South African Labor Markets: Adjustment and Inequalities

Literature › Works

Peter Fallon; Robert Lucas (1998). South African Labor Markets: Adjustment and Inequalities. Informal Discussion Papers on Aspects of the Economy of South Africa, No. 12. The World Bank, Southern Africa Department.

Type	working paper
Scope	Post-1994 South African economy
Method	econometric
Period studied	1960–1997
Regions	South Africa, former homelands (TBVC)
Themes	labour markets wages, inequality poverty unemployment, unions strikes, transition post apartheid, education human capital, bantustans removals influx, agriculture land, methods data sources
Citation key	fallon1998

Argument

The paper argues that South Africa's unemployment and wage inequality stem from slow formal job creation since the mid-1960s, set against labour supply growth that small-scale agriculture and informal activity (stunted by apartheid-era land and urban policy) could not absorb. Rising black real product wages, driven partly by unions, abolition of influx control and reduced discrimination, depressed black formal employment, but were only part of the story. Labour markets clear for skilled workers but not for the unskilled, and wage differentials by race, gender, location and union or institutional status are large by international standards even after controlling for education and experience. It reviews the new labour legislation (BCEA, LRA, EOES) and proposes policies beyond the labour market: macro stability, human capital, competition, wage restraint, public works and tripartite agreement.

Evidence and method

Time-series labour demand (CES, non-linear 3SLS) for 16 sectors, 1961-93; pooled wage equations for 18 manufacturing subsectors, 1961-93, and Industrial Council subsectors, 1978-88; the 1993 SALDRU/World Bank Living Standards and Development Survey (about 9,000 households, 23,965 individuals aged 16-70) used for probit and earnings regressions; Standardized Employment Series and labour force projections (Sadie 1991); Population Censuses 1980/85/91; October Household Survey 1994; government and private pay comparisons for 1993.

Findings

• Headline unemployment and its racial skew are extreme by international standards. (p. 9)

  unemployment rate that, at end-1993, ranged between 12.3 and 29.8 percent depending on the definition used

• Formal job growth lagged labour force growth in the 1980s, and the informal sector is small. (p. 9)

  In the 1980s, average annual formal job growth was only about 0.6 percent compared with a labor force growth rate of 2.5 percent

• The broad unemployment rate for African males is 33.6 percent against 3.6 percent for white males. (p. 9)

  33.6 percent among African males by the broadest definition as compared to only 3.6 percent among white males

• Black real wages rose through the 1970s and 1980s while white wages stagnated, narrowing differentials. (p. 18)

  White wages were near stationary while Black wages grew in a somewhat erratic manner. Wage differentials thus narrowed considerably between Whites and other groups of workers.

• Long-run wage elasticity of demand for black formal labour is -0.71, much higher than the earlier aggregate estimate of -0.28. (p. 19)

  average long-run wage elasticity across the sectors of -0.71 (Table 3)14, i.e. a 10 percent increase in the real product wage would eventually lead to a 7.1 percent decrease in Black employment

• Counterfactual: constant real product wages would have raised black formal employment and cut black unemployment by about 6 points. (p. 19)

  If Black real product wages had remained constant in 1970-94, Black formal employment would have grown at 1.48 percent per year instead of the 0.9 percent actually achieved.

• Skilled labour markets clear while unskilled ones do not: unemployment probabilities fall sharply only at high education levels. (p. 20)

  Third, within Black groups, although average unemployment probabilities are much higher than for Whites, these probabilities fall off very sharply at high education levels, thus indicating that markets clear for skilled Blacks.

• Racial wage differentials persist even after controlling for other characteristics. (p. 23)

  Even after standardizing for other relevant factors that determine earnings, among the least-educated groups, Whites receive 118 percent more than Africans

• Influx control abolition and unionism supported African wages, which are rigid against unanticipated inflation. (p. 21)

  In 1975-85, the decline and eventual abolition of the system of influx controls seems to have had a positive effect on African real wage rates, and a correspondingly negative impact on White wages

• The union wage premium implies modest but possibly sizeable employment losses. (p. 26)

  given a union wage differential of 0.3, African formal wages are increased on average by about 9 percent. Combining this with the estimated average long-run wage elasticity of -0.71 suggests that African formal employment could be reduced by as much as 6.3 percent.

• Rural African unemployment is higher than urban, unlike other developing countries, which the authors tie to land policy. (p. 28)

  presumably because so much land was reserved for white commercial farming that little was left for traditional subsistence agriculture.

• South Africa is unusual in that the unemployed outnumber informal workers, a legacy of apartheid-era restrictions. (p. 5)

  the only medium-sized country in the world in which the number of unemployed exceeds the number of informal workers