The high costs of a job search can be a barrier to finding employment even in cities’ dense labour markets. This column reports evidence that cash constraints cause unemployed youth in developing countries to give up looking for good jobs too early. In Addis Ababa, Ethiopia, providing transport subsidies to young people has increased the intensity with which they look for work and has made them more likely to find permanent jobs.
Economists have long thought that cities play an important role in the effective functioning of labour markets. Yet young people in urban Africa typically spend long periods of time in unemployment or underemployment while looking for good jobs.
In principle, dense labour markets in cities should reduce the time taken for workers to find good matches. But these benefits can be mitigated by high transport costs when cities are badly planned. The rapid growth of African cities has often not come with corresponding investments in transport infrastructure or well-located housing, leading to congestion and an increasing number of people living on the outskirts of cities, far away from jobs.
Search costs are commonly understood to impose significant frictions on labour markets. Cash constraints could compound these frictions in poorly planned and sprawling cities if high transport costs make it particularly costly for the poor to invest optimally in a job search. Until now, there has been relatively little empirical work establishing causal links between search costs and employment outcomes, particularly in developing countries.
My study shows a causal link between the costs of transport required to look for work and individual employment outcomes. I use a randomised controlled trial of transport subsidies to test whether young jobseekers living far from the centre of Addis Ababa in Ethiopia are constrained in their ability to search for jobs. Transport subsidies cover the cost of travelling to the centre, but no more, in the way that a bus-fare subsidy programme would.
The study is designed around a striking feature of the labour market in Addis Ababa: formal job vacancies are advertised on physical job boards in just three locations in the city centre. Young people have to travel in person to these locations regularly if they want to find out about new jobs.
Providing free transport to the centre of the city increases the probability of finding a permanent job up to four months later.
Why is it that search costs constitute such a large barrier to finding good work? A one-way trip by minibus to the centre costs less than $1, but this constitutes 12% of the median weekly expenditure for individuals that took part in the study.
Are young people so short of cash that they simply cannot afford to pay these costs to search for a job? In fact, young people were shown to travel to the centre regularly to look for work, especially early on in the study. But as they ran short of cash, their search effort declined rapidly over time. Some became completely discouraged or took up work in the informal sector.
My research uses a weekly phone survey to track job search behaviour among the participants in the study. The results show that the transport subsidies can prevent young people from giving up job search too early, and this increased persistence translates into better jobs.
These findings suggest that cash constraints are stopping them from optimally investing in a job search. They would ideally want to borrow money to allow them to keep searching for work if they could, but they may find this difficult to do alone.
The results suggest a role for social insurance to support the unemployed during a job search. Labour markets could be made more efficient, as well as more accessible and equitable to a growing and aspirant urban population, through policies that reduce the costs of finding work. This could be done through improved and subsidised transport for the poor, including new light rail, bus rapid transit and urban road upgrades.
What’s more, online or mobile phone-based matching services or job search assistance programmes could play a direct role in improving matching between workers and firms. The findings also highlight the importance of encouraging denser, affordable urban housing, so that economically disadvantaged jobseekers can live closer to jobs and thus have better access to opportunities in growing cities.
Simon Franklin is a Postdoctoral Research Economist at the London School of Economics, at the Centre for Economic Performance, where he is part of a programme of research on Urbanisation in Africa.