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Labour Market Policy

Index

• Policies for Unemployment June 2017
• Why has unemployment risen in new SA 22 June 2017

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Policies for Unemployment June 2017

In the decade following the dismantling of restrictive Apartheid labour laws, unemployment in South Africa almost doubled. The same previously disadvantaged groups had to bear a disproportionate share of the costs of such higher unemployment.

Levinsohn offered several reasons for the rise in unemployment. First, the global trend of skill-biased technological change drove the need for better skilled workers and impacted South Africa’s mining and agricultural sectors where many unskilled black¹ persons worked. Second, there was a large influx of mostly under-educated black women into the labour market just when demand for less skilled workers declined. Third, the increased labour supply coupled with the drop in demand for labour would have led to wage declines that society found unacceptable – resulting in a sizeable rise in unemployment.

¹The author used the term “black” to include the African, Indian/Asian and coloured population groups.

The socio-economic costs of the unemployment were viewed on three levels:

• Unemployed people represent lost economic output – which could have had a positive growth impact of as much as 48% per capita GDP.
• The static costs of unemployment were amplified over time – unemployed workers did not gain the skills and experience to support their productivity in the future, and thus ever greater skills gaps developed between the employed and unemployed; unemployment is not a self-correcting problem, and the longer the wait to address it, the costlier it becomes in terms of future growth.
• Unemployment gives rise to social ills associated with a loss of hope such as crime, disengagement and a lack of investment in one’s future well-being.

Levinsohn remarked that in 2007, unemployment was probably the single most pressing challenge that the country faced.

The context – South Africa’s labour market

Levinsohn identified four key patterns in the labour market data by 2007:

1. Unemployment and labour force participation rose over the previous decade, and unemployment levels (by both narrow and strict definitions) were high.
2. Unemployment was not evenly distributed across the age spectrum – it was more concentrated amongst younger adults.
3. Unemployment was high even for those with a matric qualification, but nearly zero for those who held university degrees.
4. Transitions from unemployment into formal sector employment were as rare as transitions from the informal sector to formal sector.

With reference to labour force data, Levinsohn observed that labour force participation rates were low by international standards, and that completion of high school did not guarantee entry into the labour market.

A targeted wage subsidy

Levinsohn proposed a targeted wage subsidy to facilitate the school-to-work transition, with the targeted population identified as recent school leavers. A critical component of the policy was a probationary period during which subsidized workers could be dismissed at will.

What is a targeted wage subsidy?

Levinsohn argued that a tax on wages (e.g. through payroll deduction) would discourage employment in the formal sector and encourage investment in capital (rather than labour). Such a tax on wages would raise revenue for the fiscus but not encourage employers to hire. Further, it would not be collected in the informal sector.

Levinsohn argued that a wage subsidy had the opposite impact. By lowering the cost of labour employed in the formal sector, a wage subsidy increased demand for labour in that sector, increased employment and favoured labour above capital while the costs were borne by the fiscus. A targeted wage subsidy was only for a subset of workers, and thus increased the relative attractiveness of hiring from the target group, as opposed to those outside the group.

The economic argument for a targeted wage subsidy

Levinsohn argued that the labour market data “overwhelmingly” suggested that there was something “preventing young school-leavers from entering the labour market”. By 2005, unemployment for school-leavers was above 50% in terms of the narrow definition. He emphasized the importance of getting younger workers into their first jobs.

Levinsohn outlined several market imperfections. First, firms may be unwilling to employ recent school-leavers because they needed training, and once trained, the better workers would leave for other jobs. The second firm could afford to offer higher wages as it would save on training costs and employ a trained worker. This problem could not be solved by shifting the training costs to the employee – it was impractical given socio-economic realities. Levinsohn conceded that while a targeted wage subsidy was not the first-best policy response, it could work in the right direction.

A second market imperfection was linked to disengagement that young people experienced when unemployed (and the costs to society of associated social ills). A targeted wage subsidy would re-engage young school-leavers and alleviate a burden on society.

A third market imperfection arose due to wage agreements with trade unions – which also influenced non-union wages. If at prevailing wages employers could still fill jobs with experienced workers available in the labour market, there would be no reason to hire new and inexperienced workers. This reality resulted in substantial unemployment for new entrants to the labour force.

