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Essays on Labour Economics in Developing Countries and the Role of the Public Sector

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Essays on Labour Economics in Developing Countries and the Role of the Public Sector Essays on Labour Economics in Developing Countries and the Role of the Public Sector Ravi Somani December 2018 A dissertation submitted in partial fulfilment of the requirements for the degree of: Doctor of Philosophy University College London Department of Economics University College London 1 Declaration I, Ravi Somani, confirm that the work presented in this thesis is my own.Where information has been derived from other sources, I confirm that this has been indicated in the thesis. Signature: 2 Abstract This thesis presents a study of the internal functions of public-sector organisations in developing countries and how public-sector hiring policies interact with the wider economy, using Ethiopia as a case study. The first chapter introduces the thesis. The second chapter provides empirical evidence on how public-sector hiring policies impact education choices and private-sector productivity. I study the expansion of universities in Ethiopia and find that it leads to an increase in public-sector productivity but a decrease in private-sector productivity. The findings are rationalised by the following labour-market conditions, consistent with most developing country contexts: (i) entry into public employment is favoured towards those with a tertiary education; (ii) the public sector provides a large wage premium; (iii) entry into public employment requires costly search effort. The third chapter uses novel survey instruments and administrative data to mea- sure the individual-level information that bureaucrats have on local conditions and a field experiment to provide exogenous variation in information access. Civil servants make large errors and information acquisition is consistent with classical theoretical pre- dictions. Bureaucrats have better information when: there are low costs of acquiring information; they are delegated authority over decision-making; there are organisational incentives to use operating information. The fourth chapter analyses the introduction of a management-information system, which provides civil servants better access to information on their local environment, in the education sector. I find that the intervention significantly improves certain service delivery outcomes (enrolment), while other outcomes (schooling conditions) sig- nificantly worsen, consistent with the existence of multitasking in the bureaucracy. The fifth chapter studies performance evaluations in the civil service. I use the dual-evaluation system in the Ethiopian civil service to measure supervisor bias and analyse its effects on service delivery, showing that supervisor bias is associated with efficiency losses in the public sector. The final chapter concludes. 3 Impact Statement Impacts Within Academia The analysis presented in this thesis uses new data on public officials and public-sector organisations that I helped design and implement. Existing research on the functioning public sector has been limited by lack of detailed information on the characteristics of public-sector workers, their working environment, and productivity measures [Finan et al., 2017]. Research on the effects that public-sector hiring policies have on the wider economy and attempts at defining the optimal public-sector wage premium have also been limited by detailed individual-level data on public-sector workers. For the purpose of this thesis, I collected individual-level data on the characteristics and performance of a representative sample of public-sector workers in Ethiopia across five sectors of the service to help fill this gap. Existing studies on the effects of expanding higher education have largely focused on developed country contexts, finding positive effects and leading to policy recommen- dations encouraging such expansions in developing countries [De Meulemeester and Rochat, 1995; Bloom et al., 2006]. The second chapter of this thesis (`Public-Sector Wages, Education Choices and Productivity') provides direct empirical evidence of the implications of expanding higher education in developing countries, taking advantage of new data on Ethiopian labour markets, including detailed information on the public sector, and a rapid expansion in public universities in Ethiopia. I provide evidence that such expansions can have negative effects for private-sector productivity under certain labour-market conditions, the first such evidence to my knowledge. Impacts Outside Academia Two chapters from this thesis (`Hierarch and Information' and `Does Providing Infor- mation to Civil Servants Improve Service Delivery?') have featured in the 2018 Ibrahim Forum Report on Public Service in Africa, which highlights the latest research on public services in Africa. The analysis from this thesis has also been part of a World Bank policy report titled `Moving Further on Civil Service Reforms in Ethiopia', which has formed the foundation for future reforms in the civil service in Ethiopia, currently being drawn up. The empirical evidence presented in the second chapter (`Public-Sector Wages, Edu- cation Choices and Productivity') highlighted a feature of labour markets in developing countries that was previously not documented { the fact that a large proportion of graduates in most developing countries are public employees. The significance of the 4 public sector for skilled labour markets in developing countries is important for de- signing education policy and public-sector hiring policies. This feature has now been incorporated in the Worldwide Bureaucracy Indicators published by the World Bank, as a result of this research.1 1https://datacatalog.worldbank.org/dataset/worldwide-bureaucracy-indicators [Accessed: 20th December 2018]. 