Determinants of Labour Demand in Manufacturing Sector in Ethiopia

Job creation has become an urgent agenda for policymakers of many sub-Saharan African nations who are struggling with unemployment. Thus, this study has attempted to examine the determinants of labour demand in the manufacturing sector in Ethiopia using industry-level panel data containing 37,555 firms grouped into 100 industries with 919 observations over the period of 2002–2020. By using a two-step system generalised method of moments estimator, the study reveals that the real wage and product market competition difficulty impact the labour demand of manufacturing industries significantly and negatively, while the value of energy, locally sourced and imported raw material used as well as the output, fixed capital stock and labour demand first lag has a positive and significant effect, holding other factors constant. In addition to the lags of the endogenous variables, the pension of the worker contributed by the industries and the percentage of firms facing a high raw material shortage in the industries were used as external instruments to treat the endogeneity of real wage and output, respectively. The consistence of the results was checked by using the robust form of ordinary least square and fixed effect model estimations. In order to address the problem of raw materials shortage, it is suggested to provide incentives for agricultural production driven by industry needs. Policy interventions aimed at lowering the proportion of raw material imports are recommended due to the severe shortage of foreign currency. In addition, industries’ labour demand will rise as a result of fixed capital formation, improved energy provision and efficient consumption, and smoothing competition in the product market.