Unemployed youth in urban Ethiopia who are provided with transport subsidies increase the intensity with which they look for work and are more likely to find good permanent jobs. That is the central finding of research by Simon Franklin, published in the September 2018 issue of the Economic Journal.
The evidence of his study suggests that cash constraints cause unemployed young people in developing countries to give up looking for good jobs too early. Policies that help to subsidise job search or provide unemployment insurance hold promise for helping them to invest optimally in job search.
Economists have long thought that cities play an important role in the functioning of labour markets. But sprawling and congested cities could mitigate these benefits if some people live so far away from the centre that they find it too expensive to travel to the centre to find jobs.
The new study shows a causal link between the costs of transport required to look for work and individual employment outcomes. It uses a randomised controlled trial of transport subsidies to test whether young jobseekers who live far from the centre of Addis Ababa in Ethiopia are constrained in their ability to search for jobs. Transport subsidies cover the cost of travelling to the centre, but no more, in the way that a bus-fare subsidy programme would.
The study is designed around a striking feature of the labour market in Addis Ababa: formal job vacancies are advertised on physical job boards in just three locations in the city centre. Young people have to travel in person to these locations regularly if they are to find out about new jobs.
Providing free transport to the centre of the city increases the probability of finding a permanent job four months later.
Why is it that search costs constitute such a large barrier to finding good work? A one-way trip by minibus to the centre costs less than $1, but this constitutes 12% of the median weekly expenditure for individuals in the study.
Are young people so short of cash that they simply cannot afford to pay these costs to search? In fact, young people travel to the centre regularly to look for work, especially early on in the study. As they run short of cash, their search effort declines rapidly over time. Some become completely discouraged or take up work in the informal sector.
The research uses a weekly phone survey to track job search behaviour among the participants in the study. The results show that the transport subsidies prevent young people from giving up job search too early, and this increased persistence translates into better jobs.
These findings suggest that cash constraints are stopping them from optimally investing in job search. They would want to borrow money to allow them to keep searching for work if they could, but they may find this difficult to do. Policies that help to subsidise job search or provide unemployment insurance hold promise for helping them to invest optimally in job search.
‘Location, Search Costs and Youth Unemployment: Experimental Evidence from Transport Subsidies’ by Simon Franklin is published in the September 2018 issue of the Economic Journal.