Levinsohn said that the above market imperfections “argue(d) for a nationwide targeted wage subsidy”. The pervasiveness of unemployment further supported the case for a national policy. Because unemployment was a “country-wide multi-sector problem”, Levinsohn argued that it would not self-correct by labour reallocating on its own from one sector to another. Accordingly, government needed to respond with a policy targeting younger workers.

Levinsohn identified a fourth market imperfection in the context of the costs of dismissal. For employers it is difficult and costly to dismiss workers under existing labour laws. Employers were unlikely to hire a new labour force entrant whose quality and productivity were unknown and even less so, if dismissal was both difficult and costly. According to Levinsohn, data supported the view that uncertainty about worker quality coupled with high dismissal costs contributed to unemployment. The critical bottleneck was entry into the job market. The goal of the wage subsidy was to get workers through the “front door”, and “then let the market decide if the fit is a good one”.

Levinsohn reasoned that a targeted wage subsidy would encourage more risk-taking if it were tied to revised rules for dismissal of workers who benefitted from the subsidy. He proposed a probationary period during which a “no-questions-asked dismissal policy applied. The author argued that the targeted wage subsidy would in effect subsidize job search (by workers) and experimentation by firms.

Although the economic argument for such a wage subsidy is strong, there are caveats:

• Destructive churning – the risk of abuse if participants are freely dismissed just prior to the expiry of the subsidy; however, firms will be reluctant to fire good workers and rotate their workforce, and would need to re-incur training costs to hire replacements; in any event, sacked workers would be better off for having gained work experience;
• Substitution with non-targeted workers may occur – It was not expected that firms would hire non-targeted workers as the new dismissal rules would not apply to them;
• The risk of stigmatization of targeted workers in the eyes of employers could be addressed if the policy included all recent school leavers;
• The policy could induce learners who would otherwise be studying to leave for a subsidized job; however, if the subsidy is available to all 18-year olds, those who remained in school could use it later.

Implementation issues – How to craft the policy

Levinsohn outlines a few higher-level issues:

• Eligibility – all South Africans upon reaching 18 receive a wage subsidy card to be used while working for a registered business; employers draw down a subsidised amount per month;
• Expiration – subsidy should not expire so that learners who wish to remain in school, can do so;
• Level of subsidy – equivalent of proposed R5,000 per year in mid-2007, subject to assessment after a pilot project;
• Probationary period – to be negotiated with stakeholders, but author proposes 10 weeks for a “no questions asked” dismissal policy to be in place;
• Cost – Estimated in 2007 assuming 75% of 1 million 18-year-old beneficiaries will use their R5000 wage accounts = R3.75 billion; however, subject to budget and fairness considerations.

Immigration reform

South Africa has a shortage of highly skilled workers. Levinsohn argued for a welcoming immigration policy aimed at increasing the supply of high level skills. Such skills will stimulate economic growth and increase the demand for less skilled workers (thereby alleviating unemployment).

Levinsohn recommended that applicants with a post-graduate degree from pre-approved universities/ institutions be granted automatic entry, and that the policy should apply to both temporary and permanent workers.

Related policy responses to unemployment

Other policies to alleviate unemployment include the reform of the education system and public works programs. However, such policy options were not considered for the following reasons:

• The need to adopt a pragmatic view – that the employment policy must deal with the labour market that exists, and not the labour market that government desired;
• Fixing the school system is a long term project which will not address today’s unemployed; policies should aim to alleviate unemployment in the near term;
• There is little evidence that public works programs provide a base for sustained future employment – generally participants are not trained for gainful employment.

Conclusions

Unemployment threatens the achievements of the new South Africa and its burden is mostly borne by those who were previously most disadvantaged. Each of the proposed polices will alleviate unemployment.

A targeted wage subsidy is an ambitious policy with a substantial cost to the fiscus, while a reformed immigration policy will have a more modest impact.

There are costs to postponing a policy response to unemployment. Over time unused human capital depreciates – yet another reason to target school-leavers before their learning is forgotten.

