– they do not contribute to much of new and sustained increases in employment. **But, graduation rates are very, very low** – hardly any micro (less than 20 employees) and small (21-50 employees) enterprises graduate to medium (51100 employees) and large (101+ employees) size status.

- In addition, **it is incumbents, not entrepreneurs, that do much of initial, and sustained job creation** – new entrants create an abysmal proportion of new jobs and since most end up exiting the market they destroy most of these jobs. In other words, **entrepreneurs in Ethiopia make minimal impact on the labor market and do not last very long anyway** . It is mostly incumbents that do the heavy lifting, of initial and sustained job creation over time. This result holds quite consistently across cities and industries.

- What factors seem to drive sustained increases in jobs across Ethiopian cities?

- **Job creation** : Intra-industry clustering, low taxes and licensing fees, and low transport and power costs determine firms’ ability to grow employment.

- **Emergence of Job Superstars** : Industry concentration in a few manufacturing sectors and low licensing fees increase the probability that firms will double employment every 4 years. This is particularly true for small and medium enterprises.

- **City-level employment** : Employment at the level of cities is higher when intraindustry clustering and industrial diversity is high, and transport costs are low.

How can public policy help draw on these findings to improve economic outcomes for cities in Ethiopia<sup>14</sup> ?

- **Identify and invest in cities’ competitive advantage** . Secondary and smaller cities are seeing the growth of naturally forming industrial clusters, while Addis Ababa’s advantage seems to lie in its diverse industrial structure. As the government’s MSME Strategy notes, not all cities will be able to attract medium and large enterprises in equal measure—cities will end up specializing in particular sectors and industries. Cities in Ethiopia will have different functions, and their capital and labor needs will differ accordingly. The government can encourage discrete growth corridors (e.g. Bahir Dar–Gonder, Mekele–Dessie, Harar–Dire Dawa, and Addis Ababa–Hawassa) by strengthening inter- and intra-city cluster links and providing the necessary infrastructure. More generally, cities should develop their local economic development strategies and invest in quick-wins for identifying and exploiting their comparative and competitive advantages.

- **Identify and invest in growing the missing middle of companies and jobs across urban areas** . Most of existing employment takes place within small, entrepreneurial firms, many of which are also informal. At the same time, new and sustained job creation in Ethiopia comes from medium and large firms. Small entrepreneurial firms seldom sustain increases in job creation. In particular, the quality of employment and associated incomes is low, suggesting that self-employment will not be a panacea for robust economic growth. Wage employment is crucial to job growth and sustainability, but Ethiopia has a sizable missing middle. Research (in Ethiopia and elsewhere) demonstrates that waged employment is associated with a fall in urban poverty and the emergence of more formal employment, the latter also increasing with city size. In fact,

> 14 This section draws upon the World Bank (2015a) Ethiopia Urbanization Review.

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