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Unleashing Potential: The Impact of Somalia's Low Labor Force Participation Rate on Economic Growth


Friday May 24, 2024
By Hussein Abdullahi Yusuf


The Labor Force Participation Rate (LFPR), as defined by the Somalia National Bureau of Statistics, quantifies the fraction of a nation's working-age populace, typically defined as individuals aged 15 years and above, who are actively involved in the labor market. This involvement encompasses both individuals currently employed and those actively seeking employment (i.e., the unemployed yet available for work). 

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In 2023, Somalia's working-age population, aged 15 years and above, amounted to 8.8 million individuals. Among them, 3.28 million were actively engaged in the labor force, leaving 5.6 million individuals outside of the workforce. Consequently, Somalia's labor force participation rate for that year stood at 34.9% in 2022.

Comparing this rate to neighboring countries reveals a significant discrepancy. Eretria, Tanzania, Ethiopia, Kenya, South Sudan, Uganda, and Rwanda boasted labor force participation rates of 80%, 82%, 82%, 74%, 72%, 71%, and 62%, respectively, see table 1.

Furthermore, the global labor force participation rate reached 60.8% in 2023. This data underscores Somalia's relatively low labor force participation rate compared to both its regional counterparts and the global average.

Table 1: Total Labor Force, Labor Force Participation rate, and Unemployment rate of Eastern African Countries.

Country

Labor Force (2023, in millions)

Participation Rate (2022)

Unemployment Rate (2023)

Somalia

3.28

34.94%

19.19%

Ethiopia

61.66

82.03%

3.33%

Kenya

25.5

74.07%

5.60%

Tanzania

31.22

82.32%

2.56%

Uganda

18.88

70.67%

2.85%

Rwanda

5.28

62.13%

14.95%

Djibouti

0.26

33.45%

26.28%

Eritrea

1.8

80.12%

5.85%

South Sudan

4.47

71.55%

12.04%

Sources: World Bank data, 2024.

Analyzing the trend of falling labor force participation rates in Somalia over the past decade (2012-2022) reveals a concerning decline.

The labor force participation rate, which stood at 35.47% in 2012, has experienced a downward trajectory, reaching 34.94% in 2022, indicating a decline of -0.53% over the period.

The low and declining labor participation rates in Somalia can be analyzed through several key factors:

1. Political Instability and Conflict: Persistent political instability and conflict spanning three decades have created an environment unfavorable for economic activity and investment, leading to a dearth of job opportunities.

2. Educational Barriers: Limited access to education and vocational training, evidenced by 2.9 million individuals aged 15 and above not enrolled in school in 2019, impedes skill development and readiness for the labor market, exacerbating unemployment.

3. High Unemployment Rate: The youth demographic faces disproportionately high unemployment rates, with 84.9%, 51.8%, and 25.8% of those aged 15 to 24, 25 to 34, and 35 to 44, respectively, not participating in the labor force, as reported in the Somalia Labor Survey.

4. Economic Structure: A significant portion (51.4%) of the labor force engages in the informal sector, which offers limited formal employment opportunities, contributing to low labor force participation rates.

5. Gender Disparities: Cultural and social norms that restrict women's participation in the workforce, with 62% of females aged 15 and above not engaged in labor force activities, particularly impacting prime-age women (20-44), further diminish overall labor participation rates.

6. Infrastructure Challenges: Inadequate infrastructure, including transportation, electricity, and communication systems, increases business costs and limits job creation, with Somalia's high electricity costs compared to neighboring countries hindering economic activities.

7. Health Issues: High prevalence of health problems and inadequate healthcare services decrease workforce productivity and participation, further constraining labor force engagement.

8. Insufficient Investment: Limited foreign and domestic investment impedes the establishment of businesses and industries, resulting in fewer job opportunities despite efforts to attract investment through policy measures.

9. Regulatory Environment: A complex and cumbersome regulatory framework hampers entrepreneurship and business formalization, reducing formal employment opportunities. Somalia's low ranking in ease of doing business underscores the need for regulatory reforms to foster a more conducive business environment.

The effects of nonparticipation in the labor force on society reveals significant implications, particularly concerning economic growth, Government revenue, family wellbeing and dependency ratio.

Low economic growth: This adverse impact on economic growth is evident in recent economic outlook reports, such as the one released by the International Monetary Fund (IMF) in April 2024. While Somalia's projected economic growth rate for 2024 stands at 3.7%, countries like Ethiopia and Rwanda are expected to achieve growth rates exceeding 6%. See table 2

Table 2: Real GDP growth rate of Eastern African Countries.

 

Real GDP

Annual Percent Change

Projections

Country

2024

2025

2029

Rwanda

6.9

7.0

7.3

Ethiopia

6.2

6.5

7.0

Uganda

5.6

6.5

7.0

Tanzania

5.5

6.0

6.6

South Sudan

5.6

6.8

5.8

Djibouti

6.5

6.0

5.5

Kenya

5.0

5.3

5.3

Burundi

4.3

5.4

5.0

Somalia

3.7

3.9

4.5

Sources: IMF, World Economic outlook April 2024

Rising Dependency Ratio: As the proportion of the population outside the labor force increases, the dependency ratio escalates. This places additional strain on the working population, necessitating the redistribution of economic resources through social and government transfer programs to support the growing number of dependents.

Reduced Family Well-being: The economic burden stemming from fewer active workers necessitates the dispersion of resources, resulting in diminished family well-being. With economic returns stretched thin, families may experience financial strain and a decline in living standards.

Impact on Poverty Rate: The strain on social welfare systems contributes to an escalation in the poverty rate. From 71% in 2017, the poverty rate climbed to 73% by 2023, based on the 2017 poverty line. This statistic underscores the challenges faced by families in maintaining adequate standards of living amidst the growing dependency ratio.

Moreover, the government faces a constricted tax base due to the dwindling labor force participation rate. This limitation severely impedes the government's capacity to generate revenue, as evidenced by the meager government revenue of 2.9% of GDP in 2023.

Addressing low labor participation rates in Somalia requires a multifaceted policy approach. To boost the Somali labor force participation rate, several policy solutions are proposed.

Firstly, investment in skills enhancement is crucial. This involves developing higher and adaptable skills in the workforce to meet evolving market demands. Additionally, increasing public spending on early childhood education and improving overall education quality is vital to equip individuals with the necessary skills and knowledge for employment.

Promoting female participation in the labor force is another key aspect. This can be achieved by boosting educational enrollment among young women and implementing measures to remove barriers to their participation.

Taxation reform is essential to incentivize workforce participation. Introducing reduced taxation on low-income jobs and individuals can alleviate financial burdens and encourage more people to join the labor force.

Supporting family caregiving arrangements is important to enable prime-age women to participate in the labor force while fulfilling caregiving responsibilities. Social reforms and awareness campaigns are also needed to encourage urban women's participation in economic activities.

To reduce unemployment levels, deliberate policies such as tax incentives for businesses to hire more workers and stimulate business expansion are necessary. Encouraging the establishment of small-scale manufacturing enterprises and discouraging imports can create job opportunities and promote local production.

Utilizing local labor for low-paying jobs and prioritizing employment opportunities in the industrial sector are also crucial. Additionally, improving agricultural productivity, supporting the growth of other sectors, and expanding vocational training schools are important measures to enhance employability and create job opportunities.

Investment in infrastructure development is essential to create an enabling environment for economic activities and job creation. Strengthening institutions and governance, enhancing transparency and accountability, and improving access to healthcare services are also important factors to maintain a healthy and productive workforce.




 





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