<!-- Start of picture text --> Figure 33. Change in formal employment, mean real wage, and total formal employment by ISIC 1-digit<br>subsector, 2014-2022<br>120<br>100 Mining and quarrying Financial and insurance activities<br>Electricity, gas, steam, air<br>80 conditioning supply<br>Information and communication Public administration and defence<br>Education<br>60 Human health and social work<br>Water supply, sewerage, waste Transportation and storage<br>management Administrative and support services Other service activities<br>40<br>Real estate activities Professional, scientific and Retail trade<br>technical services<br>Trade/repair of motor vehicles<br>20 Wholesale trade<br>Construction<br>Accommodation and food service<br>Arts, entertainment and recreation Manufacturing Agriculture, forestry and fishing<br>0<br>-10 -5 0 5 10 15 20 25 30 35<br>Change in employment (2014-2022; thousand workers)<br>Agriculture, forestry and fishing Mining and quarrying Rest of industry Non-industrial services<br>Note: Bubble size corresponds with 2022 formal employment.<br>Source : World Bank and ZRA staff analysis based on PAYE database<br>Mean real wage (2022; thousand 2010 ZMK)<br><!-- End of picture text -->

# 6. Discussion

That the within-firm component is the main drag on labor productivity and wage growth across various sectors suggests that economy-wide productivity constraints are a critical factor in Zambia. Cross-cutting factors such as poor infrastructure, burdensome regulations, and low technology adoption are more likely to affect firms and sectors similarly, thus impacting the within-firm component of productivity growth and leading to broad-based declines across sectors. By contrast, distortions to competition from entry barriers, policies that create an uneven playing field, and poor enforcement of anticompetitive behavior are more likely to impact allocative efficiency (the between-firm, entry, exit, and structural transformation components of productivity growth). The salience of the within-firm component in explaining productivity and wage declines in Zambia underscores the severity of business environment and firm capability constraints in the country.

Moreover, Zambia stands out from other developing countries for which similar analyses have been conducted. Analyses in other countries such as Croatia, Côte d’Ivoire, Ecuador, and Türkiye have often found the between-firm component to be the main drag on productivity growth, indicating allocative efficiency problems (Patiño Peña and Ferro Forthcoming, World Bank 2022a, World Bank 2021a, World Bank 2019a). It is less common to see economy-wide productivity declines driven by the within-sector component, although a study in Kosovo came to similar findings (World Bank 2021b). We now analyze specific business environment constraints that are especially salient and relevant to firm productivity— and, by extension, wage—trends in Zambia.

Recent evidence suggests that labor productivity declines within formal firms in non-mining industry and services partly reflect business environment constraints. Over 600 Zambian firms across manufacturing, construction, wholesale and retail trade, hotels, restaurants, transportation, and information technology 19