares they obtained because of the wage policy applied, were able to provide the resources for financing rural innovation, in the majority of cases on a family linkage basis. The flows of financial resources from urban workers to rural smallholders allowed innovation and investment in agriculture to take place.

In the latest period, the competitive rural-urban wage differentials were reduced. The returns from education fell, increasing the overall number of unskilled employees. However, the reduction in urban-rural wage differentials had a beneficial effect on skill formation at the firm level. While in the previous period the inter-urban wage differentials between senior and junior workers narrowed, reducing the incentive to acquire firm-specific skills, the reduction in wages for the urban unskilled workers again led to a seniority and skill differential, and therefore meant an incentive to acquire skills. Urban wage differentials, according to the authors, have proven to be a fundamental element in developing human capital.

The conclusions and policy implications of this analysis are direct. The authors believe in the functioning of the labour market as an equilibrating force. Wages are not considered rigid despite the imbalances in the demand and supply of different types of labour. The authors criticize alternative approaches: "The policy implications of the segmented labour market type view are grossly misleading. In this view these wage differentials do not serve any useful efficiency function, although they do determine the distribution of income. Hence, it is implied, public policy can and should squeeze these differentials, so that the resulting income distribution is made to conform to public preferences.... This conclusion would be as unwarranted as its premise. At least in Kenya, its post-war economic history provides an ample demonstration of the costs which are associated with the various wage policies aimed in part at affecting the income distribution."

Intervention in labour markets proved to be counterproductive. After their very detailed analysis, which includes recognition of the role of institutions (the authors argue that "trade unions serve an efficiency function, and to that extent would have to be invented if they did not already exist"), the policies they recommend do not differ from an ancient and well-known laissez-faire.

A last remark on the fact that the authors - who declare themselves to be new neo-classical economists - refer to the views of their opponents as "conventional wisdom". In present-day economics, it seems that "conventional wisdom" has become synonymous with "other school traditions" - whatever they are.

Daniele Archibugi