# **I. INTRODUCTION**

A major focus for Tanzanian policy makers is how to attain middle-income status by 2025<sup>2</sup> through greater economic diversification to reduce poverty and to ensure good quality jobs for the approximately 800,000 young people who enter the labor market each year. Creation of new jobs of good quality will require more rapid economic and productivity growth and, on the demand side, growth in employment from expansion of existing firms and the creation and growth of new enterprises. The skills deficit in the labor force is acknowledged to be a constraint in Tanzania for both existing and new firms, given the low levels of educational attainment and technical skills of the population. However, there is little data on the specific skills shortages that firms face, the strategies they use to address these shortages, and the way these skill deficits impact their operations.

The most important source of systematic information on the demand for skills in African companies comes from Enterprise Surveys fielded by the World Bank.<sup>3</sup> The Enterprise Survey contains information on firm characteristics and performance but only limited data on workforce skills; where it shines is in detailed assessments by firms’ managers of different elements of the business environment, rankings of obstacles, and their overall impact on their operations. Many elements – power outages, corruption, infrastructure, access to finance and changes in regulatory or fiscal regimes – directly constrain or introduce uncertainty into firms’ operations, and as such loom large in rankings of major business environment constraints. Hence, rather counterintuitively, the results seem to show that availability of skills is not a major constraint for firms in Africa.

This study uses a unique survey of Tanzanian businesses to investigate the demand for skills in formal-sector firms,<sup>4</sup> how they respond to skill constraints, as well as the effects on productivity of their strategies to meet skills deficits. The motivation for this study was to inform the policy dialogue on developing higher level skills in Tanzania, particularly in applied sciences, engineering and technology (ASET) and to support preparation of a new project “Education and Skills for Productive Jobs (ESPJ)” financed by the World Bank.<sup>5</sup> Another motivation was to pilot

> 2 Tanzania Development Vision 2025 envisions Tanzania becoming a middle income country by 2025 (Planning Commission, 1999)

> 3 The Enterprise Surveys on the links between skills and firm performance in many countries and regions have been widely used in research. For example, see Almeida (2010) on East Asia, Tan et al. (2007) on Russia, and Perotti (2014) on 29 countries in Sub-Saharan Africa.  While this research has yielded important insights, it has been limited by the paucity of information on different dimensions of workforce skills and skill gaps.

> 4 The formal sector is defined here as the universe of non-agricultural private enterprises producing goods and services for sale, that are registered with the authorities, and that employ five or more employees.

> 5 This study on skills demand in the formal sector is one of several background papers prepared for the project. Other studies focus on the education and occupational structure of the labor force and forecasts of future supply (Meade, 2014); skills needs assessments in several sectors such as agribusiness (Temu, 2015), tourism and hospitality (Anderson, 2015), transport and logistics (Rwebangira, 2016), and construction (Lema et al., 2015); study of the informal sector (Billetoft, 2015); projections of educational attainment (Moreno and Tanaka, 2015); financing and institutional arrangement for skills development (Dachi, 2015); and assessments of the current TVET system (Mwaduma, 2015).

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