Wages Equal Productivity. Fact or Fiction? Evidence from Sub Saharan Africa

Summary If labor markets operate with only minor frictions, productivity premiums associated with worker characteristics should equal the corresponding wage premiums. We evaluate this for labor market experience, schooling, job tenure, and training using matched employer-employee data from the manufacturing sector of three sub-Saharan countries. Equality holds remarkably well in Zimbabwe (the most developed country in the sample), but not at all in Tanzania (the least developed), while results are intermediate in Kenya. Where equality fails, the pattern is for more general human capital characteristics (such as experience) to receive a wage return that exceeds productivity, while the reverse applies to more firm-specific characteristics (such as tenure). Localized labor markets and imperfect substitutability of worker-types provide a partial explanation.