Determinants of Income in Informal Self-employment: New Evidence from a Long African Panel*

This article investigates the returns to workers’ productive assets, in the form of physical capital, human capital and labour, in an African labour market. We specify a model for the income-generating process grounded in the literature on firms’ production technology, hence abridging the gap between the analysis of individual earnings and the study of firms’ value added. Identification in the empirics is achieved by means of panel estimators that are suitable to address the endogeneity of input choices, which derives from both time-varying and time-invariant unobservable heterogeneity. The use of these estimators is made feasible by the length of a newly constructed Ghanaian household panel dataset at CSAE. We further explore issues of endogeneity in the selection of different technologies, defined by their capital and labourintensity. Finally, we analyse the shape of returns to capital, with the aim to detect potential non-convexities in technology. The results evidence that capital and work-experience play the strongest role in income-generation, while the shares of value-added attributed to labour and to formal schooling are low. Marginal returns to investment are high at low capital levels, but they decrease very rapidly, pointing against the existence of non-convexities due to minimum-scale requirements and implying that real income gains resulting from micro-investment are modest. JEL Codes: J24, J31, O12, O17 *This paper uses data from the six rounds of the Ghana Urban Household Panel Survey, conducted by the Centre for the Study of African Economies (CSAE). The dataset forms part of ongoing CSAE research into urban African labour markets funded by the ESRC, RECOUP, IDRC, DFID and the Gates Foundation. We are greatly indebted to Moses Awoonor-Williams and members of the Ghana Statistical Office, who assisted in the data collection. Centre for the Study of African Economies, University of Oxford, E-mail: [email protected]