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Why has unemployment risen in new SA 22 June 2017

Notes re remarks about the structure and approach of the original article:

1. This article appears to be written by labour market economists for labour market economists. It is very technical and does not assist policy makers to better understand the labour market challenges.
2. It is possible that the authors produced a much more comprehensive article, and then summarized it for client. Important approaches and methodologies were not explained in the final version, so that context is lost for some of the findings. Paragraph numbering and headings are also inconsistent – and may indicate that a summary replaced the original work.
3. Inconsistencies were noted in terminology used – the terms “African” and “black are used without an explanation of the scope of the terms. Reference is also made to a “matric degree” (p 59).
4. An example of an apparent contradiction appears in section 3.2. The authors observed that Africans were falling behind in wages, but the in graphs used, the population group “black” was excluded; only data pertaining to the coloured, Asian and white population groups were used – See Figure XI on p 27.
5. However, the authors’ work on youth unemployment is particularly relevant. Their analysis and description of unemployment at the level of the individual is also valuable as it sheds light on the complexity of the challenges associated with tackling unemployment.

1 Abstract

We document the rise in unemployment in South Africa since the transition in 1994. We describe the likely causes of this increase and analyse whether the increase in unemployment is due to structural changes in the economy (resulting in a new equilibrium unemployment rate) or to negative shocks (that temporarily have increased unemployment.) We conclude the former are more important. Our analysis includes a multinomial logit approach to understanding transitions in individual-level changes in labour market status using the first nationally representative panel in South Africa. Our analysis highlights several key constraints to addressing unemployment in South Africa.

2 Introduction

The primary focus is to understand why unemployment in South Africa is so high. The authors analysed data from labour force- and household surveys from 1995 to 2005.

Official labour statistics in South Africa apply the definitions of the International Labour Organisation (ILO): working age persons are included in the labour force if during the week of reference, they were employed or wanted to work, were available to start within a week, and also actively looked for work in the previous four weeks (narrow definition). Under the extended (or broader) definition, the requirement of active job search is discarded.

3 The structure of unemployment and labour input

Extensive data analysis enabled the authors to document unemployment in South Africa. They argued that unemployment comprised of two parts – its equilibrium rate (the rate at which, all else equal, the unemployment series converged) and deviations from the equilibrium. They asked whether unemployment represented an increase in the equilibrium rate or whether temporary shocks had driven unemployment above the equilibrium level.

3.1 Participation, employment and unemployment rates

The authors considered participation, employment and unemployment for the population aged 16 to 64 years. They found that unemployment was “extremely high” and increased between 1995 and 2005. Using the ILO definition, unemployment doubled between 1995 and 2001. At the same time, labour force participation increased while the employment rate decreased.

3.1.1 International comparison

Labour force participation rates were low by international standards. South Africa experienced lower employment rates and higher unemployment rates than OECD, Latin American and even African countries.

3.1.2 Historical view

The authors viewed unemployment as a historical problem, which grew during the mid-1970s, and 1980s (as labour unions were gaining strength). Labour supply increased after 1994.

3.1.3 The urban/rural divide

Unemployment was high in both rural and urban areas, but only slightly lower in urban areas. Discouragement (i.e. the rate of discouraged workers in the labour force) decreased from around 40% in a rural district to below 10% in an urban one. The more rural the area, the higher was the concentration of discouraged workers. Participation and employment was higher in urban areas than rural ones. The authors found the low level of labour market participation and employment in rural areas striking, and it compared poorly with Latin America and the Caribbean.

3.1.4 Gender

Female unemployment rates were about 50% higher than for males. Over the period 1995 to 2005, participation rates for both males and females improved and the gender gap narrowed (i.e. the participation rate for both genders increased, and more notably for women).

3.1.5 Racial perspectives

African blacks experienced far worse labour market outcomes than the coloured, Indian or white population groups. While Africans increased participation rates by approximately 10% from 1995 to 2005, their unemployment jumped by about 50% -- leading to the deduction that new labour market entrants were not finding jobs. Statistics showed that by 2005 all racial groups were performing worse in terms of employment than in the previous decade.

3.1.6 Educational level

Labour market performance was compared by educational achievement. Four distinct education groups were referenced: less than matric; matric; post-matric and tertiary (degree completed).

Higher education correlated with better employment outcomes and greater labour market participation. The largest increase in participation was for workers with a Matric or less, although the employment rate for that group declined. The employment rate for persons with a matric decreased to below 50%, and their unemployment rate almost doubled to above 28%. The post-matric group also faced high unemployment, while those with a university degree were less impacted by unemployment (ranging from 2.1% to 7.7%) over the period.

