ILO Working Paper 151

Do productivity gains translate into adequate wages? Firm-level evidence from Ethiopia (LIMMS, 2018–2020)

This study provides a comprehensive analysis of the relationship between firm productivity, wages, and employment dynamics in Ethiopia’s manufacturing sector between 2018 and 2020. Using firm-level data from the Large and Medium Manufacturing and Electricity Industries Survey (LIMMS), it offers new evidence on how productivity gains are translated—or not—into fair remuneration, highlighting structural barriers that limit wage growth and emphasizing the need for stronger wage-setting institutions and collective bargaining mechanisms.

Abstract

This paper examines the relationship between firm productivity, wage dynamics, and employment patterns in Ethiopia’s manufacturing sector, using firm-level data from the Large and Medium Manufacturing and Electricity Industries Survey (LIMMS) for 2018–2020. In line with the objectives of the SAW-A project—which promotes adequate wages and sustainable livelihoods through improved wage-setting and social dialogue—the study explores how firm characteristics such as size, age, and ownership shape the translation of productivity gains into fair and decent remuneration for workers.

The study addresses two key research questions:

To what extent does productivity growth translate into wage increases in Ethiopia’s manufacturing sector?
How do firm characteristics mediate this relationship, particularly in terms of employment expansion and wage inequality? Using regression analysis, the paper estimates firm-level wage-productivity elasticity, controlling for sectoral, regional, and firm-specific factors.

Findings reveal that a 1% increase in value added per worker leads to only a 0.2% rise in real wages, suggesting that only 20% of productivity gains are passed on to workers. Wage-productivity elasticity also varies significantly across subsectors, with industries such as beverages and textiles
exhibiting stronger pass-through effects compared to food production. Additionally, the study highlights gender and regional wage disparities, with firms employing a higher share of female workers paying systematically lower wages and certain regions demonstrating high productivity but persistently low wages.

By situating the analysis within the broader effort to promote adequate and living wages under the SAW-A framework, the paper underscores the structural barriers that prevent productivity growth from translating into better living standards. Strengthening collective bargaining, improving wage-setting institutions, and promoting equitable distribution of productivity gains emerge as critical pathways for ensuring that industrial development in Ethiopia supports both enterprise sustainability and decent livelihoods.