Contracts and Wage Differentials in Cameroon Labor Market

Belmondo TANANKEM VOUFOMinistry of Economy, Planning and Regional Development

Cameroon

4th RDW Conference: Developing and Implementing Policies for a Better Future at Work (8-10 July 2015)

Geneva, 9 July 2015

OUTLINE OF PRESENTATION

1. Background2. Research objectives3. Theoretical background 4. Data and descriptive statistics5. Methodology6. Results and policy implication

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1. Background (1/2)

• Flexibility in labour use has become one of the key sources of competitive advantage for firms in the age of globalization.

• The degree of flexibility depends on many aspects of the labour market (employment contracts, wages, working hours and work organization).

• Regarding employment contracts, the increase of atypical contracts has generated a concern over its effects on labour market equilibrium.

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1. Background (2/2)

• In particular the relative situation of temporary workers has played a central role in the numerous studies carried out in the last years on fixed term jobs and their consequence in term of wages and employment vulnerability.

• Temporary jobs imply lower pay, reduce incentives for employers to provide trainings and limit employer’s opportunity for career progression and wage growth.

• Studies find that permanent workers earn around 10% to 15% more than temporary ones (Jimeno and Toharia, 1993; Davia and Hermanz, 2004).

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2. Research Ojectives (1/2)

• Temporary work and its labor market’s implications have been extensively studied in Europe (especially in Spain, Germany and the United Kingdom) and in United States. The question has been less explored in developing countries, where labor market regulation is a serious concern due to poor living conditions and scarcity of jobs.

• This study, focusing on a developing country (Cameroon), contributes to fill this gap. There is specificity in the Cameroonian labor market, as we can distinguish three types of labor contracts: Fixed-term contracts (FCTs), Indefinite-term contracts (ITCs) and Verbal agreements (VA).

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2. Research Ojectives (2/2)

• The aim of our study is to find out whether the wage differentials between the three types of workers (i.e. workers with ITCs, FTCs, and VA) are related to differences in the distribution of personal and job characteristics in both groups or they register different returns for the same features.

• Our study is restricted to salaried employees of the formal private sector, as most public-sector workers are civil servants, who by definition have indefinite contracts.

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3. Theoretical Framework (1/2)

• Neo-classical theorist : earnings differentials are the result of differences in productive efforts, ability or education. Thus, where the various types of contracts relate to differences in productivity, wage differentials would exist.

• Theory of compensating differentials (Rosen, 1974): since temporality implies uncertainty about future income and welfare loss, temporary workers should earn more than permanent ones in order to compensate for the higher degree of instability they assume.

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3. Theoretical Framework (2/2)

• Probationary period and a sorting mechanism for firms. Due to the lack of information about the real productivity of aspirants, to begin with, workers may be hired on fixed-term contracts and a lower wage with the probability of obtaining indefinite contracts once they have acquired experience in the firm (Abadía, 2014).

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4. Data and Descriptive Statistics (1/3)

• Our empirical analysis employs data from the Employment and Informal Sector Survey (EESI) carried out in 2010 by the National Institute of Statistics (INS). The EESI is a variant of the 1-2-3 system of surveys for which phase 3 on poverty is not carried out.

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4. Data and Descriptive Statistics (2/3)

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VA

FTC

ITC

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Affilated to social security

VA

FTC

ITC

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Trainning

VA

FTC

ITC

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Wage augmentation

VA

FTC

ITC

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Unionization

4. Data and Descriptive Statistics (3/3)Type of contract Raw wage gap

Amount (XAF) Percentage

ITC-FTC 60,895 36%

FTC-VA 45,551 42%

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0.2

.4.6

.8D

ensi

ty

8 10 12 14Log(Monthy Wage)

FTC workers

VA contract workers

kernel = epanechnikov, bandwidth = 0.2120

Kernel density estimate

0.2

.4.6

.8D

ensi

ty

6 8 10 12 14Log (Monthly Wage)

ITC workers

FTC workers

kernel = epanechnikov, bandwidth = 0.1957

Kernel density estimate

5. Methodology (1/2)• We first estimate a linear Mincer-type model of wage

determination for each group separately: W=βX+ƐWhere W is the logarithm of the monthly wage, X is a set of individual characteristics, β is the set of rewards associated to these characteristics and Ɛ is the error term.

• To take into account the endogeneity of the type of contract we use the correction model of Trost and Lee (1948);

• In the first stage, we estimate a multinomial logit model that represents a polytomous contract type choice. In the second stage, with the multinomial logit model estimates, a selection term for the alternative of temporary employment (λ) is generated and included among the explanatory variables of the wage equation.

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5. Methodology (2/2)

• Further, in order to identify the sources of wage differentials between groups of workers, we use the Oaxaca decomposition.

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• The first two terms are the unexplained part of the wage gap, which is assumed to be due to differences in wage setting behaviors of the two groups of workers. The third term is the part of the gap due to differences in the characteristics of workers (difference in education level, experience, occupation, etc.). The last term is the part due to selection. (βnd is the mean of the β among the three groups)

6. Results and policy implication(1/2)

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Wage gap decomposition results Components of the wage gap

ITC-FTC FTC-VA

Values Contribution (%) Values Contributions (%)

Endowments 0.366 133.30 0.333 62.85

Discrimination -0.456 -166.31 0.065 12.33

Selectivity 0.365 133.01 0.132 24.82

Total 0.274 100.00 0.531 100.00

6. Results and policy implication(2/2)

• There are a number of policy prescriptions which derive from our results. Our results thus reveal that VA contract workers are very vulnerable. Not only they have the worst endowments, but they also register low returns to their characteristics. The authorities should consider legislation and regulation of verbal agreement contracts.

• There is also a failure to respect the Labor Code provisions concerning Fixed-term contracts. Indeed, a FTC cannot be concluded for a more than two years period, and cannot be renewed several times. It however appears that 12.8% of workers having from 6 to 10 years of seniority in the firm or more than 10 years of seniority (9.0%) have a Fixed-term contract. The National Observatory of Labour should then pay more attention on the effectiveness of the application of Labor Code provisions concerning Fixed-term contracts.

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THANK YOU FOR YOUR KIND ATTENTION

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