Determinants of Labor Productivity Among Smes and Large‐sized Private Service Firms in Kenya

Abstract

Using the 2018 World Bank enterprise data, this study sought to establish whether the determinants of labor productivity in the Kenyan private service sector varied with the size of the firm. Unlike previous studies that just focus on the determinants of labor productivity among manufacturing firms; this study employed the two‐stage switching regressions model to correct for the firm‐size effect. The findings revealed that capital intensity, employee wage, high school education, and managers' experience impacted positively and significantly on labor productivity while tax burden and power outages significantly decreased labor productivity across all firms. The differences in the determinants of labor productivity across both firms were, however, found to be negligible and insignificant. With the political uncertainty and tax burden constraints perennially defining the Kenyan economy, the study recommended the provision of a favorable business environment and investment in human capital as key channels of optimizing service sector productivity. The selectivity variable was also significant across both firms, hence supporting the role of self‐selection in labor productivity studies. Correcting for the firmsize effect was very crucial; something that has been largely ignored in previous studies on labor productivity.