Labor Market. Kazakhstan. Jobs. Issue No. 4. Achievements and Remaining Challenges. Victoria Strokova, Angela Elzir and David Margolis

Transcription

1 Public Disclosure Authorized Jobs Series Issue No. 4 Public Disclosure Authorized Public Disclosure Authorized Labor Market Outcomes Kazakhstan Victoria Strokova, Angela Elzir and David Margolis Public Disclosure Authorized Achievements and Remaining Challenges

2 2016 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC Telephone: ; Internet: Some rights reserved This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) commons.org/licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Attribution Please cite the work as follows: Victoria Strokova, Angela Elzir and David Margolis Kazakhstan Labor Market Outcomes: Achievements and Remaining Challenges. A note prepared for Kazakhstan s Jobs: Sector Specific Analysis (a product of the Joint Economic Research Program). World Bank, Washington, DC. License: Creative Commons Attribution CC BY 3.0 IGO Translations If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third-party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to re-use a component of the work, it is your responsibility to determine whether permission is needed for that re-use and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: ; pubrights@worldbank.org.

3 Contents 1. Introduction 1 2. Jobs and Productivity 3 3. Demographics and Labor Market Outcomes 7 Employment and Unemployment Determinants of Activity and Employment Type Determinants of Wages Access to Jobs 21 Impact of Labor Markets on Poverty Labor Market Outcomes of the Bottom 40 Percent Challenges Ahead and Policy Implications 30 Annex A: Additional Tables and Graphs Annex B: Methodology and Additional RESULTS on Informality Annex C: Methodology of the Bottom 40 percent ANALYSIS and RESULTS Annex D: Methodology and RESULTS of the Earnings ANALYSIS References iii

4 Acknowledgments This note was prepared by Victoria Strokova (Economist, Jobs Group, co-task Team Leader), Angela Elzir (Junior Professional Associate, Jobs Group), and David Margolis (Consultant, Jobs Group), with contributions from Aida Imanbekova (Consultant, Jobs Group), Aizhan Shamurzaeva (Consultant, Jobs Group), Aizhan Imasheva (Consultant, Jobs Group), Chengyan Gu (Consultant, Jobs Group), Shafique Jamal (Consultant, Jobs Group), and Judy Yang (Economist, Poverty and Equity). Valuable comments and guidance were received from Namita Datta (Senior Private Sector Development Specialist, Jobs Group, co-task Team Leader) and Thomas Farole (Led Economist, Jobs Group). The note is a product of the Joint Economic Research Program. The team worked with close guidance from David Robalino (Practice Manager, Jobs Group) and Naveed Naqvi (Program Leader, Human Development and Jobs, Central Asia). Peer reviewers were Roberta Gatti (Lead Economist, Social Protection and Labor), Christos Kostopoulos (Lead Economist, Macroeconomics and Fiscal Management), and Steven R. Dimitriyev (Lead Private Sector Development Specialist, Trade and Competitiveness). The work was carried out under strategic guidance from Saroj Kumar (Country Director), Francis Ato Brown (Country Manager, Kazakhstan), and Ludmilla Butenko (Former Country Manager, Kazakhstan). iv

5 1. Introduction This note presents a detailed analysis of jobs in Kazakhstan at the macro and individual levels, including regional and socio-economic disparities. At the macro level, 1 it includes a diagnostic of the links between economic growth, jobs, and productivity across different economic sectors. At the individual level, 2 the analysis focuses on labor market outcomes of women and men, young and adult workers, residents of urban and rural areas, and people in the bottom 40 percent of the consumption distribution. 3 It also presents a detailed analysis of determinants of employment and wages. The results show that economic growth over the past decade has led to sustained job creation and rapid poverty reduction. The country has benefited from the global commodities boom to become one of the top 10 fastest growing economies in the world, achieving annual real per capita income growth of close to 7 percent. Kazakhstan is also characterized by strong labor market performance, even during periods of economic slowdown, with high labor force participation rates, low inactivity, and low unemployment. Increases in real wages have been the main contributors to poverty reduction from 80 percent in 2001 to 15 percent in 2013 (measured by the PPP- corrected US$5 per capita per day). Prosperity was also shared over this period since the growth in consumption of the bottom 40 percent of the population outpaced that of the top 60 percent, resulting in upward mobility and a growing middle class. 4 However, the economy remains highly natural resource-dependent and the concentration in capital intensive sectors means that the impact of growth on jobs remains relatively weak. Despite impressive strides, diversification remains a challenge for the country, with minerals, oil, and natural gas accounting for 73 percent of exports and 39 percent of GDP, which has important implications for the number and types of jobs being created. In particular, the dominance of capital-intensive extractive sectors in economic production has implications for the scale of job creation. As a result, the impact of growth on jobs remains relatively weak. Between 2003 and 2013, real GDP grew on average by 7 percent per year while employment expanded only by about 2 percent per year. Furthermore, Kazakhstan faces the same competitiveness challenges as other resource rich economies. Some of the labor market outcomes, such as the expansion of employment in low-productivity non-tradable sectors (construction, services, etc.), can be attributed to the fact that domestic production of tradable goods remains uncompetitive. Consequently, even though Kazakhstan experienced productivity-enhancing structural changes, jobs continue to be concentrated in low productivity activities. The concentration of investments in capital-intensive sectors means that the impact of growth on jobs remains relatively weak. In fact, while the sector with the largest relative decrease in employment was agriculture (below average productivity), there was little increase in the share of employment in high labor productivity sectors (mining and real estate activities). The main contributors to employment growth were low and below average productivity sectors, such as construction, education, wholesale and retail trade. Despite some reallocation 1 This analysis uses national accounts data and official government statistics on employment and utilizes a recently developed JobStructure tool. 2 This analysis utilizes most recent data for Kazakhstan: the Labor Force Surveys (LFS) for and the Household Budget Surveys (HBS) for The definition of bottom 40 percent (B40) or top 60 percent (T60) refers to the distribution of per capita household consumption, in which individuals are ranked by the expenditure of their household, deflated by regional price indices, based on data available in the 2011, 2012 and 2013 Household Budget Survey. Consumption aggregate used is the one developed by the ECAPOV team. 4 Azevedo, Joao Pedro, Sarosh Sattar, and Judy Yang. (2015). Kazakhstan Economic Mobility and the Middle Class ( ). Manuscript in progress. 1

