Are Small Firms Labour Constrained? Experimental Evidence from Ghana

Abstract

Firms in poor countries are much smaller than firms in rich countries, with the modal firm being a single person, the owner. Meanwhile, youth unemployment and underemployment are widespread. Understanding whether labour market frictions co-exist with capital and managerial skill constraints to limit firm growth is thus quite important. This project studies a program that randomly placed unemployed young people to work as apprentices with small firms in Ghana. Firms that were offered apprentices by the program experienced increases in both firm size and profits over the two years of our study window. These effects vary as a function of worker cognitive ability (unobserved by the firm owner), highlighting the potential role of screening in firms’ hiring decisions in our context. This screening interpretation echoes the widespread use of an entry fee mechanism to hire apprentices in our baseline labour market. This research was funded under the Private Enterprise Development in Low Income Countries (PEDL) Programme