Unemployment in South Africa: a microeconomic approach

Geeta Kingdon and John Knight

(Papers)

In South Africa, unemployment is extremely high (see Table below) and it is seen as one of the most pressing socio-political problems facing the government.  There has been a lively debate on the extent, nature, and cures of unemployment in South Africa but the outcome has been rather inconclusive.  This reflects the lack of good empirical evidence in the past.  The World Bank-funded SALDRU data collected in 1993 and subsequent October Household Surveys and Labour Force Surveys permit detailed microeconomic and empirical analysis of unemployment in South Africa.

The work has focused on the dimensions, incidence, appropriate definition, and nature of unemployment in South Africa with attention to related aspects such as unemployment duration; unemployed job-search; reservation wages; the informal sector; explaining the racial-gap in unemployment probability and in earnings; and the relationship between unemployment, poverty, and quality of life. 

The work has been funded by the UK Department for International Development.

Unemployment rates in South Africa, 1993-2004

 Year

Source

 Broad definition

Narrow definition

Sep 1993

SALDRU

31.2

13.0*

Oct 1994

OHS

31.5

20.0

Oct 1996

OHS

35.6

21.0

Oct 1998

OHS

38.6

26.1

Sep 2000

LFS

36.9

25.8

Sep 2002

LFS

41.8

30.5

Sep 2004

LFS

41.0

26.2

Sep 2005

LFS

38.8

26.7

Source: SALDRU data from South African Labour and Development Research Unit, University of Cape Town; October Household Survey (OHS) and Labour Force Survey (LFS) data from Statistical Releases of Statistics South Africa.

*The large difference in narrow unemployment rates between SALDRU data on the one hand and both OHS and LFS sources on the other, is because SALDRU used a reference period (for job-search) of one week, whereas the OHS and LFS surveys all use a reference period of four weeks. The broad definition applies only the criterion of wanting work, not active job-search.


Papers

The measurement of unemployment

  • Kingdon, G. and J. Knight. “The measurement of unemployment when unemployment is high”, Labour Economics, 13, No. 3: 291-315, June 2006. (also CSAE Working Paper WPS/2000.2).

    Abstract: This paper asks whether the broad or the narrow measure of unemployment is the appropriate one in the particular circumstances of the South Africa labour market.  The answer matters because the measure chosen makes a difference to perceptions about the extent of the unemployment problem in South Africa.  The narrow measure counts as unemployed only those jobless persons who actively searched for work in the previous four weeks while the broad measure also includes those that say they want work, even if they did not actively search. This paper develops three new tests as to whether those not searching but wanting work are distinct from the searching unemployed. It asks: are non-searching persons richer, happier, and do they have a lesser impact on local wages, than the searchers?  The results favour the use of the broad, inclusive, measure of unemployment.

  • Fassler, M., G. Kingdon, and J. Knight.  “Transitions from Unemployment to Employment in South Africa”, mimeo, Department of Economics, University of Oxford, Oct. 2001.

    Abstract: This paper asks whether the rate at which the searching unemployed exit unemployment over time is significantly higher than the rate at which the non-searching unemployed exit unemployment. This is of importance because if searchers are more likely to find work than non-searchers, then job-search would seem to be an appropriate criterion for judging a person’s labour market attachment, and for defining unemployment.  The analysis is based on panel data from the KwaZulu Natal Income Dynamics Study over 1993 and 1998.  Among males, search made no difference to the probability of exiting unemployment but among women job-search was a significant determinant of transitions into employment.  However, the result for women cannot be used to conclude that search had a causal effect on work-transition probability for women because search is endogenous: the search decision depends on the expected likelihood of exiting unemployment.  For instance, high local unemployment rates (e.g. exceeding 50-60%) would deter job-search. 

The nature of unemployment

  • Kingdon, G. and J. Knight. “Unemployment in South Africa: The Nature of the Beast”, World Development , 32, No. 3, March, 2004. (also CSAE Working Paper WPS/2001.15).

