What’s Wrong With Ghana’s Economy – Only 2% Of Employment Is In Formal Sector

We may or may not want to take as precisely accurate this estimate of the employment in Ghana’s formal economy – only 2%. This is, note, the percentage of the those entering the labor market each year, not the average over all age cohorts. But if this is anything like accurate, to within even an order of magnitude, then we can easily diagnose what is wrong with Ghana’s economy. Wages are too high, regulation and taxation of business is too great. That’s why jobs and incomes are created outside that sector which is so regulated.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] The National Entrepreneurship Innovative Plan (NEIP), has revealed that, just two per cent of the 250, 000 Ghanaians who enter the labour market annually are employed in the formal sector, yearly. This disclosure was made by Mr. Franklin Owusu Karikari, the Director for Business Support for NEIP at an entrepreneurship awareness program at Sunyani over the week. [/perfectpullquote]

Sure, it’s great that there’s regulation of the business sector. That companies don’t maim their employees, that people gain access to paid holiday and all that. Equally, we do want business to be paying at least some taxation – even if only user fees – for the public goods they enjoy. And there’s nothing wrong with a societal attempt to make sure that all have incomes, even that work pays.

But all such has to be tempered with a realisation of how much of all these good things can be afforded. And if we’ve got that formal, regulated and taxed, sector producing near none of the employment in the economy then we’ve a good sign that we’re asking too much of it. People just won’t employ labour under those conditions and costs. Therefore no one does.

Note what does then happen – everyone works in the informal sector where they gain none of those protections and government gains no revenue either. This is, in a manner, just the Laffer Curve again in a different guise. We normally think of this as being if tax is too high then a lower rate will gain more revenue. But here we’re stating that if the cost burden of legal employment is too high then a lower such burden would increase the level of formal employment. It’s the same concept.

The Ghanaian economy is simply burdened with costs that are too high. Relaxing that taxation, those workers rights and protections, would expand the formal economy at the cost of the informal. That is, more people would gain some protection, the average level of protection would rise, if the level demanded were lower.

We could even say that it’s possible to have too high a minimum wage, too high a level of worker protection.