Unemployment in South Africa, 1995-2003: causes, problems and policies

Literature › Works

Geeta Kingdon; John Knight (2005). Unemployment in South Africa, 1995-2003: causes, problems and policies. GPRG Working Paper Series, GPRG-WPS-010. ESRC Global Poverty Research Group (Centre for the Study of African Economies, University of Oxford).

Type	working paper
Scope	Post-1994 South African economy
Method	mixed
Period studied	1995–2003
Regions	South Africa
Themes	inequality poverty unemployment, labour markets wages, transition post apartheid, methods data sources, demography urbanisation, education human capital, unions strikes
Citation key	kingdon2005

Argument

The paper argues that unemployment rose sharply after apartheid mainly because labour force growth (over 4% a year) far outpaced slow growth in formal-sector labour demand. A formal-informal segmentation framework shows insiders in the protected formal wage sector, while the burden of adjustment falls on the informal and self-employed sector and on the unemployed. Wage rigidity in the formal sector and bargaining-council rules worsen the outcome, but the authors say greater wage flexibility alone could not have prevented the rise. They argue the broad definition of unemployment is the more meaningful measure, and that unemployment is largely involuntary rather than chosen search. They criticise public works and skills policies as untested and weakly grounded, and recommend growth-promoting policy, reform of labour regulation (notably the ergo omnes extension of bargaining agreements) and better data.

Evidence and method

Mainly the October Household Survey 1995 and Labour Force Survey September 2003, with the OHS 1994, 1997 and 1999, GHS 2003 and the Survey of Employment and Earnings. Also secondary studies: Casale et al. on earnings and employment; Fallon and Lucas and others on wage-employment elasticities; McCord's 2003 survey of about 700 public works households; World Bank firm and informal-sector surveys; Charmes's cross-country informal-sector data; and the authors' own probit models (Appendix 3).

Findings

• Unemployment rose sharply between 1995 and 2003 on both definitions. (p. 4)

  Over that period the unemployment rate rose from 17 to 28% on the narrow definition and from 29 to 42% on the broad definition.

• By 2003 broad unemployment exceeded formal-sector employment in the labour force. (p. 5)

  In 2003 the shares of LF, L’I and FI in the total (broad) labour force were 38, 20 and 42% respectively: broad unemployment actually exceeded formal sector employment.

• The core cause is the rapid divergence between labour supply growth and formal employment growth. (p. 5)

  it is the sheer speed of divergence between the growth of the labour force and the growth of formal sector employment (the divergence over the period 1997-2003 being nearly 4 % per annum) that is the underlying cause.

• Estimated wage-employment elasticities imply that wage flexibility alone could not have averted rising unemployment. (p. 10)

  it is also clear from the estimated elasticities that greater wage flexibility would have been unable to prevent the rise in unemployment.

• The non-searching unemployed are more deprived than searchers, supporting the broad definition. (p. 11)

  in South Africa the non-searching unemployed are, on average, significantly more deprived than the searching.

• Slow economic growth was insufficient to absorb the unprecedented growth in the labour force. (p. 14)

  Unemployment has increased inexorably basically because economic growth - which averaged only 2.7% per annum and less than 1 percent per annum in per capita terms over this period - was insufficient

• Mean real earnings of the employed fell substantially, with the decline concentrated in informal work. (p. 14)

  mean real earnings (across employed persons of all races) fell in 2000 prices from 3014 to 2360 Rands per month between 1995 and 2003

• Public works programmes leave most participant households in poverty. (p. 21)

  even with PWP income, 99% of the households in one PWP and 87% in the other still fell below the poverty line by a significant margin

• South Africa's informal sector is unusually small for a middle-income or developing country. (p. 24)

  South Africa remains an international outlier in terms of the small size of its informal sector

• Apartheid repression of black informal enterprise partly explains the weakness of African self-employment. (p. 27)

  The lack of African self-employment is, to some extent, a legacy of apartheid.

• Controlling for characteristics, Africans were far more likely than whites to be unemployed, and the gap widened. (p. 36)

  an African person was nearly 30 percentage points more likely to be unemployed than a white person of similar observed characteristics.