# **3. Labor productivity and sectorial employment shifts: UBI 2002 and UBI 2009**

In this section we assess the effect of the structural change of the 2000s in Uganda (as captured between UBR 2001 and UBR 2010) on aggregate labor productivity by analyzing data from the 2002 and 2009 waves of the UBI. Did aggregate productivity increase because of the rise in the employment share of the non‐traded sector at the expense of the traded sector? Or, did the inter‐sectorial reallocation of labor involved in the process actually reduce productivity or remain neutral to it? And if aggregate productivity did in fact change one way or the other, what specific mechanisms brought the change about?

Our working hypothesis is that the shifts in employment across enterprise size and age groups that the reallocation of labor between traded and non‐traded activity involved as described in section 2 must be a part of those mechanisms. If labor productivity differs at the firm level within each industry across business size groups or business age groups because of economies of scale or due to life cycle effects and there are inter industry differences in the level or duration of those effects, then a reallocation of labor from one industry of a given firm ‐age structure or firm‐ size structure of employment to another one with a different structure would change aggregate productivity even if there were no other technological or institutional differences between the two industries involved.

One would nonetheless expect other differences to exist as well at least in some cases in which case it would be useful to identify them as among the factors behind the aggregate productivity gains or losses we may associate with the observed structural change in Uganda along with factors contributing to inter‐industry difference in technology, market structure, and rates of investment, on which the UBI surveys also provide information along with data on factor inputs.

If the microenterprises to which employment shifted in 2000s in Uganda are less productive on average than the large scale establishments the employment shares of which were declining, then the observed structural change would have reduced aggregate labor productivity other things being equal. One potential source of mitigation to this could be the fact that the employment share of established businesses also increased at the same time. For this would boost aggregate labor productivity if established businesses turn out to be more productive than startups or younger businesses. However, unlike that of the rising employment share of microenterprises, the effect on labor productivity of shifts in employment shares across the size distribution of firms are not clear cut. For, on one hand, startups and younger firms could be less productive on average in as far as they are less experienced and would need to fill the resulting skills gap through a costly process of learning by doing. On the other hand startups and younger firms could have greater potential for productivity enhancing innovation than more established firms. The overall effect on aggregate labor productivity of the reallocation of labor across the age distribution firms would depend on how these two factors balance out or reinforce each other in any given situation.

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