6 of labor in the last decade, a large share of the workforce remains in low productivity employment, particularly in agriculture. Self-employment remains relatively high at almost 30 percent of all employed. 5 There are important variations in labor market outcomes and wages across regions and between different population groups, potentially exacerbated by limited geographic mobility. While there are relatively small differences in labor force participation rates across regions and different population groups, there are major gaps in access to different types of employment. Individuals in the bottom 40 percent of the consumption distribution are more likely to live in lagging (mostly agricultural) regions, are more likely to be unemployed, or work in low productivity jobs, particularly as self-employed or personal farmstead workers. 6 There are also important differentials in wage earnings across sector and regions, and by educational attainment, age and gender. These large wage differentials, especially across regions and sectors, indicate some constraints to labor mobility. Removing some of these constraints or lowering individual costs of mobility could help improve access to better jobs. One of the important factors to ensure access to better jobs among the bottom 40 percent of the population is education. The education gap between individuals in the bottom 40 and top 60 percent of the consumption distribution may grow in the future. Although tertiary education has become more prevalent in the population, the gap in educational attainment between the bottom 40 and top 60 percent has widened in more recent generations. As the older generations leave the workforce and the younger ones enter, the skills gap is expected to widen. Therefore, improving the educational attainment and skills of those in the bottom 40 percent could allow them to access higher productivity, better paid jobs. Improving the relevance and quality of education overall is also needed so new entrants into the labor market can convert educational attainment into better skills and higher earnings. Economy-wide institutional reforms continue to be needed to enable private sector job creation and diversification. 7 While Kazakhstan has made impressive improvements in several areas, it remains critical to continue to improve the business environment. This includes reforming laws and regulations to address the specific obstacles faced by enterprises in different sectors; further strengthening the rule of law and improving the quality and effectiveness of service delivery; making room for the private sector and encouraging competition; improving the performance of the financial sector; and institutionalizing a professional and merit-based civil service. 8 It is important to note that a comprehensive government reform program called 100 Steps was announced in 2015 with the aim to tackle some of these issues. In addition, Kazakhstan could consider additional regional and sectoral policies targeted to the bottom 40 percent of the population. Broad-based policies that promote investments into the private sector are fundamental, but the relationship between overall investment and jobs is complex, not always resulting in the types of jobs that may benefit the bottom 40 percent or create jobs for the older workers or the highly skilled. While the government has been promoting investments in particular sectors, they are primarily targeted at relatively low labor intensity sectors (manufacturing) or the construction sector which mostly creates temporary jobs. Going forward, in addition to the broad-based reforms, Kazakhstan could consider more targeted policies that aim to promote jobs for specific population groups in given regions. These policies would seek to address barriers to job creation in particular sectors and regions and complement economy-wide policies. The rest of the note is organized as follows: Section 2 discusses the relationship between economic growth, jobs, and productivity across different economic sectors. Section 3 discusses demographic trends and overall labor market outcomes. Section 4 focuses on assessing spatial and sectoral differences in access to jobs, including for those in the bottom 40 percent. Section 5 concludes with a discussion of challenges and broad policy implications. 5 While this share is actually not too high for low and middle income countries, it is almost twice as high as the average of the countries in the Organization of Economic Development and Cooperation (OECD) (16.8 percent) and is higher than the Europe and Central Asia (ECA) average of 20 percent. 6 Personal farmstead is defined as work on personal plots of land, either for self-consumption or trade/barter, or both, for at least one hour during the reference week. 7 World Bank Beyond Oil : Kazakhstan s Path to Greater Prosperity through Diversifying, Volume 2. Main report. Washington, DC. 8 Ibid. 2