3.1.7 By age

The participation rate of youth below 20 years was low, but youth aged 20 to 24 years faced double the unemployment rate of the entire population. Unemployment amongst youth increased by 82%, compared to an increase of 72% for the whole population. Further, labour force participation increased among persons aged 16 to 29 years.

3.2 Unemployment rates

The composition of the labour force changed substantially in the first decade post-Apartheid. The proportions of African blacks, young people and women increased, and these changes caused unemployment to rise.

Of the people who were unemployed in 2005, just under 60% had never worked before. Amongst those who had worked before, 58.6% had been unemployed for a year or more; for those who had never worked before, 68.3% had been unemployed for a year or more. Long-term unemployment was identified as a problem, esp. among the youth as young people made up the majority of those who had never worked.

3.3 Labour supply

Labour force participation rates of men and women increased during the late 1990s, and more notably for women. This was a “substantial shock” to the labour market. Participation rates decreased between 2000 and 2005, but it may have been due to incomparability of the OHS- and LFS surveys. Labour force participation increased between 1995 and September 2000 both in urban and rural areas. In the next period up to 2005, both urban and rural participation rates trended downward, with greater decline seen in rural rates.

The shift in unemployment prior to 2005 was attributed to changes in labour force participation.

3.4 Patterns in labour demand

The authors considered the evolution of the composition of employment in South Africa. Analysis by Bhorat was used to describe trends in employment between 1970 and 1995, and data from the OHS and LFS were added to cover the period 1996 to 2005. The analysis revealed “a dismal employment performance”. In 35 years, total employment only increased by 57%, resulting in an annualised growth rate of 1.3% per year. Over the same period the number of employees grew by 35.3% (or by an annualised growth rate of only 0.8%).

3.5 Summary

Supply of labour increased after Apartheid ended. There was an “unprecedented” influx of African women into the labour market and these entrants were relatively less skilled. At same time demand for labour did not increase. Shrinking activity in the mining and agricultural sectors (where mostly less-skilled labour was employed) also saw demand for labour fall. The authors observed that the decline in the demand for unskilled labour, the change in demand for higher skills, and the huge influx of low skilled labour had created a “perfect storm” – unemployment ballooned among less skilled and less-experienced workers. As a result, policies to move the unemployed into the labour market faced even greater hurdles.

4 Sectoral viewpoint

The authors investigated the compositional changes in employment and trends in wages.

4.1 Employment trends by sector and skill level: 1975-2005

The authors ascribed the poor growth in total employment between 1970 and 2005 to substantial structural change. The primary sector – mainly agriculture and mining was shedding labour, while the sectors for finance, wholesale and retail sales, and community and personal services increased employment (See Table 1). The sectoral composition of employment changed markedly – agriculture contracted from 33% of total employment to only 11%, while wholesale and retail swelled from 3% to 11%.

This substantive shift altered the composition of employment in terms of qualifications required, as the labour market favoured more skilled workers. Displaced low-skilled workers from agriculture and mining were unable to relocate to other areas to find work, which could explain why there were so many discouraged workers in rural areas.

Table 1: Evolution of relative employment by industry (%)

Table 2 shows the changes to skill composition of the labour force. There was a structural shift of employment from the primary - to the tertiary sector as evidenced by the drop in employment of lowest-skill workers and the increase in the share of workers with at least some tertiary education. All industries became more skills demanding and the pool of unemployed became more unskilled. The skills gap between the employed and unemployed also widened.

Table 2: Evolution of relative employment by education level in South Africa (%)

4.2 Wages and quantities by educational attainment

The authors constructed a relative wage index in three skill categories (unskilled, semi-skilled and skilled) for the period 1995 to 2005. Total employment contracted in the late 1990s across all three skill categories, but esp. for skilled workers. Relative wages for skilled workers increased slightly, but wages for unskilled and semi-skilled workers remained stable.

4.3 Evolution of wages

Average real wages in South Africa were stable or declined slightly (by approximately 10%) between 1995 and 2005. While the real wages of most groups declined, the share of high-income workers increased over the period, which propped up the average wage. Real wages for workers under 30 rose slightly, but fell for workers over 30. Workers without a tertiary qualification lost almost 20% of their real wage.

