Review of Development Economics, 11(1), 170–186, 2007

The Nature of Unemployment among Young Men in

Urban Ethiopia

Pieter Serneels*

Abstract
This paper investigates the nature of unemployment among young men in urban Ethiopia and finds that it
is concentrated among relatively well-educated first-time job seekers who aspire to a public sector job and
spend on average close to four years in unemployment. This is consistent with a segmented labor market
model where youngsters queue in unemployment for a good job, as confirmed by an empirical test of the
theoretical prediction. We observe a negative (causal) relationship between household welfare and both
the incidence and duration of unemployment, indicating that unemployment is concentrated among the rel-
atively worse off urban households, which from a national perspective represent the middle classes, and find
suggestive evidence that part of this effect is due to malnutrition during childhood. Job search through social
networks is only effective after one has become unemployed, suggesting that networks provide insurance
only after exposure to the risk.

‘The man asks whether he will be allowed in.

“Possibly”, says the doorkeeper, “but not at the moment.” ’1

1. Introduction
Unemployment in developing countries is believed to be of a different nature than in
high income countries. The limited number of studies all point in the same direction:
that it is a queueing phenomenon where the unemployed are waiting for a good job
and that it is concentrated among the relatively well-educated, who often come from
the middle classes, confirming Myrdal’s (1968) early conclusion that it is a ‘bourgeois
phenomenon’. This is confirmed for Sri Lanka (Dickens and Lang, 1996; Glewwe, 1989;
Rama, 1999), Indonesia (Manning and Junankar, 1998); and Colombia (Tenjo, 1990).
What do these findings teach us about unemployment in Sub-Sahara Africa, if
anything at all? Turnham (1993) suggests that unemployment in Sub-Sahara Africa,
although overwhelmingly an urban phenomenon, is relatively high; this is confirmed
by more recent data.2 The intriguing question is why this is the case.
There is only a handful of careful empirical studies on unemployment in Africa.
Rama (1998) considers unemployment in Tunisia and finds that it is concentrated
among the young relatively well-educated. Kingdon and Knight (2000, 2001) analyze
unemployment in South Africa and observe that it is highest among the relatively low
skilled who come from a poorer than average background and live in the homelands.
Tunali and Assaad (1992), the only paper that analyzes the duration of unemployment,

* Serneels: Department of Economics, University of Oxford, Manor Road Building, Manor Road, Oxford
OX1 3UQ, UK. Tel: 44 1865 271084; Fax: 44 1865 281447; E-mail: pieter.serneels@economics.ox.ac.uk. The
author would like to thank Stefan Dercon, Kevin Lang, Mans Söderbom, Francis Teal and an anonymous
referee as well as the attendants at seminars in the Universities of Boston, Nottingham, Oxford and
Southampton for useful comments. All remaining errors are mine. This paper was possible thanks to funding
from the ESRC, grant R00429834677.

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 UNEMPLOYMENT IN URBAN ETHIOPIA 171

focus on casual laborers in the construction sector in Egypt and find that unemploy-
ment in this sector is more than a transitory phenomenon. In this paper we analyze
the nature of unemployment among young men in urban Ethiopia by looking at both
its incidence and duration. Although it would undoubtedly be interesting to also con-
sider female unemployment, we limit ourselves to men because they dominate the
labor market, are typically the main breadwinner, and because female labor supply is
more difficult to measure and requires a different analysis.3 In the next section we
present a theoretical model. In section 3 we discuss the data and Ethiopian context.
Sections 4 and 5 analyze the incidence and duration of unemployment. In section 6 we
discuss the results and test the main prediction of the theoretical model.

2. Theoretical Framework
The theoretical model focuses on the supply side and explains queuing unemployment
in a dual economy in the spirit of Bulow and Summers (1986) and Saint-Paul (1996).
We simplify the standard job search model, as set out by Mortensen (1986), by assum-
ing that there are only two types of jobs: a good one and a bad one, both having a
given wage. Concentrating on first-time job seekers, we assume that all agents start in
unemployment; they are also homogenous, live forever and maximize their welfare by
maximizing the present value of future income streams, discounting the future at a rate
0 < d < 1.
∞
max ∑ d t yt dt subject to dt +1 = f ( dt ), (1)
d ,t
t =1

where d indicates the employment state, which can be unemployed, working in a good
job or working in a bad job. When unemployed, agents receive benefits (B)—in a
developing country this is household support; when working they receive the corre-
sponding wage, wg in a good job and wb in a bad job, with wg > wb > 0 and wages
constant over time.4 Good jobs require skills and there is negative duration depen-
dence in the primary sector (cf. Blanchard and Diamond, 1994), which is rationed. Jobs
in the secondary sector require no skills and one can always get a bad job; the sec-
ondary sector is competitive. Workers in the secondary sector cannot undercut the
wages in the primary sector. Once a worker has entered a job, he stays there for life,
so there is no mobility between the sectors. Recruitment in the primary sector is thus
assumed to be internal. Finally, unemployment only happens at the beginning of a
career—once employed, agents do not become unemployed again.5
In this framework a young man enters the labor market unemployed and then has
two options: to immediately take up a bad job or to wait in unemployment for a good
job. This can be seen as an optimal stopping problem in a dynamic programming
context, where at each point the individual compares the present value of the two
options. The value function can be written as:
Vt = max(Vt u − Vt b, 0), (2)
where V ut represents the present value of unemployment and V bt is the present value
of a bad job. Let l represent the probability of getting a good job; 0 ≤ λ ≤ 1; and using
the Bellman (1957) principle, the present value of unemployment can be written as:
Vt u = lVt g + (1 − l )( B + d max(Vt u+1 − Vt b+1, 0)), (3)
where the present value of job i (i = g, b) is given by:

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172 Pieter Serneels

∞
wi
Vt i = ∑ d t wi = . (4)
t =1 1−d
The young man will stay in unemployment as long as
lwg + (1 − d )(1 − l )B − lwb
Vt u − Vt b = > 0. (5)
(1 − d )l
Given that 0 < d < 1 and 0 ≤ l ≤ 1, this can only be true if:
wb
−B
l > − −d
1 . (6)
wg
−B
1−d
Defining the wage gap as the ratio between wages in the primary and secondary sector
G = wg /wb and assuming no benefits (B = 0), we find that he will stay in unemployment
as long as
1
l> , (7)
G
i.e. as long as the probability of getting a good job exceeds the inverse of the wage gap.
This result is intuitively similar to Harris and Todaro (1970), but we do not need migra-
tion. When we introduce benefits, the threshold decreases, and people will stay longer
in unemployment. The higher the benefits, the smaller the required hazard to make
people stay in unemployment. In section 6 we test equation (7) for urban Ethiopia.

3. The Ethiopian Context and Data

We use the first round (1994) from the Ethiopian Urban Socio-Economic Survey
(EUSES) household data collected by the Economics Department of Addis Ababa
University in co-operation with Göteborg University and Oxford University. The
survey collected data from a random sample of 1500 households in the seven largest
cities.
Table 1 presents the characteristics of the urban labor market in Ethiopia. The public
sector employs almost one-third (27%) of the male labor force, while self-employment,
casual and informal sector work employ another third (34%).The formal private sector
is small (7%), a direct consequence of the plan economy under the Dergue.6 The public
sector pays the highest wages, followed by the formal private sector, while the self-
employed have the lowest income from labor, earning less than half the salary of public
sector employees. The gap in wages between the two dominant career paths (public
sector and self employment: G in the above model), is large (2.8) and suggests a seg-
mentation of the labor market into “good” and “bad” jobs.
How did we measure unemployment and its duration? Unemployment is self-
reported, but the level of detail of the questions, and the presence of control questions
make it impossible to pretend to be unemployed.7 The duration of unemployment is
measured as follows. Working men were asked how long their last spell of unemploy-
ment had lasted, giving a direct measure for unemployment duration. Because the
unemployed themselves were not asked how long they had been unemployed, we cal-
culate their duration as age minus time worked, minus the age at which schooling was
completed.8 The resulting mean duration is 45 months, which is close to the observed

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 UNEMPLOYMENT IN URBAN ETHIOPIA 173

Table 1. Descriptive Statistics

For all men

Employment distribution
Public sector 27%
Formal private sector 7%
Self employment, casual workers, and informal private sector 33%
Unemployed 34%
Median real earnings per month (1994 PPP USD)
Public sector employee 80
Private sector wage employee 44
Self-employed 29

For active young men

Employment distribution
Public sector 15%
Private sector wage employment 7%
Self employment, casual workers, and informal private sector 27%
Unemployed 51%
Duration of unemployment
Mean duration of unemployment (in months) 45
Highest level of education
None 13%
Primary education 14%
Junior secondary education 36%
Senior secondary education 31%
Tertiary education 6%
Sample size
Number of households 1,500
Number of men between 15 and 30 680
Household characteristics
Average number of household members 6
Average number of household members unemployed 1
Average monthly total household expenditures per capita (in 1994 PPP USD) 25
Average monthly food household expenditures per capita (in 1994 PPP USD) 18
Average value of household assets per household member (in 1994 PPP USD) 289

For unemployed young men

Looking for work?a
Looking for work but unable to find any 94%
Not at paid work and not looking for work 6%
Ever worked before? 15%
Ever refused a job? 2%
Job looking for
Public sector 50%
Private sector wage employment 13%
Self-employment, casual work, and informal private sector work 14%
Any work 23%
Mean reservation wage (1994 PPP USD) 41
(28)
Medium for search
Through friends, relatives, church, ethnic associations 40%
Through government employment agency 15%
Through advertisements 40%
Asked prospective employer 5%
How support yourself while unemployed?
Through parents’ help 84%
Small occasional jobs 12%
Through help from friends, spouse, own savings, or loan from relative 4%
a
We have information on two types of unemployment: those ‘looking for work but unable to find any’, and those
‘not in paid work and not looking for work’. While some doubt whether the latter should be considered unem-
ployed (see e.g. Flinn and Heckman, 1983), others argue that in an environment with high unemployment, job search
may be passive and people may be waiting for, rather than actively looking for, a job (see e.g. Kingdon and Knight,
2001). This may be even more valid when job search takes place through social networks, for which we find indi-
cations in Ethiopia. However, since only 6% of the unemployed in urban Ethiopia are not looking for work, the
difference between the narrow and broad unemployment rate is less than 2%. Throughout the paper we use
the broad unemployment rate, but all our results are robust using the narrow definition. We also find that the
unemployed in the two categories do not differ in their main characteristics.