7 2. Jobs and Productivity Strong economic growth in the past decade has contributed to robust employment gains, although the employment-growth elasticity has been low by international standards. Between 2003 and 2013, the economy has added 1.5 million jobs. During this period, real GDP grew on average by 7 percent per year, while employment expanded by about 2 percent per year (Figure 1). This implies an elasticity of around 0.28, which is lower than the average for Europe and Central Asia (0.48) and OECD countries (0.5) (Figure 2). In fact, in 2013, employment grew by just 0.7 percent compared to 2012, while GDP grew 6 percent in real terms. Figure 1 GDP and employment growth, Figure 2 Employment-growth elasticities, Employment growth (annual %), % +" # 7% *" #, -. /#0123/-. /4# #" :;#%!! &<%! $&#66=# 6% ) " # 5% ( " # 4% ' " # 3% &" # 2% %" # 1% $" # KAZ 2% 4% 6% 8% 1 12% 14% 16%! " #! " # %" # ' " # ) " # +" # $! " # $%" # $' " # $) " #, -. /#>>? # #" :;#%!! &<%! $&#66=# GDP Growth (annual %), Source: Authors calculations using World Development Indicators. Chile Canada Australia Brazil Kyrgyz Republic Tajikistan Malaysia Uzbekistan Armenia Korea, Rep. USA Kazakhstan Azerbaijan Russia Turkmenistan Ukraine China Georgia OECD members ECA Source: Authors calculations using World Development Indicators. Growth has been sufficient to create jobs, as the growth of employment was growing at a faster rate than the growth of the labor force. In the majority of countries, employment has been growing as fast as the labor force (Figure 3). However, in Kazakhstan, employment growth has been higher (2.1 percent) than the labor force growth (1.7 percent) between 2003 and As a result, unemployment has decreased during this period, as discussed in detail later. Employment gains were driven by the services, construction, trade, and the education sectors. During , employment expanded in construction (contributing 21 percent of the total increase in employment), wholesale and retail trade (15 percent), education (18 percent): transportation and warehousing (10 percent), and other services (35 percent). Employment in manufacturing increased by 15 percent but contributed only 4 percent to employment gains. Employment 3

8 Labor force growth (annual %), Figure 3 Employment and labor force growth, )"!#$ 3.5% ("%#$ *+,-.$/-.01$2.-345$ $#:;$'!!(<'!&($ 3. ("!#$ 2.5% '"%#$ 2. '"!#$ 1.5% &"%#$ KAZ 1. &"!#$ 0.5%!"%#$ 0.!"!#$!"!#$!"%#$ % &"!#$ &"%#$ '"!#$ '"%#$ ("!#$ % % 3. =-4+9$1>?9-@1A$2.-345$ $#:;$'!!(<'!&($ ("%#$ )"!#$ 3.5% 4. Total employed growth (annual %), Source: Authors calculations using World Development Indicators. in the public administration and social sectors (such as health and education), both of which have a high share of public employment, contributed almost a third of employment increases during this period. Agriculture was the only sector that contracted, declining in absolute terms by 14 percent. Overall, reallocation of employment away from agriculture toward services progressed at a relatively slow pace, while job creation in industry was very low (Figure 4). The sectors with the highest elasticity of employment to value added during the same period were construction and education; while the lowest was wholesale and retail trade9 (Figure 5). Figure 4 Trend in employment by sector, Figure 5 Employment-growth elasticities by sector, Construction Education 2.5 Transportation, storage and communications Millions 2.0 Human health and social work activities Manufacturing 1.5 Public administration and defence 1.0 Mining and quarrying Wholesale and retail trade 0.5 Agriculture, forestry and fishing (1.5) (1.0) (0.5) Agriculture Mining Construction Public and social Other services Manufacturing Source: WEO; Authors calculations using data from the Statistical Committee of RK. Trade Source: WEO; Authors calculations using data from the Statistical Committee of RK. 9 Given increasing output, low employment-growth elasticity could indicate increasing labor productivity, which is discussed next _Kazakhstan Labor Market.indd 4 6/2/17 12:08 PM

