Why has unemployment risen in the New South Africa?

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Abhijit Banerjee; Sebastian Galiani; Jim Levinsohn; Zoë McLaren; Ingrid Woolard (2008). Why has unemployment risen in the New South Africa?. Economics of Transition 16(4). Blackwell Publishing Ltd (EBRD).

Type	journal article
Scope	Post-1994 South African economy
Method	econometric
Period studied	1970–2005
Regions	South Africa
Themes	inequality poverty unemployment, labour markets wages, unions strikes, transition post apartheid, education human capital, demography urbanisation, agriculture land, mining migrant labour, methods data sources
Citation key	banerjee2008

Argument

The article documents how unemployment rose after the 1994 transition and argues that the rise is structural, not a temporary shock. A large influx of mostly unskilled African women into the labour force coincided with stagnant labour demand, falling demand for unskilled labour in agriculture and mining, and skill-biased change. Household survey panel data show stable aggregate rates hiding heavy individual churning, with Africans and youth stuck in unemployment or the informal sector. Wage rigidity (a union premium), costly search shaped by apartheid-era spatial separation, a weak informal sector and a generous old-age pension are offered as reasons for persistence. The authors conclude that the equilibrium unemployment rate has risen and that active policy is needed.

Evidence and method

October Household Surveys (1995, 1997), Labour Force Surveys (2000–2005), the 1970 Census and a newly constructed LFS panel (2001–2004) covering about 30,000 households per wave. Employment trends for 1970–1995 draw on Bhorat's analysis of the 1970 Census and the 1995 OHS. Union premium regressions use household fixed effects and stratified matching. Secondary literature on pensions, reservation wages and discrimination is also used.

Findings

• Narrow-definition unemployment doubled between 1995 and 2001. (p. 4)

  Using the ILO definition, unemployment doubled between 1995 and 2001, going from an already high unemployment rate of 15.6 percent to 30.3 percent.

• Pre-transition unemployment is described as fairly low, though data limitations preclude certainty. (p. 2)

  Unemployment appeared to be fairly low through the 1970s and 1980s, although data limitations preclude certainty.

• Changes in labour force composition explain part of the rise in unemployment. (p. 7)

  Indeed, we estimate that changes in composition of the labour force account for 31 percent of the increase in unemployment between 1995 and 2005.

• Employment growth from 1970 to 2005 was weak relative to population growth. (p. 7)

  Total employment only increased by 57 percent, which implies an annualized growth rate of 1.3 percent per year.

• Stagnant labour demand relative to population growth is central to the unemployment story. (p. 8)

  Contrasting this employment growth with the fact that the population aged 14–65 grew at 2.68 percent per year paints a clear picture of the role stagnant labour demand played in the unemployment problem.

• Agriculture shed a large share of employment between 1970 and 2005 while trade and finance expanded. (p. 10)

  Agriculture went from 33 percent of total employment to only 11 percent while Wholesale and Retail Sales increased from 9 to 25 percent

• Union density rose sharply after the legalisation of black unions. (p. 12)

  The rate of unionization grew from 5.5 percent in 1980 to 19 percent in 1985 (following the official legalization of unions) to 37 percent in 1993

• A sizeable union wage premium persists for African and all male workers. (p. 13)

  In 2004, we estimate the union wage gap for African males to be around 23 percent (see column 5) and 17 percent for all males.

• Racial gaps in informal-sector persistence reflect the continuing disadvantages of Africans. (p. 19)

  While only 19 percent of whites in the informal sector remain there after six months, over 50 percent of Africans and Coloureds, and 43 percent of Indians do.

• Apartheid-era spatial separation is held to raise job search costs for black job seekers. (p. 20)

  The differential effectiveness of search may be accounted for by the legacy of apartheid-era spatial separation between Black job seekers and the centres of business and industry where the jobs are.

• The generous old-age pension is traced to the extension of the apartheid-era white pension. (p. 21)

  This is a result of extending the very generous apartheid-era pension program for whites to the rest of the population.

• The authors attribute the rise in unemployment to structural change following apartheid's dismantling. (p. 3)

  most of the evidence points to structural changes in the labour market that resulted from the dismantling of apartheid