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174 Pieter Serneels

(a) Unemployment rate per age (b) Distribution of unemployment duration (in months)

.025
.8

.02
.6

.015
Density
Unr
.4

.01
.2

.005
0

0
15 20 25 30 35 40 45 50 55 60 0 12 24 36 48 60 72 84 96 108 120
Age Unemployment duration

Figure 1. Incidence and Duration of Unemployment

average duration of 42 months obtained from a more recent round of the survey where
the currently unemployed were asked directly how long they had been unemployed.
As in any other economy, unemployment is concentrated among the young. Figure
1(a) shows that it peaks at age 19 and falls thereafter, to reach a sustained level only
beyond age 30. We focus on men between age 15 and 30, who represent 81 of the unem-
ployed.9 Table 1 reports the descriptive statistics of the young. Over 50% of the young
men are unemployed, with a mean duration of close to four years. A total of 87% of
the unemployed have completed at least primary education while almost two-thirds
have finished junior secondary school or more. On average one household member
out of six is unemployed. Average consumption per household member is 25 USD and
70% of the household budget is spent on food. The mean value of household assets,
excluding dwellings, is 289 USD.

4. Who are the Unemployed and What Determines the Probability of

Being Unemployed?
Table 1 shows that the vast majority of young unemployed (94%) are actively looking
for work. Some 85% have never worked before. The concentration of unemployment
among first-time job seekers is similar to other developing countries,10 and may well
be a distinctive characteristic from unemployment in industrialized countries, where
movements in and out of unemployment are more frequent (Layard et al., 1991).
Almost none of the unemployed (2%) have ever refused a job offer and half of them
are looking for a job in the public sector, while only 13% are looking for a formal
private sector job. Comparing these aspirations with the actual distribution of jobs in
the youth labor market indicates that the public sector attracts more candidates (50%)
than it can offer places (15%). Job search happens especially through social networks
(40%) and by responding to advertisements (40%). Contrasting this with how working
young men have found a job suggests that the unemployed rely too much on adver-
tisement and not enough on approaching the employer directly.11 The majority of
unemployed are supported by their parents.
To explain the incidence of unemployment, we run a probit model with exogenous
individual characteristics that typically explain labor supply as right-hand side vari-
ables, using the model:

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 UNEMPLOYMENT IN URBAN ETHIOPIA 175

Ut = b 0 + b 1 AGE + b 2 EDU + b 3 ETH + b 4 HEALTH + b 5EDUM

+ b 6 PROFFATH + b 7 ADDIS + e i , (8)

where EDU stands for education and ETH for ethnicity. HEALTH is measured by
height for age.12 Household background is captured by mother’s education (EDUM),
and father’s profession (PROFFATH). We also control for the local labor market con-
ditions by including a dummy variable for the capital (ADDIS).
The estimation results are reported in Columns 1 to 3 of Table 2.13 Age has a posi-
tive effect indicating that relatively older young men are more likely to be unemployed.
Education also has a positive effect, with especially the junior and senior secondary
educated significantly more likely to be unemployed. Health has a negative effect that
is significant at the 10% level; but the effect becomes insignificant once we control for
household wealth (see Columns 4 to 6 in Table 2). This suggests that part of the welfare
effect may be through nutrition and that physical appearance may be used by employ-
ers as a screening device. Ethnic origin has no significant effect, whatever ethnic
variable we include, rejecting the belief that some groups have lower unemployment
rates than others.14 Household background, on the other hand, seems to have a strong
effect, not so much through the mother’s education, but especially through the father’s
profession. Column 1 of Table 2 shows that young men whose father is employed in
wage work are more likely to be unemployed, while Columns 2 and 3 show that this
comes from having a father working in the civil service as opposed to being self-
employed. However, when we include household welfare (see Columns 4 to 6), the
effect becomes insignificant suggesting that this is a welfare effect related to the rela-
tive high earnings of civil servants. Finally, those living in Addis Ababa are about 10%
less likely to become unemployed, suggesting that there are still strong incentives for
unemployed young men to migrate to the capital.
A second exercise we carry out is to include household welfare in equation (8).There
are two reasons why this is interesting. First, there is a strong belief and some evidence
that unemployment in developing countries is both ‘luxury unemployment’ (Udall and
Sinclair, 1982) and a ‘middle class’ phenomenon (Hirschman, 1982), but there are no
empirical tests for low-income Sub-Sahara Africa.15 Furthermore, it is interesting to
investigate the direction of causation. If unemployment is queuing for a good job,
households may support some of their members to queue as part of a portfolio invest-
ment strategy, which lowers their household income.
A univariate analysis indicates that the urban unemployed in Ethiopia come from
significantly poorer urban households.16 To carry out a multivariate analysis, we esti-
mate the equation

Ui = b 0 + b 1 AGE + b 2 EDU + b 3 ETH + b 4 HEALTH + b 5EDUM

+ b 6 PROFFATH + b 7 ADDIS + b 8 HHW + e i , (9)

where HHW stands for household welfare and is proxied by the mean value of house-
hold assets per household member—which measures household savings—and per
capita consumption per month.17 When we test formally whether each of these vari-
ables is individually omitted from the model, we find that they are.18 Because we find
evidence that household welfare is endogenous,19 we run an instrumental variable
probit where household assets and consumption are instrumented by characteristics
of the household head. The estimation results are reported in Columns 4 to 6 of Table
2. Since the two welfare variables are moderately correlated (0.33), we include them
separately as well as together. Both variables have a significant negative effect and

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Journal compilation © Blackwell Publishing Ltd. 2007
 Table 2. Probit Unemployment for Young Men (Marginal Effects)

Exogenous variables only Including household welfare

176

(1) (2) (3) (4) (5) (6)

Unemployed Unemployed Unemployed Unemployed Unemployed Unemployed

© 2007 The Author

Age 0.155 0.156 0.146 0.17430 0.11708 0.19441
(0.059)** (0.059)** (0.059)* (0.07800)* (0.07605) (0.08429)*
Age squared −0.004 −0.004 −0.004 −0.00428 −0.00310 −0.00476
Pieter Serneels

