May 21, 2024

Public works in the city

Do government employment programs boost the welfare of the urban poor in developing countries?

Addis Ababa is Ethiopia's capital and largest city.

Source: fivepointsix

While the majority of the world’s poorest populations live in the countryside, the share of the poor living in cities has increased rapidly since the 1990s. The changing geography of poverty poses new challenges for developing countries trying to translate antipoverty programs designed for rural environments to urban settings.

In a paper in the American Economic Review, authors Simon Franklin, Clément Imbert, Girum Abebe, and Carolina Mejia-Mantilla show that urban public works can help lift the urban poor out of poverty. However, labor market dynamics in cities need to be considered when evaluating such programs.

While urbanization has gone hand in hand with falling poverty rates in many areas around the world, Africa has seen little to no reduction in overall poverty. To address this concern, Ethiopian authorities extended one of their most successful rural programs to the country’s capital and largest city, Addis Ababa.

Starting in 2018, the Urban Productive Safety Nets Program (UPSNP) offered employment at relatively high wages—about 50 percent higher than private wages—to work on neighborhood improvement projects. The projects involved small-scale tasks such as cleaning streets, maintaining drains, garbage disposal, and gardening. At its peak, UPSNP enrolled nearly a fifth of households in the city.

If other countries are thinking about implementing public works programs, I think they need to think a lot about what their labor market looks like, for instance what sort of outside employment options beneficiaries of the program are likely to have.

Simon Franklin 

The neighborhoods were randomly selected for participation in the program, after which community leaders helped assign jobs to the neediest households. By comparing households with the program to those without it, the authors first estimated the program's impact on employment. 

However, they found almost no effect on overall employment. While UPSNP significantly increased employment on public works, it offset the hours worked in the private sector by nearly the same amount. This showed that the urban poor did not lack employment opportunities—one common justification for public works—but it also suggests that the program significantly impacted private sector wages. 

“The basic intuition is that this program is taking people out of the labor market and putting upward pressure on wages, because employers have to pay people more in order to keep people employed,” Franklin told the AEA. “And that could raise wages for everyone.”

Given that most residents commuted to other neighborhoods for work, a simple comparison between treated and untreated neighborhoods would fail to incorporate the program’s full impact on private wages in the city.

To account for any spillover effects, the authors employed a spatial equilibrium model. Such models take into account transport networks in the city and labor market interactions between neighborhoods.  

Estimates from the authors’ model implied private sector wages everywhere increased overall by nearly 19 percent after the program was fully rolled out. By contrast, a naive comparison that ignored spatial spillovers would imply about a 9 percent increase. Even in neighborhoods that did not participate in the programs, private sector wages increased by as much as 3 percent in the first year of the program, before it had been fully implemented.


Neighborhood spillovers
The chart below plots the logarithm of wages in each neighborhood against the neighborhood's exposure to UPSNP through the commuting patterns of workers. The red circles represent untreated neighborhoods, and the green triangles represent treated neighborhoods.
Source: Franklin et al. (2024) 


While indirect wage gains accounted for the bulk of the gains, the authors also found that the public works improved local amenities. The authors calculated that improvement in neighborhood quality from the projects was equivalent to about a 2.5 percent increase in rents.

Combining the improvements in wages and amenities revealed significant gains for the poor in Addis Ababa. Overall, their welfare increased by 22.4 percent. Better neighborhood amenities and direct wage gains each contributed about 3 percent, but by far the largest gains came from higher private sector wages in both treated and untreated neighborhoods. In fact, the indirect increases in wages made the UPSNP more beneficial on the whole for the poor than comparable cash transfer programs.

The authors’ work highlights the importance of urban labor market dynamics and accounting for spillover effects when evaluating antipoverty programs.

“If other countries are thinking about implementing public works programs, I think they need to think a lot about what their labor market looks like, for instance what sort of outside employment options beneficiaries of the program are likely to have,” Franklin said. “Depending on what your local context is, these programs have the potential to either reduce unemployment or to raise wages like we saw in Ethiopia.”

Urban Public Works in Spatial Equilibrium: Experimental Evidence from Ethiopia appears in the May 2024 issue of the American Economic Review.