The authors found evidence of a rise in the return to education for workers who attained tertiary level qualifications (“beyond matric”), and a decline in returns for those who had achieved matric or lower. These findings were consistent with an increase in the demand for skilled labour and also an increase in the supply of labour.

4.3.1 Labour unions

Labour unions played an important role in wage progression due to their sizeable membership and both their economic and political power. Unionisation rates in 2004 were the highest in the sectors for mining (78.5% of employees), manufacturing (40.2%), electricity and water (32.3%), and educational, medical and legal services (62%). The authors anticipated that the presence of unionised workers would have driven up wages faster than productivity growth, thereby worsening unemployment.

The estimated union wage premium increased between 1995 and 2004. The wage premium for unskilled and semi-skilled workers increased over time, but decreased for skilled workers. An an additional significant public sector wage premium was noted.

4.3.2 Wage push

Given that real wages had fallen in South Africa between 1995 and 2005, the authors felt somewhat odd to discuss the possibility that a wage push had driven unemployment. The fall in wages was faster among the lower skilled and young, and these groups had been disproportionately affected by unemployment.

The authors considered whether a wage push in the formal sector by powerful unions and binding minimum wage laws, would have resulted in job losses in the formal sector, which would have increased the demand for informal sector jobs. In turn, some friction or rigidity in the informal sector could have turned the increase in demand into unemployment.

The authors concluded that despite the large and growing union wage premium, they found no evidence that the increase in unemployment was driven by wage growth. The growing wage premium, esp. for African workers kept the wages of unionized unskilled workers from dipping as fast as they otherwise would have. Wage growth was positive for higher-skilled unionized workers, but their union premium decreased over time, thus suggesting that productivity had increased more than wages. Even when the authors deflated wages by the PPI, they were unable to find signs that wages had been growing faster than productivity.

4.4 Summary

High skilled workers experienced a growth in employment share and real wage increases as the economy changed toward more skilled workers. The unemployed were becoming less skilled. The skills gap between the skills levels of the unemployed and the employed was also widening.

5 Evidence on the speed of transitions

The authors examined data at individual-level to explore how workers had adjusted (or not) to the changing labour market. The goal was to find out who was unemployed and which factors determined transitions into and out of the labour force. This was necessary in order to better target the unemployment problem.

Distinct categories were used to describe employment status: not economically active (NEA), unemployed (both discouraged and searching), employed in informal sector, and employed in formal sector.

5.1 A snapshot of employment status

Urban inhabitants were more likely to be unemployed or in the formal sector, and less likely to be in the informal sector than rural inhabitants. The informal sector was overwhelmingly African and female which reflected the proportion of domestic workers in the informal sector. Compared to other population groups Africans were also more likely to be unemployed in the informal sector, and less likely to be in the formal sector or NEA.

A matric qualification did not guarantee employment. While holders of a matric qualification were more likely to have been in the formal sector, and less likely in the informal sector than workers who had less than matric, they were also more likely to be unemployed. A large portion of the unemployed still had to find their first job and actually enter the labour force. Persons who had never held a job, were 35% more likely to have been unemployed than workers who had worked before. This underscored the importance of securing the first job, and also pointed towards a focal area for potential policy intervention.

For the authors this result was a likely combination of sorting by the labour market and the glut of matric holders that drove down returns to a matric. It also reflected the mismatch between skills taught in school and the skills required in the workplace.

On the other hand, at least some training beyond matric gave some assurance against poor labour market outcomes. Candidates with post-matric education were 11% less likely to have been unemployed, and were 8% less likely to have been in the informal sector.

5.2 Transition matrices

The authors used LFS data to consider individuals’ experiences over time; to determine who made employment transitions; and to assess how large the gross flows were. The found that:

• Of unemployed adults aged 16-64 (and either discouraged or searching), only 9.6% found employment in the formal or informal sector after six months.
• Discouraged workers most frequently transitioned into actively searching for work – with about 14% shifting to employed after six months.
• Discouraged workers were twice as likely to transition into the informal sector as the formal sector, while the unemployed who were searching, were equally likely to transition into the informal or formal sectors. About 12% of those who had initially worked in the informal sector transitioned to the formal sector within six months.
• Of those with formal sector employment, only 16% had transitioned into another state after 6 months, with 84% having remained in the formal sector.
• So-called retirement was not a permanent (absorbing) state esp. for those who held less than a matric qualification, e.g. of those who had retired, only 68% were classified as retired six months later. This may have been due to how data was recorded, but the authors found that another 16% were classified as NEA six months later. They found evidence that 15% of persons who were recorded as “retired” were either working or looking for work within six months.