(0.001)** (0.001)** (0.001)** (0.00164)** (0.00161)+ (0.00178)**

Primary is highest level of education 0.128 0.125 0.142 0.09814 0.11483 0.06338
(0.078) (0.079) (0.078)+ (0.09851) (0.10010) (0.10839)
Junior secondary is highest level of education 0.273 0.273 0.296 0.22952 0.26480 0.22338
(0.065)** (0.065)** (0.064)** (0.08183)** (0.07912)** (0.08752)*
Senior secondary is highest level of education 0.393 0.393 0.423 0.35120 0.38046 0.34154

Journal compilation © Blackwell Publishing Ltd. 2007

(0.059)** (0.059)** (0.058)** (0.07398)** (0.07512)** (0.08231)**
Tertiary is highest level of education 0.160 0.164 0.189 0.12234 0.16867 0.10754
(0.093)+ (0.092)+ (0.091)* (0.11750) (0.11573) (0.12787)
Height for age −0.049 −0.049 −0.050 −0.00407 −0.01963 −0.00724
(0.027)+ (0.027)+ (0.027)+ (0.03624) (0.03614) (0.03790)
Tigray −0.006 −0.010 −0.004 0.03305 −0.00814 0.04359
(0.079) (0.078) (0.079) (0.08776) (0.08668) (0.09275)
Gurage −0.054 −0.064 −0.061 −0.05251 −0.02160 −0.05453
(0.054) (0.053) (0.054) (0.06618) (0.06540) (0.06878)
Years of schooling mother 0.009 0.011 0.014 0.01643 0.01879 0.01530
(0.007) (0.007) (0.007)* (0.00862)+ (0.00891)* (0.00934)
Father works in wage employment 0.117 0.05716 0.07397 0.05079
(0.046)* (0.05726) (0.05649) (0.06003)
Father works in civil service 0.106
(0.052)*
Father works as self employed −0.077
(0.047)+
Value of household assets per hh member (I) −0.00007 −0.00008
(0.00002)** (0.00003)**
Total consumption per capita (I) −0.00106 0.00036
(0.00057)+ (0.00079)
Living in Addis Ababa −0.111 −0.114 −0.118 −0.11832 −0.12610 −0.10234
(0.044)* (0.044)** (0.044)** (0.05492)* (0.05823)* (0.06185)+

Standard errors in parentheses.

+ significant at 10%; * significant at 5%; ** significant at 1%.
(I) = Instrumented by monthly wage income of the parents in the household; gender, age, education, marital status, ethnicity, religion, and profession of the household head;
and place of living.
 UNEMPLOYMENT IN URBAN ETHIOPIA 177

confirm the negative relationship between unemployment and household welfare

observed at the univariate level.20 The effects of the other variables remain largely the
same, with the exception of father’s profession and health, for which the coefficient
becomes smaller and loses significance. A Hausman test indicates that the Instrumen-
tal Variable model is not different from the model without instruments.
Does this mean that the unemployed come from poor households? It depends on
the perspective. The results indicate that urban unemployment is more prevalent
among low income households. However, our sample only contains urban households,
which are better off than rural households. To get a national perspective, we use data
from the 1996 national Household Income and Consumption Expenditure (HICE)
survey. When we restrict ourselves to the urban unemployed, we observe the same neg-
ative correlation. But when we include rural data, we find that unemployed young men
come from better off households than working young men, because the majority of
working young men in rural areas are poor. Combined, this confirms that unemploy-
ment in Ethiopia is a middle-class phenomenon. However, it also indicates that
unemployment is not a luxury, since the wealthiest do not have the highest unem-
ployment rates.21
A final point of interest is whether job aspirations and search medium affect the
chance of being unemployed. Including job aspirations in equation (9), we find that
aspiring to a public sector job has a large and significant positive effect, while aspiring
to self employment or casual work has a large significant negative effect, as reported
in Table 3, confirming the queuing hypothesis.22 Including the search medium in equa-
tion (9), we find that those searching for a job through the most anonymous media—
government agencies and advertising—face a higher probability of being unemployed;
while those asking the employer directly are less likely to be unemployed, as reported
in Table 3.23 Social networks, like relatives, friends, or ethnic and religious associations

Table 3. Effect of Job Aspirations and Search Medium on Incidence of Unemploymenta

Unemployed

Aspire to a public sector job 0.15869

(0.06422)*
Aspire to a private sector wage job 0.09784
(0.08103)
Aspire to self employment or casual work −0.38299
(0.06767)**
Job search through relatives and friends −0.01292
(0.05763)
Job search through government agency 0.21025
(0.07768)**
Job search by asking prospective employer −0.36195
(0.06467)**
Job search through consulting advertisements 0.18395
(0.05956)**
Job search through ethnic or church association −0.10767
(0.15907)

a
Standard errors in parentheses; + significant at 10%; * significant at 5%; ** significant at 1%.
We report the coefficients of this variable when added to the model in Table 4 Column 4.

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178 Pieter Serneels

do not seem to play the role that they are sometimes attributed (Holzer, 1988;
Granovetter, 1995), at least not for the chances of becoming unemployed. Job search
through the government employment agency is also ineffective.

