Allocation of Labor in Urban West Africa: Insights from the Pattern of Labor Supply and Skill Premiums Ralitza Dimova, Christophe J. Nordman, and François Roubaud* Abstract Using comparable data from five West African capitals, we assess the rationale behind development policies targeting high rates of school enrollment through the prism of allocation of labor and earnings effects of skills across the formal and informal sectors, and not working.We find that people with high levels of education allocate to the small formal sector, while less educated workers allocate to the informal sector. While high levels of education are given more value in the relatively smaller sectors of salaried employment, observed skills like education appear to be fairly unprofitable in the larger self-employment sector. The fact that only the small formal sector in urban West Africa both seems to absorb highly educated workers and provide high skill premiums may be an important reason for the observed low demand for education and high dropout rates. 1. Introduction Educational investment in general and investment in basic education in particular have long been among the main targets of both bilateral and multilateral donors. Between the 1960s and the turn of the twenty-first century, the World Bank, the single largest donor, doubled its total investment, while the eight largest bilateral donors reached a contribution of more than US$100 million per annum (EFA Global Monitoring Report, 2005). As Sub-Saharan Africa has consistently been the primary destination of educational investment, it is not surprising that gross elementary school enrollment rates in the subcontinent increased from 40% in the 1960s to 87% in the 1990s, while gross secondary school enrollment rates rose from 3.4% to 26% over the same period (World Bank, 2004). Yet, the number of adults without basic literacy increased from 131.4 million in 1990 to 136 million in 2000, more than one in 10 children continued to repeat at least one grade in more than half of the Sub-Saharan African countries, and the expected link between increasing levels of educational enrollment and growth remains as elusive as ever (Pritchett, 2001; UNESCO, 2007). A plausible, but often ignored, explanation of the above pattern could be either the low rentability of the available stock of education or low availability of easily attainable high-skill jobs in the Sub-Saharan African labor market, which decrease both the individual incentive to acquire education and the association between educational enrollment and growth. The two strands of literature touching on this issue have failed to reach a consensus. On the one hand, there has been an ongoing debate on the appropriate measurement of returns to different types of education (Psacharopoulos *Dimova: Faculty of Economics and Finance, Brunel University, Kingston Lane, Uxbridge, Middlesex UB8 3PH, UK. E-mail: ralitza.dimova@brunel.ac.uk. Nordman (corresponding author) and Roubaud: IRD, DIAL, 4 rue d’Enghien 75010, Paris, France. E-mails: nordman@dial.prd.fr and roubaud@dial.prd.fr. We thank two anonymous referees, Francis Teal, and participants at the 2008 annual CSAE conference in Oxford and at the Third IZA–World Bank conference in Rabat for helpful comments.The usual disclaimer applies. Review of Development Economics, 14(1), 74–92, 2010 DOI:10.1111/j.1467-9361.2009.00540.x © 2010 Blackwell Publishing Ltd