reflecting their different economic structures, stages of development, and business environments. For example, in Côte d’Ivoire, Croatia, Ecuador, and Türkiye, studies find rising misallocation of resources— that is, less productive firms not being outcompeted by more productive ones—to be the main drag on productivity growth (World Bank 2021a, World Bank 2022a, Patiño Peña and Ferro Forthcoming, World Bank 2019a). By contrast, in Kosovo, the data suggest that falling productivity of incumbent firms is the main driver of overall productivity declines (World Bank 2021b).

# 3. Data

The empirical analyses in this paper leverage two databases from the Zambia Revenue Authority. One draws information from Corporate Income Tax (CIT) returns, while the other draws information from Pay As You Earn (PAYE) Tax returns. The CIT database covers over 5,000 firms that paid corporate income tax in Zambia for the 2014-2021 period. In Zambia, firms that have annual turnover (sales) exceeding ZMK 800,000 or engage in specified business activities are liable for CIT.<sup>4</sup> The standard income tax rate is 30 percent. However, certain industries have special rates that apply to them. For firms with annual profits below K250,000, the tax rate is 30 percent. For industries with annual profits exceeding K250,000, the rate is 40 percent. For those in farming and agro-processing, the rate is 10 percent, while certain manufacturing industries have a rate of 15 percent. If a firm’s turnover is below the CIT filing threshold, the firm is liable for the Turnover Tax at 4 percent monthly across all sectors.<sup>5</sup> With variables drawn from firms’ returns, the CIT database contains panel data on firms’ registration location, sales, cost of sales, and wage bills. It is thus the primary source of firm-level variables for output, capital, labor, and inputs used for productivity estimation (see below discussion on specific variables used for estimation). Available and comparable CIT data cover the 2014-2021 period.

The PAYE database covers over 800,000 workers that paid into PAYE tax in Zambia over the 2014-2022 period. In Zambia, every firm that offers employment is required to operate PAYE, which is a method of collecting income tax from their employees' earnings, although in practice compliance varies across firms and across workers within firms and is limited overall. The employer is obligated by law to deduct income tax from its employees' taxable salary or wages—regardless of whether they are full-time workers or casual employees—on a weekly, fortnightly, or monthly basis. The tax is deducted from all types of payments made to an employee, including salaries and wages, overtime payments, bonuses, profit sharing, fees, leave pay, commissions, allowances, cash benefits, and any benefit, advantage, or allowance (excluding non-money fringe benefits) and payments on taking up or leaving employment.<sup>6</sup> PAYE income tax calculation is based on a progressive slab system that splits the total taxable income of the employee into brackets, with each tax bracket having a corresponding tax rate. Drawing information from fields in PAYE returns, the PAYE database provides information on formal workers’ monthly gross pay and sector of operations. Thus, the PAYE database is the main source for jobs-related analyses in this paper. Available and comparable PAYE data cover the 2014-2022 period.

> 4 Mining and consultancy firms are required to register for Corporate Income Tax regardless of their turnover. 5 Turnover Tax filings are not part of the CIT database and not accounted for in this paper’s analyses because Turnover Tax filings do not contain the necessary variables on labor and costs necessary for productivity estimation in line with this paper’s methodology.

> 6 Employee emoluments that are not subject to PAYE include Labour day Awards, Ex-gratia payments, Medical expenses and Funeral expenses.

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