5. The Duration of Unemployment

To fully understand the nature of unemployment, one also needs to consider duration.
We know of only four papers that discuss the duration of unemployment in develop-
ing countries. Dickens and Lang (1996) find that unemployment duration in Sri Lanka
is four years or more with more educated having longer spells. Kingdon and Knight
(2001) find that 37% of the unemployed in South Africa are unemployed for three
years or more. Appleton et al. (2001) study unemployment duration among retrenched
workers in China and find a mean duration of 47 months, with longer spells for the
unhealthy and lower educated. Tunali and Assaad (1992) consider the special case of
casual workers in the construction sector, excluding first-time job seekers, and find that
the average worker is unemployed 36% of the time and that education and experience
have no effect. In all except the last paper, which is a specific case study, the duration
of unemployment is very long, expressed in years rather than months. We observe the
same in urban Ethiopia, where young men are on average unemployed for 45 months,
or close to four years. With a median of 35 months or close to three years, the distrib-
ution is skewed to the right, as shown in Figure 1(b). Spells below two years represent
close to 40%.
To analyse who spends most time in unemployment, we consider a model similar to
equation (8), but now with the duration of unemployment as the dependent variable:24

Ti = a 1 AGE + a 2 EDU + a 3 ETH + a 4 HEALTH + a 5EDUM

+ a 6 PROFFATH + a 7 ADDIS + e i . (10)

For analyzing duration data, one can follow different methodologies. The most
common way is to use a proportional hazard (PH) model, which is straightforward and
usually gives robust results, but relies on a strong assumption, namely that the explana-
tory variables have the same proportional effect for all durations.25 Although there
may be theoretical reasons to expect the assumption to hold, it remains an empirical
question whether it actually does.26 The Cox model enables us to test the proportion-
ality assumption and we find that it is rejected at the 3% level.27 Although the obtained
point estimates are robust to different distributional specifications, since the data fails
proportionality, we estimate equation (10) using a piecewise constant hazard model.
This model does not require the proportionality assumption, it considers a constant
hazard but allows shifts over time by introducing dummy variables for different time
segments. We interact these dummy variables with the (other) independent variables,
thus allowing the variables to have different effects over the defined intervals. The
interpretation is similar to an OLS regression with time-specific slopes. Since the data
fits a Weibull model with an inverse U-shape hazard that reaches a maximum at six
years, we define two intervals: below and above six years.28
The estimation results are reported in Column 1 of Table 4. The coefficients reflect
the change in the log of duration due to a one-unit change in the relevant variable.
We find that age has a strong positive effect on duration, even after controlling for
education. The age effect is concave and diminishes over time. A young man aged 18
has a four times longer duration than an otherwise identical young man of 15, while a
22 year old has a 12 times longer duration than the 15 year old. This effect has the

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 UNEMPLOYMENT IN URBAN ETHIOPIA 179

same sign but is considerably larger than in OECD countries and suggests that employ-
ers will use age as a screening device in combination with unemployment duration.
The effect of education is different for different levels. Junior secondary educated are
more likely to have longer durations, while senior secondary educated have shorter
durations. Primary and tertiary education have no effect. We find no evidence for an
effect of health or ethnicity. Household background has a strong effect. Those
with higher educated mothers have longer durations; those with a father in self-
employment or public service have shorter durations, while those with an unemployed
father have significantly longer durations. These variables remain significant when we
include household welfare. For the latter this suggests that young men with an unem-
ployed father are discouraged from looking for work, or that other unobservable
characteristics play a role. The high significance of father’s profession suggests that
inside information pays off.29 Interestingly enough, neither of these variables had an
effect on the incidence of unemployment.
Duration in Addis Ababa is not significantly shorter than in the other cities, but when
we include a finer local unemployment rate30 it has a large positive and significant effect
that remains significant when we control for household welfare, indicating that local-
ity plays a role. A final important result is the high significance of the constant,
suggesting that duration does not depend on time spent in unemployment—there is
limited duration dependence—a finding that supports queuing and is what we expect
for a segmented labor market (Serneels, 2002a).
To look at the relationship with household welfare, we extend equation (10) as
follows:

Ti = a 1 AGE + a 2 EDU + a 3 ETH + a 4 HEALTH + a 5EDUM

+ a 6 PROFFATH + a 7 ADDIS + a 8 HHW + e i , (11)

where household welfare (HHW) is measured as before. The results are reported in
Columns 2 to 4 of Table 4. Household welfare is negatively associated with unem-
ployment duration, which is consistent with the result from the incidence analysis. A
formal test for endogeneity is difficult to construct for duration models, but to see
whether the results are biased by potential endogeneity, we test whether the coeffi-
cients are different when we include the predicted value from an auxiliary equation;
we find that none of the coefficients change significantly whether we use assets or con-
sumption (results not reported), suggesting that if the variable is endogenous, it does
not bias the results.
Finally we investigate the role of job aspiration and the medium of job search. Those
aspiring to a public sector job have longer durations, while those aspiring to self
employment or casual work have shorter durations, as reported in Table 5. Given that
the public sector is associated with relatively high wages, while self employment and
casual work are associated with low wages, this provides strong evidence that the
unemployed are queuing for a high paid job.
Regarding the job search medium, we find that those who look for a job through
friends and relatives or by approaching the employer directly have shorter durations,
as reported in Table 5. Combined with the absence of a social network effect on the
incidence of unemployment, this indicates that social networks only set in once the
individual actually is unemployed, rendering support to the interpretation of social
capital as an insurance mechanism that comes into operation after the individual has
been exposed to the risk. Combined, this suggests that friends and relatives only report
vacancies to the actual unemployed, presumably because they have a higher marginal

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180 Pieter Serneels

Table 4. Determinants of Duration Using a Piecewise Constant Hazard with Varying Coefficients

