# 1. Introduction

Zambia’s private sector must deliver quality jobs at scale to keep up with the expanding working age population, contribute to economic transformation, and reduce poverty. Based on population growth projections, Zambia needs to create over 10 million new jobs by 2050 to keep its labor force participation and employment rates from declining. The country’s working age population is projected to more than double between 2022 and 2050 (Merotto 2017). This growth will provide a demographic dividend if Zambia can drive productivity growth and economic transformation. However, if Zambia’s private sector fails to generate enough good jobs to absorb this expansion, economic growth will fail to permeate to the rest of the economy as new working-age Zambians will be unable to access productive opportunities. This will limit its impact on poverty reduction and increase the risk of upheaval.

As well as creating new jobs, Zambia’s private sector needs to make existing jobs more productive. Low productivity is limiting Zambia’s potential to diversify its sources of growth and to create quality jobs and firms. While shifts in labor to higher-productivity sectors and within-sector productivity improvements can contribute to labor productivity growth and higher wages, Zambia’s private sector has had limited success in both areas. Lower-productivity sectors such as agriculture (58.7 percent of employment) and wholesale and retail trade (14.1 percent) still account for most employment. Existing high-productivity sectors tend to generate few jobs. These include financial services (0.5 percent of jobs) and mining, which accounts for only 1.1 percent of jobs despite its role as Zambia’s primary export driver. Meanwhile, lower-productivity informal employment accounts for three-quarters of jobs, and within-sector productivity has generally been flat (Zambia MLSS 2022, World Bank 2024).

It is thus critical to identify the drivers of and barriers to productivity, formal employment, and formal wage growth in Zambia. Leveraging firm and worker administrative tax data from Zambia, this paper decomposes labor productivity and wage growth among formal firms and workers in Zambia into withinfirm, between-firm, inter-sectoral, and dynamic components. We find that aggregate labor productivity of formal firms declined over the 2014-2021 period, driven by secular within-firm declines in the nonmining industry and service sectors. By contrast, labor productivity grew in agriculture and remained flat in mining over the same period. Real wage trends for formal workers have mostly mirrored labor productivity dynamics, declining 40-50 percent across non-agriculture sectors but growing slightly in agriculture, largely driven by within-firm shifts rather than between-firm or between-sector dynamics. The declines in labor productivity and wages reflect business environment challenges related to access to finance and electricity, as well as burdensome formal compliance requirements and competition with the informal sector. Within-firm labor productivity challenges also reflect low skills and capacity— including low technology adoption—among both firms and workers.

The rest of this paper is structured as follows. Section 2 provides background about the related literature and the private sector in Zambia. Section 3 outlines the data sources we leverage in the paper. Section 4 first outlines the methodology used for productivity analyses and then discusses the results of these analyses. Section 5 outlines the methodology and results for jobs-related analyses. Section 6 discusses the productivity and wage findings in the context of salient business environment and firmlevel constraints in Zambia. Section 7 concludes with the implications the paper’s findings and areas for further research.

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