5.2.1 Dynamic movement between employment categories

The authors were “struck by just how much churning” took place in the labour market. The individual level data showed “remarkable mobility”, e.g.

• Only about 50% of the workers employed in the informal sector were still employed there six months later.
• 50% of the workers who were looking for work were still searching six months later.
• Only about one-third of discouraged workers were listed as such six months later.
• About 30% of NEA persons had moved out of that category after six months.

The high level of mobility at individual level could not be attributed to the impact of HIV/AIDS.

All in all, there was no clear pattern of transition from the informal- to the formal sector. An equal proportion of both men and women transitioned from the informal sector into unemployed, and from searching into the formal sector. However, men transitioned into the formal sector at a higher rate (16.5%) than women did (8.5%). The authors suggested that characteristics such as quality of education or access to personal networks played a role in securing a job.

5.2.2 Youth unemployment

Two reasons were given for high youth unemployment rates: low outflows because searching was not successful, and high inflows as high school drop-outs went directly into unemployment and were likely to remain in that category. Youth aged 16-24 who had been searching for work, were more likely to transition into the discouraged worker status than to find work (in either the formal or informal sector). Of the NEA youth (mostly students), about 22% transitioned out of NEA in six months – but only 3% into employment and 18.5% into unemployment.

Unemployment was high amongst workers under 35 years, and most of the unemployed youth had never worked before. A proposed policy response was that government induce employers to create special low wage jobs for young workers by designating them a separate category. According to the authors such an arrangement already existed – called a learnership, and it was subsidised.¹

The retention rate in the informal sector among youth was low – 28%. This indicated that youth likely held casual or temporary jobs in the informal sector rather than something more permanent. Only about 8.5% of the youth in the informal sector transitioned to the formal sector, and they were less likely to shift into the formal sector than into any other employment category.

The potential benefits of getting youth into their first job were emphasised. The school-to-work transition was key, but it had not worked at the time of the research. It was submitted that the youth may have struggled to find employment because of search costs, or reservation wages or because of a mismatch between skills taught and skills required in the labour market.

¹Comment: It is not correct to equate a special low wage job category with a learnership. The Skills Development Act 97 of 1998 regulates learnerships. A learnership is skills development intervention and essentially a structured learning/training pathway for candidates participating in work-integrated learning. It contains a structured learning component (academic, practical and/or simulated learning) and also structured workplace experience. The successful completion of a learnership leads to a qualification associated with a trade, occupation or profession. The learnership contract is not akin to an employment contract because it is a tripartite agreement between a learner, a registered training provider and an employer (workplace training provider). Unless the learner was employed by the employer prior to the learnership, the employer is only obliged to employ the learner for the period of the learnership – usually the reasonable time required to complete the education and training programme and practical work experience. Thus, where the learner did not work for an employer prior to entering into the learnership, there is no legal obligation on that employer to offer the learner employment beyond the duration of the learnership agreement.

5.2.3 Transition for adults by education level

Labour market transitions of adults (aged 16-64) by education level were analysed. Those with higher levels of education had better employment outcomes, both in terms of transitions and job retention. A person educated beyond matric had a higher probability of retaining formal sector employment after six months (from 83% to 92%), and also faced a reduced probability of transitioning into unemployment if the formal sector job was lost.

Post-matric qualifications increased the probability of remaining in the formal sector by 7%. Workers in the formal sector with a matric or less, had about 8% change of a transition into unemployment over six months, compared to less than 2% for workers with qualifications beyond matric. The authors noted – “having a job in the formal sector is one thing, and, apparently keeping it is quite another.”

The nature of retirement also differed, depending the education level of the retiree. Those with less than matric were less likely to remain retired. Retirees with a post-matric qualification were more likely (82%) to have remained retired 6 months later.

Informal sector employment was much more important for persons with a matric or lower educational level, than it was for those with tertiary level qualifications. Tenure in the informal section also decreased with education –the probability of remaining in the informal sector was 54% with less than a matric, 40% with matric and only 23% with more than a matric.

