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High Unemployment Yet Few Small Firms: The Role of Centralized Bargaining in South Africa

Literature › Works

Jeremy R. Magruder (2011). High Unemployment Yet Few Small Firms: The Role of Centralized Bargaining in South Africa. University of California, Berkeley.
Type working paper
Scope Post-1994 South African economy
Method econometric
Period studied 2000–2003
Regions South Africa (national), magisterial districts and district councils
Themes labour markets wages, inequality poverty unemployment, unions strikes, comparative theory, methods data sources
Citation key magruder2011

Argument

South Africa combines very high unemployment with very few small firms. The paper tests whether centralized bargaining (bargaining councils), which extends agreements made by large unionised firms and unions to all firms in an industry and district, contributes to this. Bargaining council coverage is spatially discontinuous, so the author uses difference-in-differences, spatial regression discontinuity and spatial fixed effects, instrumenting coverage with district-council eligibility. Councils lower industry employment by about 8-13%, with the losses concentrated in small firms and self-employment, and raise wages. The effects are not driven by firms relocating across borders. They account for only about one percentage point of unemployment, so councils exacerbate rather than explain the problem.

Evidence and method

Statistics South Africa Labour Force Surveys (September 2000-2003) aggregated to magisterial-district level, with district identifiers inferred from personal identification codes and linked to the 1997 October Household Survey. Bargaining council coverage is from a database the author compiled from the Government Gazette. Comparison data come from the 1995-96 Brazilian LSMS, and the SBP (2005) small-business red-tape study is also used.

Findings

  • Spatial fixed effects estimates show bargaining councils lower industry employment and raise wages relative to uncovered neighbouring districts. (p. 5)

    industries which have an agreement in a particular magisterial district in a given year have about 8-13% lower employment and 10-21% higher wages

  • The spatial RD estimates are larger than the difference-in-differences estimates, though imprecise. (p. 21)

    Employment declining by 36%, Small Firm and Self Employment declining by 30%, and Large Firm Employment decreasing by 23%.

  • Estimated effects are larger and more precise in districts too small to influence council formation, consistent with the theory and minimal endogeneity. (p. 29)

    we see employment fall by 12-16% relative to neighbors and other industries or other years within the magisterial district

  • Firms do jump borders to avoid councils, but this does not drive the employment estimates. (p. 31)

  • The aggregate unemployment contribution is modest, so councils exacerbate rather than explain South Africa's unemployment. (p. 33)

    If each of these industries were to increase employment by 8-13%, it would cause a 0.88-1.43 percentage point total increase in employment.