At roughly 4% per annum, labor productivity in Tanzania has grown more rapidly over the
past 14 years than at any other time in recent history. Employment growth has also been strong
keeping up with population growth at roughly 2.2 percent per annum. However, the bulk of the
employment growth – 88.6% - has been in the non-agricultural and largely informal private sector.
Using Tanzania’s first nationally representative survey of micro, small and medium sized enterprises
- we show that these informal firms made a substantial contribution to annual labor productivity
growth through structural change. However, most of this labor productivity growth came from a
relatively small subset of these firms where annual average labor productivity is significantly higher
than average labor productivity in the rest of the economy. The owners of these firms share the
following characteristics: (i) they wouldn’t leave their business for a full time salaried position and; (ii)
they keep written accounts. Accelerating employment growth in this group of firms has the potential
to contribute 1.3 percentage points to annual labor productivity growth; to put this in perspective
the formal modern sector contributed 1.58 percentage points to annual labor productivity growth
over the past decade. Actualizing this potential will require financial products and business services
targeted at this group of firms.