Factors Influencing Labor Productivity In The Kenyan Services Sector.

Abstract

The service sector is at the heart of Kenya’s economic growth as it accounts for approximately half of Kenya’s GDP at 50.7%. However, statistics from the World Bank and KNBS reveal that with adequate value addition, this sector can hit a projected target of 70%.This study employed the 2018 cross-sectional World Bank Enterprise survey data in determining those factors that influenced labor productivity in the Kenyan service sector. The study also sought to examine how the impact of these variables on labor productivity varied based on the size of the firm. Labor productivity is a measure of efficiency in the production process and refers to a firm’s generation of higher value-added or production per unit of labor. Following Corvers (1997), the labor productivity model was modified and extended to capture other relevant but omitted variables. The two-stage switching regressions model was employed to correct for the firm-size effect on labor productivity. The study findings revealed that capital intensity, high school education and managers’ experience impacted positively and significantly on labor productivity for both firm. The impact was higher among the large firms. Tax administration significantly decreased labor productivity across all firms with the impact being higher for the large firms. The selectivity variable was significant across both firms hence supporting the role of self-selection in labor productivity studies. To optimize labor productivity, the study recommended favorable and less bureaucratic tax regulations as well as heavy investment in human capital.