There are two main explanations for the large differentials in earnings and pervasive
underemployment described above: 1) heterogeneous labour, with the preponderance of the
labourforce having low human capital and limited skills and 2) low demand for labour combined
with labour market segmentation. The labour heterogeneity argument claims that differences in
human capital and other worker characteristics explain income differentials. The segmentation
argument shifts the focus to the product markets with a shortage of good jobs, and rationing of
these jobs. It is important to ascertain which of these two explanations is relatively more
important in Africa, although of course both likely have some validity. If higher wages depend
on raising human capital then the focus of poverty-reduction strategies on education and health
in Africa is appropriate. If, however, low demand for labour originates in the product market,
improved educational attainments and health outcomes may not be sufficient to boost formal
employment, and the focus instead should be on the business climate.
There are two main explanations for the large differentials in earnings and pervasiveunderemployment described above: 1) heterogeneous labour, with the preponderance of thelabourforce having low human capital and limited skills and 2) low demand for labour combinedwith labour market segmentation. The labour heterogeneity argument claims that differences inhuman capital and other worker characteristics explain income differentials. The segmentationargument shifts the focus to the product markets with a shortage of good jobs, and rationing ofthese jobs. It is important to ascertain which of these two explanations is relatively moreimportant in Africa, although of course both likely have some validity. If higher wages dependon raising human capital then the focus of poverty-reduction strategies on education and healthin Africa is appropriate. If, however, low demand for labour originates in the product market,improved educational attainments and health outcomes may not be sufficient to boost formalemployment, and the focus instead should be on the business climate.
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