5 Acknowledgements I would like to acknowledge my two main academic supervisors, Marcos Vera Hernan- dez and Antonio Cabrales, without whose guidance this research would not have been possible. Marcos has been the perfect primary adviser throughout my PhD { support- ing and challenging my research ideas, providing invaluable advice over the progression of my research, and generally guiding me towards becoming a researcher in the field of economics. Antonio has been the ideal secondary advisor: he has been the source of inspiration of many ideas and has given me encouragement and confidence throughout the PhD. I feel extremely lucky to have had the support of both. I am extremely grateful for my meetings with Fabien Postel-Vinay, who has helped me think in alternative ways about my research questions and has greatly supported my progression. I would also like to thank Imran Rasul for thoughtful meetings, helpful feedback, and critical advice over the course of the PhD. My research focus and development has greatly benefitted from the support of Dan Rogger, who has involved me in fascinating projects, provided me with crucial advice towards their advancenment, and has greatly helped me to develop into an applied economist that researches The Bureaucracy. In terms of funding, I am thankful to the Department of Economics at UCL for PhD scholarships. I am also thankful to the World Bank, the UK Department for International Development, and the International Growth Centre for project funding that allowed me to collect the data that made much of this research possible. In terms of access to data and institutional support, I am indebted to the Govern- ment of Ethiopia and its representatives, who have been an integral part of my entire research agenda and professional development. My research agenda grew from my experience as an economic advisor in the Ministry of Education, Ethiopia, through the Overseas Development Institute Fellowship. I am eternally grateful for this life-changing opportunity. 6 Contents 1 Introduction 10 1.1 The Importance of the Public Sector . 10 1.2 Existing Literature on the Public Sector and Contributions . 10 2 Public-Sector Wages, Education Choices and Productivity 14 2.1 Data Sources . 18 2.1.1 University Database . 18 2.1.2 Ethiopian Labor Force Survey (LFS) 2013 . 18 2.1.3 Ethiopian Labor Force Survey 1999 . 19 2.1.4 Ethiopian Civil Servants Survey 2016 (ECSS) . 19 2.1.5 Ethiopian Census 2007 . 19 2.1.6 World Values Survey (WVS) 2007 . 19 2.1.7 The Living Standards Measurement Survey (LSMS) . 20 2.2 Context . 20 2.2.1 Institutional Background . 20 2.2.2 The Education System in Ethiopia . 20 2.2.3 The Expansion in Higher Education in Ethiopia . 21 2.2.4 Labour Markets in Ethiopia: High-Skilled and Low-Skilled . 22 2.2.5 Migration and Mobility . 24 2.2.6 Public-Sector Hiring . 24 2.3 Theoretical Framework . 25 2.3.1 Costly Public-Sector Search and Educated Unemployment . 28 2.4 Identification . 30 2.4.1 `Exposed' and `Unexposed' Districts . 30 2.4.2 `Exposed' and `Unexposed' Cohorts . 31 2.4.3 Identifying Variation . 32 2.4.4 Validity Checks . 33 2.5 Results . 36 2.5.1 The Effect of the Expansion on Education Attainment . 36 2.5.2 The Effect of the Expansion on Employment . 38 2.5.3 The Effect of the Expansion on Wages and Productivity . 39 2.5.4 The Effect of the Expansion on Public-Sector Productivity . 42 2.5.5 Robustness . 45 2.6 Alternative Mechanisms . 46 7 2.6.1 Selection into Higher Education . 46 2.6.2 Public-Service Motivation and Ability . 48 2.6.3 Financial Constraints . 49 2.6.4 Effects on Consumption . 49 2.7 Conclusion . 50 3 Hierarchy and Information 95 3.1 Introduction . 95 3.2 Literature Review . 100 3.3 Measuring Information . 105 3.3.1 Institutional Background . 105 3.3.2 Survey of Public Officials . 107 3.3.3 What is the Appropriate Conception of Information in the Public Sector? . 109 3.3.4 Subjective Assessments of Public Officials . 111 3.3.5 Objective Assessments of Citizen Characteristics . 112 3.3.6 Measuring the Incentive Environment . 117 3.4 The Determinants of Superior Information in Hierarchy . 119 3.4.1 Basic Descriptives on the Determinants of Information . 119 3.4.2 Prediction 1: Formal Authority is Fundamental . 122 3.4.3 Prediction 2: Management Matters . 126 3.4.4 Information, Promotion, and Service Delivery . 129 3.5 Experimental Evidence on Information in Hierarchy . 130 3.5.1 Experimental Design for Investigating Prediction 3 .
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