Why formal jobs are vanishing yet the economy is growing

Kenya’s economy is growing again. Construction is picking up, inflation is stable, and the shilling is holding its ground. 

On paper, things look promising. But beneath the macro buzz, a quieter crisis is unfolding; the formal job market is shrinking, and it has been for more than a decade.

According to the Kenya Economic Update 2025, the share of formal employment fell from 18.5% in 2010 to 15.5% in 2024, despite steady GDP growth. 

This means most Kenyans today survive on informal, unstable jobs with low pay and very little social protection.

Yet here’s the twist: the job crisis isn’t just about the economy, it’s about competition. And Kenya’s markets are some of the most restrictive in the world.

The From Barriers to Bridges report shows Kenya has the highest Product Market Regulation (PMR) score among all high- and middle-income countries assessed, a staggering 2.92, well above the middle-income average of 2.27.

This score captures the difficulty of starting, running, or expanding a business in Kenya. The rules create market structures that favour incumbents, shield inefficient state-owned enterprises, and push operating costs to exceptionally high levels. 

When competition is weak, prices rise, innovation declines, businesses stop scaling, and the job market absorbs the consequences.

Kenya’s private sector is dominated by SMEs, yet most remain small for life because the cost of expansion is prohibitively high. 

One of the biggest barriers is the cost of basic inputs. Electricity remains expensive because of years of opaque and non-competitive power purchase agreements, while the ICT sector still struggles with high data prices caused by weak infrastructure-sharing frameworks and limited regulation of dominant players.

State-owned enterprises add another layer of pressure. Kenya has more than 200 SOEs, many of which operate in sectors where private firms could easily thrive but simply can’t compete against state-backed players that receive continuous fiscal support.

Import restrictions also raise the cost of doing business. Non-tariff barriers and tariffs increase input costs by more than 40%, making manufacturing, retail, and logistics more expensive than necessary. 

Firms that want to grow and hire must first survive this high-cost system, and most simply cannot.

The reports reveal that Kenya’s gross operating margins are significantly higher than those of its peers. 

This suggests that many firms earn more than they should in a competitive market, and they do so while workers earn less.

Weak competition reduces pressure on firms to innovate or expand, and without expansion, formal job creation stalls. The result is a labour market where the economy grows, but ordinary Kenyans do not.

When businesses cannot scale, they shift to flexible, low-cost hiring models. Informal employment becomes the default because it carries no obligations: no benefits, no contracts, no pension contributions. 

More than eight out of ten new jobs created today fall into this category, leaving millions of Kenyans with unstable incomes that cannot support long-term financial planning.

This explains why household earnings feel stagnant even during periods of economic stability. Informal jobs offer survival, not prosperity.

Weak competition has created a hollowed-out labour market. There is a small pool of high-paying formal jobs concentrated in large corporations, banking, government, and parts of the tech sector. 

Below that sits a vast universe of low-paying, informal work. The middle,  where stable, mid-tier, upwardly mobile jobs should exist, has collapsed.

This missing middle is one of the clearest signs of an economy that grows without transforming lives.

The reports estimate that if Kenya tackled competition barriers in sectors such as electricity, telecommunications, transport, and professional services, annual labour compensation growth could rise by up to two percentage points. 

At Kenya’s average wage, this shift would translate into over 400,000 new jobs every year.

The connection is simple. Lower barriers allow more firms to enter the market. More firms drive innovation and investment. Investment drives growth. Growth creates stable, formal jobs.

For millions of young people entering the job market each year, the big question remains: How is the economy growing, but I still can’t find a proper job?