(1) (2) (3) (4)

Duration Duration Duration Duration
two segments two segments two segments two segments
with first with first with first with first
segment segment segment segment
72 months 72 months 72 months 72 months

Age 1.40433 1.45987 1.14980 1.18757

(0.38679)** (0.36868)** (0.42448)** (0.41261)**
Age × d2 0.67615 0.67113 0.63055 0.63413
(0.20032)** (0.20911)** (0.19208)** (0.19731)**
Age squared −0.02808 −0.02873 −0.02231 −0.02285
(0.00797)** (0.00758)** (0.00874)* (0.00851)**
Primary is highest level of −0.22097 −0.08496 −0.07361 −0.10954
education (0.44788) (0.47859) (0.48113) (0.47109)
Primary × d2 0.99887 0.69023 1.09196 0.98761
(1.08815) (1.11287) (1.11131) (1.11447)
Junior secondary is highest −0.32224 −0.34169 −0.34101 −0.30920
level of education (0.46042) (0.46981) (0.49739) (0.49018)
Junior × d2 24.93451 24.51444 26.20409 24.40913
(1.46891)** (1.50303)** (1.43065)** (1.46318)**
Senior secondary is highest −0.47921 −0.44755 −0.35875 −0.31498
level of education (0.42977) (0.43890) (0.46971) (0.46314)
Senior × d2 −2.74066 −2.95582 −2.47918 −2.66558
(1.64995)+ (1.71449)+ (1.68469) (1.73388)
Tertiary is highest level of −0.51112 −0.46660 0.25523 0.32903
education (0.67608) (0.69159) (0.90401) (0.91829)
Height for age 0.06305 0.15443 0.11039 0.16045
(0.17148) (0.17240) (0.17987) (0.18075)
Gurage 0.14966 0.32760 0.07694 0.08911
(0.31014) (0.34295) (0.32319) (0.32561)
Tigray 0.04962 0.09601 −0.05639 −0.00950
(0.47042) (0.46964) (0.47886) (0.46799)
Years of schooling mother −0.04144 −0.04215 −0.04317 −0.03717
(0.03588) (0.03552) (0.03831) (0.03863)
Years of schooling mother × d2 0.32417 0.32399 0.34347 0.33214
(0.11319)** (0.11416)** (0.10729)** (0.10766)**
Father works in civil service 0.04892 0.09884 0.34819 0.32867
(0.28485) (0.27940) (0.35090) (0.34967)
Father works in civil service × d2 −1.46301 −1.40834 −1.64503 −1.56623
(0.67463)* (0.65213)* (0.73621)* (0.73158)*
Father works as self employed 0.08118 0.02789 0.06657 0.08573
(0.29311) (0.29705) (0.29977) (0.31246)
Father works as self −1.66308 −1.54228 −1.56509 −1.49062
employed × d2 (0.68592)* (0.69692)* (0.70134)* (0.70444)*
Father is unemployed 27.61470 27.88529 28.66742 27.04576
(0.50900)** (0.53714)** (0.50889)** (0.52451)**
Father unemployed × d2 −1.57432 −2.01392 −1.76491 −1.84664
(1.03122) (1.04788)+ (1.02177)+ (1.02686)+
Living in Addis Ababa 0.01959 0.04356 0.05120 0.04982
(0.23782) (0.23888) (0.24597) (0.24328)
Local unemployment rate 4.48390 4.01288 4.19248 3.86872
(2.16447)* (2.16745)+ (2.34651)+ (2.32661)+
Total value of assets per −0.00004 −0.00005
household member (0.00001)** (0.00006)
Consumption per capita −0.00201 −0.00184
(0.00041)** (0.00043)**
Constant −13.31954 −14.32913 −10.47179 −11.09155
(4.49024)** (4.30138)** (4.91202)* (4.75708)*
d2 −16.30987 −16.14047 −15.50364 −15.50737
(4.24565)** (4.39864)** (4.02668)** (4.11573)**
ln_the:Constant q 13.80912 14.24291 15.20145 14.01828
(0.96664)** (1.00134)** (1.01356)** (1.11622)**

Standard errors in parentheses; + significant at 10%; * significant at 5%; ** significant at 1%.

q is the parameter that indicates heterogeneity.

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 UNEMPLOYMENT IN URBAN ETHIOPIA 181

Table 5. Effect of Job Aspirations and Medium of Job Search on Unemployment Durationa

Duration

Aspiring to public sector 0.43686

(0.24377)+
Aspiring to formal private sector −0.27346
(0.29031)
Aspiring to self employment or casual work −0.99026
(0.24853)**
Job search through relatives and friends −0.65335
(0.23777)**
Job search through government agency −0.08036
(0.31841)
Job search through church/ethnic association −0.59115
(0.65596)
Job search through advertisement −0.12140
(0.23002)
Job search by asking employer directly −1.10486
(0.28495)**

a
Robust standard errors in parentheses, + significant at 10%; * significant at 5%; ** significant at 1%.
We report the coefficients of this variable when added to the model in Table 4 Column 2.

utility of getting a job, or because fairness plays a role, where people prefer to provide
job information to the actual rather than the prospective unemployed.
In all models we control for unobserved heterogeneity. This is of particular impor-
tance in duration analysis since the results are sensitive to unobserved heterogeneity
(van den Berg, 2001).31 In all the estimated models, unobserved heterogeneity is
significant and large. Given that we are using cross-sectional single spell data, an im-
portant candidate for heterogeneity is the timing of the unemployment spell. Ethiopia
underwent substantial changes in its socioeconomic environment during the years
immediately before the survey. In 1991, the job guarantee for the tertiary educated was
also abolished. Until then, university graduates had been assured of a job as a civil
servant. We investigate whether these changes have affected the duration of unem-
ployment by including a dummy variable to indicate that the unemployment spell
started in or after 1991, but the variable has a small coefficient with very low
significance.