5.2.4 Labour market transitions by population group

Labour market outcomes for African workers were generally worse than for the other population groups. – They were more likely to remain in the informal sector, less likely to move into the formal sector, and less likely to keep formal sector employment once obtained.

The authors described the informal sector as a “second-best alternative to formal employment” – as the returns to education were lower than in the formal sector. For most groups, the informal sector did not seem to be a stepping stone into the formal sector. Women were 7% less likely to transition than men. Whites were 31.5% more likely to transition than Africans, and those who had post-matric qualifications were 24% more likely to make the transition to the formal sector.

The size of outflow for African workers from the formal sector was quantitatively quite large – due to both the relative size of the population, and that African workers were less likely to retain formal sector jobs than other races.

Job search was more effective for Indians and members of the white population group, compared to the outcomes for Africans and coloured persons. Of those searching, 50% of Africans and 45% of coloured persons were still searching six months later, while only 30% of white and Indian persons remained in the searching category. Africans were more likely to move from actively searching to either discouraged or NEA than into employment, while the other population groups were more likely to get a job in the formal sector or become NEA.

The authors were troubled that 17% of Africans who were actively searching for work transitioned into the discouraged category within six months. Overall the proportion of discouraged workers in the labour force increased, but Africans comprised an increasingly larger portion. Discouraged worker status was more sticky for Africans than for other population groups – 50% remained discouraged six months later, compared to 23% for white and coloured persons.

5.3 Summary

The authors concluded that the informal sector could not be used as a potential “springboard” into the formal sector. Africans blacks and younger workers were less likely to transition from unemployment to employment (either formal or informal).

The authors called for policy interventions to address unemployment and to increase the outflow from unemployment into employment or out of the labour force (NEA). They argued that if the high unemployment rate was the equilibrium rate, it was unlikely to recede on its own without policy interventions. The authors concluded that the labour market was in a steady state by 2005. They argued that the bulk of the unemployment was structural in nature, rather than transitional.

The vast amount of churning in the labour market presented two avenues for policy – increase the inflow into the formal sector and/or slow the outflow out of it. High turnover in the workforce generally resulted in a sub-optimal level of investment in human capital for firms and specific industries. The bi-directional flows may also have been hiding changes in the skill composition of the formal sector.

5.4 Search costs

High turnover rates in the labour market reduced incentives for both employers and employees to invest much in the search process, e.g. employers would be reluctant to train people knowing that they would soon be replaced, and if employees had to search for new work while they were still employed, it would limit the time and effort they were able to put in to the search.

There are potential reasons why job search may be a bigger problem in South African than in other countries. Geographical distributions of people and industries ascribed to apartheid continued to impact key elements of job search including location of jobs, travel distance and infrastructure. Further, unlike most other middle income countries, South Africa lacked high-density urban centres (which typically offered job opportunities and density made it possible to invest in low cost public transportation systems). Thus, the physical costs of job search may have been high, which impacted the effectiveness of the job search of a large portion of the population, and so increased the equilibrium unemployment rate.

The authors suggested that the history of racial prejudice may have impacted job search for both potential employers and potential workers. High search costs could also have explained the high levels of transitional unemployment, esp. when combined with the fact that the demand and supply of labour had shifted during the period 1995 to 2005.

5.5 Reservation wages

The authors considered whether it was possible for unemployed youth to be looking for a job that would pay them more or keep them closer to home than the one they could get. This question was posed in the context of the social grants paid to old age pensioners (which the authors described as generous for paying each senior citizen twice the per capita income). They also remarked that no other middle income country had a comparable scheme.

5.5.1 Pensions and reservation wages

The authors stated that unemployed South Africans were able to survive without having to take a job for so long as their elders would support them. Prior research (by Ranchod) showed that people with family members who received state old age pensions were less likely to have worked than they would have otherwise. Later research by Ranchod showed that employment rates of adults who formed part of households that had lost an old age pensioner, increased by 5% or 6%.

The authors suggested that this finding may have explained the particular age structure of unemployment – that people started to look for work when their parents had died (or were dying), thus explaining why more people above 30 years were more likely to be employed.