9 Growth in labor productivity has been the main contributor to GDP per capita growth. In Kazakhstan, GDP per capita grew by 9.1 percent annually between 2003 and Growing employment and participation contributed positively, albeit marginally (0.46 and 0.37 percent, respectively), to the growth of per capita GDP. The bulk of the per capita value added growth came from increases in labor productivity (8.33 percent). The slightly declining share of the working age population contributed negatively to GDP per capita growth, but by a very small amount (0.06 percent) (Table 1). Table 1 Decomposition of growth in per capita value added, Period: 2003 to 2013 % of Total Change % Yearly Contribution to Growth Change Change in per capita value added due to changes in productivity due to changes in employment rate due to changes in participation rate due to changes in share of working age population Source: Authors calculations using JobStructure tool and data from Statistical Committee of RK. Labor productivity growth has been driven mainly by the wholesale and retail trade as well as the mining sector. The decomposition of value added per worker changes shows that the majority of labor productivity growth came from within sectors, such as mining and wholesale and retail trade, which contributed approximately 22 and 23.4 percent, respectively (Table 2). Other activities 10 and manufacturing contributed an additional 17.5 and 7.6 percent, respectively. Agriculture contributed only 4 percent to labor productivity growth. Intersectoral shifts (i.e. changes in productivity due to reallocation of workers from less to more productive sectors) contributed about one fifth to overall labor productivity growth. 10 Other activities include the following sectors: public administration; education; health, public utilities; finance and insurance; real estate activities; accommodation and food services; professional, scientific and technical activities; arts, entertainment and recreation; and administrative and support service activities. 5

10 Table 2 Decomposition of value added per worker into sector changes and inter-sectoral shifts Period: 2003 to 2013 Change % Contribution Agriculture Mining & Utilities Manufacturing Construction Wholesale & Retail Transport & Communications Other Activities Not Defined Intersectoral Shift Total change in productivity (value added per worker) Source: Authors calculations using JobStructure tool and data from Statistical Committee of RK. While Kazakhstan has experienced some productivity-enhancing structural changes, a large share of the population continues to be employed in low productivity sectors. Despite a significant reduction in the share of employment in agriculture (10 percentage points between 2003 and 2013), there are still about 2 million people, or a quarter of all employed, who remain engaged in this sector. Furthermore, many of the other sectors that increased their share of employment, such as construction and education, also have below average productivity (Figure 6). As a result, overall labor productivity remains low, especially for the non-oil sectors, and compared to countries with similar GDP per capita levels. 11 Figure 6 Sectors and structural change in Kazakhstan, Log (sectorial productivity/total productivity), Real estate activities 0.8 Mining Manufacturing 0.2 Financial & insurance Transportation & communication Wholesale & retail trade Other % 1 8% 6% 4% 2% 2% 4% 6% 0.2 Construction Accommodation & food service Public administration & defence 0.4 Health & social work Agriculture Education 1.0 Note: The size of the bubble represents the sectoral employment shares in Source: Authors calculations using data from Statistical Committee of RK. Change in employment share, World Bank Beyond Oil : Kazakhstan s Path to Greater Prosperity through Diversifying, Volume 2. Main report. Washington, DC. 6

11 3. demographics and Labor Market Outcomes Demographic trends have important implications on the labor market. In Kazakhstan, fertility rates dropped significantly in the 1990s and early 2000s. Fertility increased sharply starting in 2005 and peaked in 2010 at 2.5 children per woman, constituting a short baby boom period. Fertility subsequently started to decline and is projected to continue decreasing to the levels of the early 2000s (2 children per woman). These trends affect the size of the working age population and, therefore, of the labor force (Figure 7). Figure 7 Trend in fertility, population pyramid (2010 and 2050) in Kazakhstan Total fertility (children per woman) Males Females Males 2050 Females Age Source: UN projections. 7

12 At the same time, labor force participation rates are already high in Kazakhstan and unlikely to contribute much more to labor force growth. Almost 78 percent of men and 68 percent of women aged 15+ participate in the labor market. 12 While women participate less than men, the share of women participating in the labor force is very high by international standards (Figure 8 and Figure 9). The share of individuals who are not in employment, education or training (NEET) is low throughout age cohorts, including among youth, with the exception of people aged as they retire (Figure 10). The number of youth entering the labor market increases sharply between the ages of 18 25, after which the activity rate flattens (Figure 11). Around two-thirds of workers exit the labor market between the ages of 60 and 64. Women tend to exit the labor force earlier due to lower retirement ages. 13 Figure 8 Male labor force participation rates, 2013 Figure 9 Female labor force participation rates, 2013 Moldova Belarus Ukraine Lithuania Latvia United States Estonia Azerbaijan Canada Russian Federation Australia Armenia Chile Georgia Malaysia Uzbekistan Turkmenistan Tajikistan Kazakhstan China Kyrgyz Republic Mexico Moldova Malaysia Mexico Turkmenistan Uzbekistan Chile Belarus Ukraine Armenia Latvia Lithuania Kyrgyz Republic Estonia United States Georgia Russian Federation Australia Tajikistan Canada Azerbaijan China Kazakhstan Source: WDI (labor force participation rate, 15+); Statistical Committee of RK. Source: WDI (labor force participation rate, 15+); Statistical Committee of RK. 12 In 2013, 82.5 percent of men and 75.5 percent of women of working age, defined as those years old, were in the labor force. 13 Until recently, retirement ages were 63 years old for men and only 58 for women. However, in 2013 a law was signed gradually increasing the retirement age for women from the current 58 to 63 years old within a decade. 8

