Effect of the East African Community Common External Tariff on Household Labor Income in Kenya

Abstract

This study investigates how changes in prices caused by the adoption of the East African Community Common External Tariff affected the labor incomes of households in Kenya. Households in rural, urban, and fully urban areas are analyzed. Workers are classified as skilled versus unskilled, formal versus informal, and agricultural versus non-agricultural sector workers. Data from the Kenya Integrated Household Budget Surveys 2005/2006 and 2015/2016 are used in the analysis. Data from these surveys were used to categorize workers and extract the price values for commodities. One hundred and twenty-one commodities classified as agricultural or manufactured goods are analyzed. Much of the reduction in import tariffs and hence reduction in commodity prices is on manufactured goods. A Mincerian wage equation that is corrected for survey design and heteroskedasticity is estimated. Further, a sensitivity analysis using a Poisson Pseudo Maximum Likelihood model is estimated. The price-labor income effect is observed to vary with the classification of workers in the country. Skilled, formal, and non-agricultural workers gained compared to their counterparts. Workers in counties that border the EAC countries and those in the major cities in the country gained more than other workers in other counties in the country. However, in all parts where gains are experienced, the magnitude is small. This shows that generally, the Common External Tariff did not have a very significant effect on labor incomes in Kenya.