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Unemployment in South Africa: the nature of the beast

Literature › Works

Geeta Gandhi Kingdon; John Knight (2001). Unemployment in South Africa: the nature of the beast. Centre for the Study of African Economies Working Paper WPS/2001-15. Centre for the Study of African Economies, Department of Economics, University of Oxford.
Type working paper
Scope Post-1994 South African economy
Method econometric
Period studied 1993–1998
Regions South Africa, homelands, urban and rural South Africa
Themes inequality poverty unemployment, labour markets wages, methods data sources, demography urbanisation, bantustans removals influx
Citation key kingdon2001a

Argument

The paper asks whether South Africa's very high unemployment is voluntary or involuntary. It argues that most of it is involuntary. The unemployed are much poorer and less satisfied with life than the informally employed, so they are not choosing leisure or search over informal work. Barriers to entry, including apartheid-era repression of black informal activity, keep the informal sector small. High reported reservation wages are unreliable guides to unwillingness to work. They reflect poor information, reporting of expected rather than minimum wages, and a bargaining stance.

Evidence and method

SALDRU 1993 household survey and the 1994 and 1997 October Household Surveys (Statistics South Africa). The authors use these to compare earnings, poverty, living conditions and perceived quality of life, unemployment duration, job-search hours, and reservation wages against predicted wages. Secondary sources on apartheid-era restrictions on the informal sector (Rogerson) and on labour-market institutions.

Findings

  • The official unemployment rate was very high and rising in 1998, depending on the definition used. (p. 2)

    In 1998 it was officially measured at 39% on the broad definition and 26% on the narrow definition

  • The informal sector is small relative to other developing countries. (p. 6)

    The proportion of informal employment in total employment in South Africa is only about 30%; in India it is estimated to be about 90%

  • Formal earnings are much higher than informal earnings, and about half or more of the gap remains after controlling for characteristics. (p. 6)

    The ratio of their geometric mean individual earnings (291 and 1017 rands per month) is 1 : 3.5.

  • The unemployed are far poorer than the informally employed, and unemployment insurance reaches almost none of them. (p. 6)

    per capita monthly household income (expenditure) of the unemployed is only 31.2% (48.2%) of the corresponding figure for the informally employed.

  • Most unemployed individuals would earn more in informal self-employment than their current household per capita income. (p. 7)

    for 87.5% of the unemployed individuals, predicted monthly informal sector earnings exceeded monthly household per capita income.

  • Unemployment lowers perceived quality of life, whereas informal employment does not. (p. 8)

    Whereas the household unemployment rate significantly lowers household happiness - controlling for household per capita income and other factors - the household informal employment rate does not depress it.

  • Apartheid repression of black informal activity, plus the lack of skills and networks it caused, helps explain the small informal sector. (p. 9)

    Historically the apartheid system repressed the informal activities of black South Africans through such restrictive legislation as the Group Areas Act, harsh licensing, strict zoning regulations

  • Most unemployed people spend little time on job search, so search could be combined with informal work. (p. 10)

    Only 9% of the narrowly unemployed searched full-time (35 or more hours) for work in the reference week, and the vast majority (68%) spent no more than 10 hours in job-search.

  • Unemployment spells are very long. (p. 10)

    It shows very long duration of unemployment (>3 years) for 37% of the unemployed. A further 29% were unemployed for between 1 and 3 years

  • About half of the unemployed report reservation wages above their predicted wages, but the reservation wage ratio is spread around one. (p. 11)

    About 50% of the unemployed have a RW that exceeds their PW.

  • Rural homeland residents, the low-educated, the young and those without work experience have higher reservation wage ratios, pointing to poor information rather than search. (p. 13)

    low-education persons, the young, those with no previous work experience, and rural homeland persons have both a significantly higher probability of being in HIGHRW unemployment and a significantly higher RWR

  • The authors conclude that most unemployment is involuntary, with the free-entry informal sector offering extremely low incomes. (p. 15)

    It is very likely that most currently unemployed workers in South Africa are involuntarily unemployed in the sense that they would accept formal sector jobs at the going wages.