6. Conclusion: Explaining the Nature of Unemployment

We find that male unemployment in urban Ethiopia is similar to that observed in Sri
Lanka, Indonesia, Malaysia, Tunisia, and Colombia: it is concentrated among relatively
well-educated first-time job seekers who aspire to a well-paid public sector job. The
vast majority of unemployed have never refused a job and are supported by their
parents. Mean duration of unemployment is close to four years, which is similar to
other countries. This fits well with a theoretical model of queuing unemployment in a
segmented labor market, like the one set out in Section 2.32 The fact that most vari-
ables have the same effect on the incidence and duration of unemployment also

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182 Pieter Serneels

confirm a queuing story. To test the predictions from theory more formally, we apply
the data to equation (7). We find that, with a wage gap of 2.8, household support of 29
USD per month (the mean per adult equivalent consumption) and a discount rate of
12.6% (the average of the credit and debit market interest rates, as reported in World
Bank (1997)), young men will stay in unemployment as long as the probability of
leaving unemployment for a good job exceeds 0.10. Using the duration model, we can
estimate the probability of getting a civil servant job (l), and find that it is 0.18, indi-
cating that the average young unemployed man in urban Ethiopia has a strong incen-
tive to wait in unemployment for a “good job” in the public service. Of course, a
number of those who aspire to a public sector job will never get one.
An intriguing question is why young men do not take up a casual job while they are
queuing for a public sector job. Although the data does not allow us to give a conclu-
sive answer, it does point in some directions. A first explanation is that the young
unemployed are credit constrained. This is confirmed by a result from the most recent
round of the survey where 86% of the unemployed who aspire to a public sector job
say they do not take up self-employment while unemployed because they do not have
the start-up capital. A second explanation may lie in the fact that social networks, the
most important channel through which a job is found, only set in after one has become
unemployed, implicitly encouraging young men to be unemployed rather than take up
a temporary job. A third factor may be social status. If bad jobs are associated with
low social status, starting one’s own business may imply a loss of reputation—espe-
cially in a stratified society where each caste has its norms and deviation from the norm
implies a loss of reputation, consistent with Akerlof (1976, 1980)—or, if public servants
are selected based on signals related to social status, it may diminish the chances of
getting a public service job.33 In both cases, the unemployed would have a reservation
level for social status that exceeds the level associated with a bad job. A pilot survey
of qualitative interviews with the male unemployed suggests indeed that loss of social
status is an important consideration in urban Ethiopia. Futher research should shed
more light on the puzzle which of these factors explains why young men do not take
up a temporary job while queueing in unemployment.

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Notes
1. Kafka (1924), The Gate, in “The Complete Stories”, Schocken.
2. Using only data obtained from household surveys (other reported unemployment figures are
often not comparable, see http://laborsta.ilo.org/), we find the following male unemployment
figures: Algeria 1995: 26%; Botswana 1995: 19%; Burkina Faso 1994: 28%; Urban Egypt 1997:
19%; Urban Ghana 1997: 13%; Morocco 1995: 18%; South Africa 1997: 24%; Urban Zimbabwe
1994: 20%. Sources: Antoninis (2001); ILO (1990) pilot surveys; ILO (1990) World Labour
Report; Knight and Sabot (1990); South Africa: October Household Survey (1997): broad unem-
ployment rate; Ghana Living Standard Measurement (1997); Kabore et al. (1997).
3. Studying female labor supply also requires taking household composition and income of the
partner into account (see, for example, Mroz, 1987). An important challenge is also to distin-
guish accurately between unemployment and non-participation in the labor force. We analyze
young women’s labor force participation in urban Ethiopia in a separate paper (Serneels, 1998),
and discuss unemployment and intra-household aspects in Serneels (2002b).
4. We make abstraction from other job characteristics like fringe benefits, job security, and social
status, which are all positively correlated with a good job and will only increase the utility gap
between the two types of jobs. We also assume that wg > B > 0, but this is not crucial.
5. The assumption of limited mobility between the sectors is crucial for a segmented labor
market and fits very well with the situation in Ethiopia. Using data from the most recent round

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 UNEMPLOYMENT IN URBAN ETHIOPIA 185