13 Figure 10 Status of working age population by age, 2013 Figure 11 School to work transition, Overall Age $!!"# 9,!"# 8 +!"# 7 *!"# 6 )!"# 5 (!"# 4 '!"# 3 &!"# 2 %!"# 1 $!"#!"# 15 $(# 16 $)# 17 $*# 18 $+# 19 $,# 20 %!# 21 %$# 22 %%# %&# %'# 25 %(# 26 %)# %*# %+# 29 %,# 30 &!# - Age. /0123# Employment Unemployment Inactivity NEET Employment Unemployment Inactivity # 98/01:.3578# ;81<3=>578# Due to the fall in fertility in the 1990s and constant participation rates, the growth of the labor force in the next few years is expected to be much slower. Kazakhstan will experience a relatively slow growth in the labor force 14 in the next few years (Figure 12). In fact, while the labor force grew by 1.5 percent annually in , it is projected to increase only by 0.5 percent annually in , which means that it will increase by less than 60,000 persons per year. As a result, the pressure on the labor market may be reduced in the short run. 15 The growth rate of the labor force will peak around 2030 when the baby boom generation enters the labor market (Figure 12). This will mean that annually, the labor force will grow by as many as 135,000 people, requiring a much faster job creation pace during that period. Figure 12 Projected labor force growth, , , , ,000 80,000 60,000 40,000 20, ,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Thousands y/y LF increase, left axis Cumulative LF increase, right axis Note: For working age population of 16+, assuming 72 percent labor force participation rate. Source: Demographics projections and trends in working age population and labor force are based on the Statistical Committee of RK. 14 Assuming constant labor force participation rate of 72 percent. 15 Assuming the current deterioration of the economic situation does not lead to a significant drop in job creation and a spike in unemployment. So far the impact of the crisis on the labor market has been limited (World Bank Biannual Economic Update, 2015), but simulations presented later in the note indicate that unemployment may increase somewhat by 2020 should current economic trends persist. 9

14 External migration flows remain relatively low, especially in comparison to the 1990s. Compared to the 1990s, migration flows have decreased dramatically in Kazakhstan. Estimates for official inflows and outflows are less than 30,000 persons per year, even though unofficial migration could be higher. It should be noted that during this period Kazakhstan has been actively pursuing a policy of encouraging repatriation of ethnic Kazakhs living abroad. Almost a million (944,500) ethnic Kazakhs immigrated to Kazakhstan during , which helped to smooth the decrease in the demographic growth observed in the country in the 1990s. 16 While migration trends may change in the future, 17 the impact of external migration on the labor market remains relatively low (Figure 13). Figure 13 Official migration flows in Kazakhstan, Thousands of persons Emigrants Immigrants Source: Economic Research Institute. Employment and Unemployment Employment rates have been traditionally high in Kazakhstan, especially for women, and unemployment has been declining steadily. The employment rate 18 was 75 percent for men and 63 percent for women in 2013, which are very high levels by international standards. 19 Employment rates are slightly higher in rural areas (Figure 14). As a result of the rapid growth in the number of jobs, the unemployment rate was halved between 2001 and 2013, from 10.4 to 5.2 percent (Figure 15). Long-term unemployment remains very low. The unemployment rate is slightly higher among women (5.9 percent compared to 4.6 percent among men) and urban areas (5.4 percent vis-a-vis 4.9 percent in rural areas) (Figure 14). The recent economic slowdown has not yet affected employment in any significant way, with the unemployment rate holding steady at 5 percent in the first quarter of Source: Economic Research Institute. 17 For instance, a slowdown in neighboring countries may increase the number of labor migrants coming to Kazakhstan. 18 Calculated as the number of employed divided by the number of working age population (15+). 19 Figure 44 in Annex A. 20 Data from the Statistical Committee of RK for Q1 of

15 Figure 14 Labor force status in working age population, 2013 Figure 15 Unemployment rates, % % 1 5% Unemployment rate, % Youth unemployment rate, % (15 24 years) Overall Male Female Urban Rural Long- term unemployment, % Employment Unemployment Inactive Source: Statistical Committee of RK. Note: Working age = years of age. While unemployment among year olds decreased dramatically, younger people (aged 25 34) do have somewhat higher unemployment rates. Youth unemployment fell drastically from almost 20 percent in 2001 to just under 4 percent in 2013, which can be attributed in large part to increasing enrollment in tertiary education. 21 However, younger people aged and do have somewhat higher unemployment rates (approximately 7 percent compared to a national average of 5 percent) (Figure 16). Even controlling for other characteristics, this age group is more likely to be unemployed. Similarly, unemployment is slightly less likely among males and the more educated (those with upper secondary and tertiary education) (Table 5 in Annex A). Those living in urban areas are also slightly less likely to be unemployed. Figure 16 Unemployment rates by age, % 7% 6% 5% 4% 3% 2% 1% Tertiary enrollment (gross) increased from 29 percent in 2000 to 45 percent in 2012 (WDI). 11