The authors found evidence of high reservation wages among younger workers – which they held off working due to family support. However, a counter-balancing impact may have been that pension receipts may have contributed to increased job searches as household members would have been able to afford to search for work (and women could migrate to search).

5.5.2 Education, expectations and reservation wages

The authors remarked that South Africa underwent an enormous transformation of the labour force during the 1990s and early 2000s. Enforcement of compulsory schooling laws resulted in almost all younger workers having at least 10 years or so of education. Thus the benefits of return to schooling and of holding a matric qualification would probably have fallen substantially. The authors remarked that if the newly educated workers had not understood that, they may have been holding out for jobs no longer available to them.

5.5.3 Employment attitudes and reservation wages

The reasons people indicated for not working, had changed with age. Most young people who were NEA gave studies as the reason. Older persons were more likely to have been NEA due to retirement, poor health (esp. people in their 50s), or to become homemakers. In the age bracket 20 to 50, the most common reason listed for not working was that people could not find any work.

The authors could not find clear indicators of reservation wages. However, if problems where better understood as to why different age groups did not work, it would be possible to improve labour force participation amongst middle aged people.

6 Conclusion

At the outset the authors noted that changes in the unemployment rate could be attributed to a temporary shock or a more permanent structural change. Data analysis showed that the demand for unskilled labour had fallen (esp. in mining and agriculture), while there was a concurrent increase in the supply of less skilled labour (most notably and influx of African women). This resulted in increased unemployment.

The influx of African women into the labour market (despite contributing to unemployment) may not have been all bad. If those women were previously NEA because they had negative perceptions about opportunities in the labour market, their entrance could be viewed as “economically hopeful”. Whether or not the influx of female labour was viewed as a “pull” or “push” effect, the authors regarded it as a structural change. Similarly, the decline in employment in the mining and agricultural sectors were also structural shifts.

There were important compositional changes in employment at the sectoral level. The pool of employed tended to become more skilled while lesser skilled workers were often relegated to the ranks of the unemployed. This was a global phenomenon and not unique to South Africa. Such sectoral changes were largely due to technical change which resulted in employers demanding more skilled workers. The authors referred to so-called “skill-biased technical change” which had impacted the country at an inopportune time – it further amplified the unemployment consequences of the increased supply of unskilled workers. This was a further structural shift in the labour market and unlikely to go away.

Examination of the employed/unemployed dichotomy revealed that it mattered greatly (in terms of outcomes) whether an employed worker was in the formal or informal sector, and for unemployed persons, whether they were actively searching or discouraged. The authors found that transitions from the informal sector to the formal sector were “surprisingly rare” and that the youth were worst off. The importance of obtaining the first job was seen as crucial to future involvement in the labour market.

The authors concluded that the South African labour market could be viewed as having two pieces. In the one piece, there is the formal labour market, and once inside, a person had a very good chance of staying in it (about 85% of entrants into a formal sector job had come from another formal sector position). The other piece of the labour market consisted of a mix of those searching for employment, those discouraged, those who declared themselves not economically active, and those employed in the informal sector. There was substantial dynamism in that piece, but none of the labour market statuses were very economically attractive.

Social security provisions such as the old age pensions may have discouraged some people from taking or seeking a job that, in the absence of a pensioner in the household, the person may have taken or sought.

While South Africa may have decreased unemployment by “inflating” its way out of labour market problems, it could not do so. Due to intense scrutiny post 1994, the country had to keep inflation under control. The authors concluded that the persistence of high unemployment even while real wages were declining suggested that the unemployment would have been even higher if it were not for moderate inflation in the late 1990s, and also that the moderate inflation was insufficient to clear the labour market.

The authors recommended the following policy options:

• To assist school-leavers to enter their first job – a wage subsidy, a search subsidy, reduced regulations for first jobs and government employment.
• To address the mismatch between where the unemployed lived and where the formal sectors jobs were found – transportation subsidies, housing policies, business location policy, and infrastructure investment.
• To address the mismatch between the skills set of the unemployed and the skills needed in the labour market – the need to adjust to the labour market that one has, not the labour market that one wants; and educational reform, training programmes and training subsidies.

The authors advocated a “cautious approach” that allowed for much experimentation in order to find the right solutions. They recommended “well-designed smaller-scale interventions” which would be accompanied by careful evaluation