of the panel survey, we find that over a six-year period, 84% of those working in a good job
remain in this job, while 82% of those working in a bad job stay in a bad job. Unemployment
only occurring at the beginning of one’s career is also consistent with the data for urban Ethiopia.
6. The Dergue ruled from 1974 until 1991 and implemented Soviet-style policies. Most medium-
and large-scale enterprises were under government control while private firms were explicitly
restricted in size and were not allowed in all sectors (e.g. construction, wholesale trade, and trans-
port). In the mid-1990s public enterprises still accounted for about 60% of employment and
more than 80% of value added in the manufacturing sector alone.
7. Respondents were asked to describe their main activity, after which the enumerator selected
one of the 25 categories that best described the stated activity; if needed, a new category was
added. Then the respondent was asked a list of questions for that specific activity.
8. Including the unemployed in the duration analysis is important because otherwise the analy-
sis would suffer from a selection bias excluding those who remain unemployed. Completed spells
also reflect past rather than present unemployment. The method we use here is similar to the
one used in early analysis of unemployment duration in OECD countries, but because many
students in developing countries finish school late, we predict the age at which schooling was
completed using a model that includes individual and household characteristics, including a term
correcting for self-selection.
9. The lower bound is driven by the legal context: employment below age 15 is illegal and the
data has no observations. The upper bound is chosen because beyond age 30, unemployment is
at a sustained and significantly lower level. A t-test indicates that the level of unemployment up
to age 30 is significantly higher than beyond age 30, while the level of unemployment up to age
31 is no longer significantly different from that beyond age 31.
10. See Dickens and Lang (1996), Glewwe (1989) and Rama (1999) for Sri Lanka; Rama (1998)
for Tunisia; Manning and Junankar (1998) for Indonesia; Tenjo (1990) for Colombia; and
Hirschman (1982) for Malaysia.
11. Twenty percent of the working young men found their job by asking the prospective
employer (22%), while 33% found it through their social network, 26% through advertisement,
and 19% through government employment agencies. Note also that search through the gov-
ernment employment agency, on which the official unemployment figures are based, represents
only 15% of the young male unemployed.
12. A number of studies provide evidence that adult height reflects childhood nutrition, and is
a measure of accumulated health; it can therefore be considered exogenous to own labor market
outcomes (see e.g. Thomas and Strauss, 1997).
13. We test the model for homoskedasticity and normality using a conditional moment test
(Pagan and Vella, 1989) and it passes both.
14. The Gurage, who are traditionally associated with trade and self-employment, and the
Tigray, who are strongly represented in government, are commonly believed to have lower
unemployment rates.
15. Evidence for South Africa indicates that unemployment is concentrated among the rela-
tively poor, but this is a middle-income country.
16. The mean value of household assets per household member is 221 USD and 529 USD for
unemployed and employed respectively, while total per capita consumption is 21 USD and 26
USD and food consumption per adult equivalent is 16 USD and 20 USD respectively. All three
pairs are significantly different at the 0.001 level.
17. We obtain the same results when we use food consumption, measured per capita or per adult
equivalent.
18. The p-values for a score test are below 0.008 for assets, consumption, or food consumption.
19. A conditional moment test for endogeneity has p-values below 0.002.
20. To study whether the effect is inverse U-shaped, we included squared terms of household
welfare, but this only renders the effect of these variables insignificant.
21. We also investigated whether the negative relationship between urban unemployment and
household welfare would be due to a household life-cycle effect, with households who have young
people who just entered the labor market being in the poorest phase of their life time. However,

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186 Pieter Serneels

we find no evidence for such a life-cycle effect since the age of the household head or the number
of young people in the household is not significant when included in the regression.
22. Although some may be queuing for the private formal sector as well, where they continue
queuing for a public sector job, as suggested by Mengistae (1999).
23. These results remain the same when we control for the type of job.
24. It is more common to report the determinants of the hazard, but we report the determinants
of duration since both are equivalent and to facilitate comparison with the determinants of the
incidence.
25. Having completed senior secondary school, for example, would have the same effect after
one year as it would have after four years in unemployment.
26. From a theoretical perspective, proportionality occurs only if individuals are myopic, as
shown by van den Berg (2001). This may be the case if discount rates are high or if there is an
opportunity to engage in “repeated search”. Since the unemployed in urban Ethiopia come from
households with low levels of welfare, we expect them to have high discount rates. Also, the vast
majority of unemployed are young men, who typically behave myopically (see O’Donoghue
and Rabin, 2000). There is also evidence for repeated (on-the-)job search in Ethiopia (see
Mengistae, 1999).
27. For a full explanation of the test, see Lancaster (1990, p. 323). The test allows for different
uses of time; we find that the highest p-value is 0.03.
28. To consider the robustness of our results we also considered an alternative approach where
the first 72 months are further sliced into three segments of 24 months. The results are not
reported but are very similar.
29. The alternative explanation, that fathers can influence the hiring of their son, is unlikely for
civil servants in Ethiopia. Public service vacancies are advertised by the Federal Public Service
Commission following strict procedures. The hiring procedure takes several months and it is
unlikely that fathers have a direct influence on their son’s hiring. However, in this kind of bureau-
cratic environment, having inside information is vital and having a father working as a civil
servant is likely to create an information advantage. Self-employed fathers can, of course, recruit
their own son, but it is unlikely that he would call himself ‘self employed’.
30. We define one unemployment rate for each of the towns except for Addis Ababa, where we
define six different geo-economic zones with their own unemployment rate (with thanks to
Bereket Kebede).
31. Since misspecification of the baseline hazard—rather than assuming the wrong distribution
of heterogeneity—is the main cause of bias in mixture models (Ridder and Verbakel, 1983), and
because the estimation method for mixture models is complex and error prone (and little is
known about its properties), we control for heterogeneity in a parametric way. Our results are
robust for alternative distributions of unobserved heterogeneity.
32. Note that a convincing formal test for labor market segmentation is not available since sector
allocation may always be driven by unobserved characteristics, as argued by Heckman and Hotz
(1986), Heckman and Sedlacek (1985) and Magnac (1991). Nevertheless, most economists agree
that segmented labor markets have something to offer and that the evidence is too strong to
neglect the theory altogether. (See, for example, Bulow and Summers, 1986; Katz and Summers,
1989; Lang and Dickens, 1992; Saint-Paul, 1996; Stiglitz, 1982.)
33. If job search takes place mainly through social networks, it is more difficult to hide signals
of low social status, which may further encourage the unemployed not to take up a temporary
job in the bad sector.

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