16 While the majority of workers are wage employees, self-employment still remains relatively high. Although there has been a gradual shift from self- employment toward wage employment, the share of self-employment remains high at 29 percent of the employed (Figure 17) and more than half of them (52.5 percent) are working in agriculture. In contrast, the share of self-employed is about 20 percent in ECA countries and 16.8 percent among OECD countries. 22 Wage employment has increased from about 61 percent of total employment in 2003 to about 66 percent in 2013, mirrored by a decrease in the number of self-employed. Wage employment is significantly lower in rural areas (55 percent). Most of the difference in employment between rural and urban areas is due to personal farmstead employment, 23 although own-account workers and employers are also relatively more frequent in rural areas. The share of public employment 24 among wage employees is also high at 42.3 percent reflecting the big role, albeit decreasing, 25 that the state continues to play as an employer. Figure 17 Overview of the working age population in Kazakhstan, 2013 Public 2.5m; 42.3% Active 9.0m; 72.1% Wage Employee 5.9m; 65.8% Private 3.4m; 57.7% Informal: 14.4% Working Age Population (15+) 12.5m; 74.4% Unemployed 0.5m; 5.2% Self-Employed 2.6m; 29. Agriculture 1.4m; 52.6% Formal: 85.6% Inactive 3.5m; 27.9% Non-Agriculture 1.2m; 47.4% Note: Self-employed include own-account workers, employers, farmstead workers, members of cooperatives and unpaid family workers. Wage employment is high in almost all sectors, except agriculture and trade. Wage employment is nearly universal in mining, manufacturing, public administration, public utilities, and other services. Self-employment is more prevalent in retail and wholesale trade (commerce), construction, transport and communications, and agriculture (Figure 18). 22 Source: WDI (ECA) and OECD ( respectively. 23 Defined as those who have worked on their personal farmstead for at least one hour during the reference week. 24 Defined as those wage employees reporting state ownership of the organization they work in. 25 Analysis of HBS data shows that the share of public employment in total wage employment decreased by almost 10 percentage points from 2006 to

17 Figure 18 Distribution of employment by type and sector in Kazakhstan, Agriculture Mining and extractives Manufacturing Public utilities Construction Commerce Transport and comm. Finance, insurance and real estate Public administration Other services Wage employment Employer Own-account self-employed Farmstead worker Note: Excluding unpaid family workers, which represent 1 percent of employed in agriculture and less than 1 percent in other sectors. The majority of self-employed in agriculture work on personal farmsteads, while self-employed in non-agriculture are mostly own-account workers. Almost two-thirds (64 percent) of self-employed in agriculture are those who work on personal farmsteads. Only about 30 percent are own-account workers, while the rest are split among employers (4 percent), unpaid family workers (1.5 percent), and cooperative members (0.5 percent). Among self-employed in non-agricultural activities, 90 percent are own-account workers and another 8.5 percent are employers. Only a very small share are unpaid family workers (1 percent) and members of cooperatives (0.5 percent). Informality is concentrated in self-employment, particularly in agriculture. A relatively small share (only 8.3 percent) of wage employees are informal, but over two-thirds of agricultural self-employment (which is largely personal farmstead work, as noted above) is informal 26 (Table 3 and Annex 2). Very few employers are informal (only 3.4 percent), while about one fifth (18 percent) of non- agricultural self-employed are informal. However, it should be noted that measurement of informality for self-employment is somewhat less reliable. 27 Due to this measurement issue and prominence of wage employment in Kazakhstan, this note primarily focuses on informal wage employment. 26 For wage employment, this note adopts a broad definition of informality based on two standard questions. First, a wage worker is considered informal if he or she does not have a written contract. Wage workers are also considered informal if their employer does not contribute to social insurance/the pension fund on their behalf. All unpaid family workers, cooperative members and personal farmstead workers are considered informal, and among the self-employed (employers or own-account workers), those whose enterprise is not registered are considered informal. 27 The question on registration changed in 2012 to make it applicable to all employment categories, whereas it previously applied only to the selfemployed. As a result, the LFS shows a significant difference in the share of formal self-employed between 2011 and

