Job Creation and Wages in Least Developed Countries: Evidence from Sub-Saharan Africa

Abstract Least developed economies are characterized by poorly functioning labour markets: only a small fraction of workers are in paid employment, where productivity and wages are low. We incorporate a standard search framework into a two-sector model of development to assess the importance of different obstacles to job creation and productivity. The model provides new insights into the characterization of poorly developed labour markets that are observed in the data, such as high wage dispersion. We estimate the model using microdata for six countries in sub-Saharan Africa and highlight the empirical relevance of labour-market frictions, entry costs and skills.