18 Table 3 Distribution of informality by job type, 2013 Type of Employment 28 Share of Employed Share of Total Percent Informal Public Wage Employment Private Formal Wage Employment Private Informal Wage Employment Agricultural Self Employment Personal Farmstead Non-Agricultural Employer Non-Agricultural Self Employment Determinants of Activity and Employment Type Men and the more educated are more likely to participate in the labor market. Controlling for a set of characteristics, 29 men are 10 percentage points more likely to be active than females. Besides gender, education plays a big role, with those with upper secondary and tertiary education being 17.7 and 15.6 percentage points, respectively, more likely to be active than those with lower secondary or less. Age is related to activity in a predictable manner: year olds, who are overwhelmingly in school, are less likely to be active (by 15 percentage points), as well as those aged 55 and above, particularly those 60 years and older, who are 70 percentage points more likely to be inactive compared to year olds. There are also some regional differences, with those in Astana particularly less likely to be active compared to the Akmola region, and those in urban areas are only slightly more likely to be inactive than those in rural areas (Table 5 in Annex A). Those who are more likely to secure public wage employment compared to private formal employment appear to be different in several respects. Keeping other characteristics constant, males are significantly more likely to be employed in formal private sector jobs compared to women, who are more likely to work in the public sector (Figure 19). Younger people (20 24 years old) are more likely to work in the private sector even compared to a relatively young cohort of year olds. On the other hand, older people (40 and above) are much more likely to be in the public wage employment. While higher levels of education increase the probability of both public and private wage employment compared to lower secondary education, the effect is most dramatic for those with tertiary education, who are 31 percentage points more likely to be in the public sector. On the other hand, those with upper secondary education are much more likely to be in the private formal sector than those with lower secondary. There are also significant regional differences; however, while those in urban areas are more likely to be in the private formal sector compared to those in rural areas, this is not the case for the public sector, where there are no statistically significant differences between rural and urban areas. 28 Due to changes in the LFS questionnaire, the classification of public and private formal sector employment shifted between 2011 and 2012, so most of the analysis that distinguishes between these two types of formal employment focuses on 2013 only. Shares of employment by public/ private among formal workers: 2010 = 32.8 percent/58.3 percent; 2011 = 33.0 percent/58.8 percent; 2012 = 42.6 percent/48.4 percent; 2013 = 42.3 percent/49.4 percent. 29 Multinomial logits estimated on the following outcomes: NEET (Not in Employment, Education or Training), in school or training, unemployment, farmstead worker, non-agricultural self-employed, public wage employment and private formal wage employment. Reference categories include female, years old, lower secondary or less, rural resident, in Akmola region, and single person household. Informal wage employment and its determinants are considered separately. 14

19 Figure 19 Marginal effects for multinomial logit model, 2013 Urban Almaty City East Kazakhstan Pavlodar South Kazakhstan Mangystau Kyzylorda Kostanay Karaganda Jambyl Atyrau Aktobe Tertiary education Upper secondary education Years old Years old Years old Years old Years old Male Private formal wage employment Public wage employment Interpretation: A male has 11.4 percentage points higher chance of having private formal wage employment than a female when both have the average characteristics of the working age population (15 64 years old). Note: Only coefficients significant for both public wage employment and private formal wage employment are included, with the exception of urban which is only significant for private formal wage employment. Reference categories include female, years old, lower secondary or less, rural resident, in Akmola region, and single person household. Determinants of self-employment in agriculture and non-agriculture differ, but younger people tend to be more likely to engage in both. Not surprisingly, residents of urban areas are considerably less likely to be in agricultural selfemployment while location (urban-rural) does not make a difference for non- agricultural self-employment (Figure 20). Younger workers (15 19 and years old) are more likely to be self-employed in agriculture compared to year olds, but the number of such workers is very small. 30 Younger people are also more likely to engage in non-agricultural selfemployment, but there are also relatively few of them. 31 Older workers, on the other hand, especially those over 60 years of age, are significantly less likely to be self-employed in non- agriculture than prime-age workers (25 29 year olds). Workers with tertiary education are less likely to be self-employed compared to those with lower secondary or less, especially outside of agriculture. 30 Approximately 16 percent of all self-employed in agriculture or about 232,000 workers. 31 Only 13 percent of all self-employed outside of agriculture or about 172,500 workers. 15

20 Figure 20 Marginal effects for multinomial logit model, 2013 Urban Almaty City East Kazakhstan Pavlodar South Kazakhstan Mangystau Kyzylorda Kostanay Karaganda Atyrau Aktobe Tertiary education Years old Years old Years old Years old Years old Male Self-employment in agriculture Self-employment outside of agriculture Interpretation: A male has 3.75 percentage points higher chance of being self-employed outside of agriculture than a female when both have the average characteristics of the working age population (15 64 years old). Note: Only coefficients significant for both self-employed in agriculture and non-agriculture are included. Reference categories include female, years old, lower secondary education or less, rural resident, in Akmola region, and single person household. Informal wage workers tend to be younger, less educated and more likely to be found in rural areas than formal private wage workers. Informal wage workers start working younger, and nearly a third of all informal workers are under the age of 30 (Figure 21). In addition, only 13.5 percent of informal wage workers have a tertiary education, relative to 34.9 percent for formal wage workers (and 52.5 percent for public sector workers) (Table 6 in Annex B). Informal workers also drop out of education earlier. Less than half (46.4 percent) of informal wage workers live in urban areas, against 61.7 percent of public sector and 69.6 percent of formal private wage workers. On the other hand, very few people work in the public sector at young ages. 16

21 Figure 21 Age distribution by formality status 2 Share of workers 15% 1 5% Age group Public wage workers Private formal wage workers Private informal wage workers Sector and location appear to play a large role for informality. Detailed statistical analysis 32 shows that while certain determinants of informal status are very strong (there is almost no informal wage employment in mining, health and social services, education and public administration services, for example), other effects are less clear. For example, informality in agriculture is significantly higher than in other sectors with the exception of commerce, while informality is significantly lower in Astana and Almaty cities. However, outside of agriculture and the main cities, a wage worker is no more likely to be informal in rural areas than in urban areas. Similarly, the apparent differences in formality related to education levels appear to be largely due to the fact that the more educated workers are more likely to work in low-informality sectors and low-informality regions. Thus, it seems that people with an upper secondary education degree are more likely to be informal than those with a lower educational attainment, but these workers are also more likely to be wage employees. The combination of these factors implies that the level of educational attainment actually does not play a significant role in explaining formality among those who have wage jobs (Table 7 in Annex B). Determinants of Wages Similar to many other countries, an analysis of wages 33 in Kazakhstan reveals a large gender gap and significant wage differentials by age (Annex 4). Men tend to earn more than women with identical characteristics; wages for men were percent higher than for women over the period. These estimates control for sector of work and worker characteristics so these wage gaps do not result from the fact that women are less likely to work in high-paying sectors such as mining, manufacturing or transportation, and are more likely to work in low paying sectors like commerce and other services (especially the education and health and social services sectors). They also do not reflect education differentials 32 See Annex B for more information about the methodology. 33 The analysis in this section exploits data from the Household Budget Surveys to estimate the determinants of wages, overall and on a sector-specific basis. It then uses the Labor Force Surveys to estimate how much individuals with different skill levels could expect to earn in different regions, and compares this to the actual distribution of employment of these skill levels in the different regions. In the absence of constraints, one should see a higher concentration of skills in the regions where these skills are the most highly rewarded; any deviation from this distribution is indicative of constraints to labor reallocation (see Annex D for more details on the methodology). 17

22 or disproportionate work in rural areas. 34 Holding these characteristics constant, women are paid less than men suggesting that there are other factors contributing to the gender wage gap. There are also significant wage differentials by age. Wages in Kazakhstan increase with age up to around 45 years of age, after which they tend to decline. This trend has been strengthening in recent years (Figure 22). This age profile of wages is also typical of most countries, as it reflects the process of skills accumulation, depreciation and selection into and out of the labor market. Figure 22 Wage differentials (relative to year olds) by age group, Source: Authors calculations using 2013 HBS. Additional skills in the form of education bring a wage premium, particularly for those with tertiary education. The estimated wage premium is 7 12 percent for an upper secondary education and percent for a tertiary education (both relative to a lower secondary education or less). 35 These estimates suggest that employers do value an upper secondary education more highly than simply a lower secondary education or less, but not by much. However, there is a significant premium in wages that comes with having a tertiary education. The lack of a significant premium for upper secondary education may be related to the low quality of education at secondary and upper secondary levels. At the international level, despite high levels of enrollment and completion of secondary education, Kazakhstan fares poorly in education quality, as reflected in the poor, though markedly improved, performance on international student assessments, 36 such as the OECD s Programme for International Student Assessment (PISA). The 2012 PISA results suggested that Kazakhstani students underperformed compared to their peers in comparator countries in reading, mathematics and science (Figure 67 in Annex A). Not surprisingly, different sectors of the economy pay different wages, even after controlling for worker characteristics (Figure 23). 37 The mining and extractive industries sector pays the most on average, with its workers earning wages between 78 and 84 percent above what similar wage workers earn in agriculture in the same year. 38 Manufacturing, transportation and communication, and finance, insurance and real estate are also relatively high paying sectors, while wage workers in agriculture, other services, and commerce earn the least. Not only do different sectors pay similar workers different amounts, they reward the same characteristics differently as well (Table 11 in Annex 4). Returns to skills, age, residing in an urban area or gender can vary 34 In fact, women make up a larger share of tertiary educated wage workers (56 percent) and slightly more than half of urban wage workers (51 percent), while men occupy 53 percent of wage jobs in rural areas. 35 Estimates from See Table 11 in Annex D for results for Kazakhstan s performance on PISA improved markedly since 2009, especially in math and science and also among the lowest achievers, but its overall achievement remains significantly behind other countries with similar income per capita levels. 37 Without controlling for other characteristics, the variation in wages within a sector can be quite large, although the ranking of sectors discussed here holds on average. 38 There are few consistent trends over the period, although wage gaps appear to be shrinking somewhat in finance, insurance and real estate, transportation and communication, and public administration services. 18