    Abstract: The huge (40%) unemployment rate in South Africa demands an explanation. This paper examines two questions about South African unemployment.  Firstly, why do the unemployed not enter the informal sector, as is common in other developing countries? Secondly, why do the unemployed not enter wage employment more readily? Are the unemployed prevented from entry due to their own high reservation wages (i.e. the wage below which they will not accept employment).  The data do not support the idea that unemployment is largely voluntary.  The policy implications – that government should diminish labour market segmentation and the obstacles to entering the productive informal sector – may be relevant also to other developing countries with high unemployment.

  • Kingdon, G. and J. Knight. “Why small informal sector and high open unemployment in South Africa?”, mimeo, Department of Economics, University of Oxford, July 2001.

    Abstract: This paper contributed material to the first section of the nature of the beast paper (above).  It focuses specifically on why South Africa is a big international outlier in terms of the small size of its informal sector, and its very high unemployment rate. The findings provide little support for the idea that unemployed people choose to be unemployed: the unemployed are substantially worse off, and less satisfied with their quality of life, than they would be if informally employed.  Various impediments to entry into the informal sector appear to increase open unemployment.

Unemployment and wages

  • Kingdon, G. and J. Knight. “How flexible are wages in response to local unemployment in South Africa?Industrial and Labor Relations Review, 59, No. 3, April 2006. (also CSAE Working Paper WPS/99.12).

    Abstract:  The spatial relationship between wages and unemployment is important for understanding the operation, and the degree of flexibility, of labour markets in developing countries.  A large amount of recent evidence finds a negative relationship between local unemployment and wages in OECD countries, a relationship referred to as ‘the wage curve’. This paper discovers a wage curve in South Africa, a country with several times the typical unemployment rate of OECD countries. The wage curve elasticity in South Africa is similar to that in OECD countries (-0.1) but persists over a much larger range of unemployment rates, implying that unemployment can have a large impact on wages.   The evidence is inconsistent with the conventional model of developing country labour markets in which high-wage regions attract high equilibrium unemployment.

Race and labour market outcomes

  • Kingdon, G. and J. Knight. “Race and the Incidence of Unemployment in South Africa”, Review of Development Economics , 8, No. 3, May 2004. (also CSAE Working Paper WPS/2001.1).

    Abstract: The paper examines both entry into and duration of unemployment using data for the mid-1990s.  An empirical model fitted to predict individuals’ probability of unemployment shows an important role for race, education, age, gender, home-ownership, location, and numerous other variables, all of which have plausible explanations.  The large race gap in unemployment is explored further by means of a decomposition analysis akin to that normally used to analyze wage discrimination.  While much of the black-white gap in unemployment rate is explained by differences in the observed characteristics of Africans and whites, there remains a substantial residual unexplained race gap which might represent black-white differences in unobserved characteristics, such as quality of education, or it might represent labour market discrimination against blacks. 

  • Kingdon, G. and J. Knight. “Quality of Schooling and the Race Gap in Labour Market Outcomes in South Africa”, mimeo, Department of Economics, University of Oxford, October 2002.

    Abstract: Previous research shows that differences in the characteristics of blacks and whites do not explain all of the huge race gaps in unemployment and earnings in South Africa. The unexplained residual could be due either or both to employer discrimination or to black-white differences in characteristics observed by employers but which are not captured in the data and are thus unobserved by the researcher.  This paper finds that controlling for school quality causes the residual component – often termed the discrimination component – to fall very considerably both for the race-gap in unemployment and in earnings.  The results suggest that due to prior discrimination in the education system black children faced much inferior schooling quality than white children, and that employers take quality of schooling into account in their recruitment and pay behaviour.

Overview papers

  • Kingdon, G. and J. Knight. “What have we learnt about unemployment from microdatasets in South Africa?”, Social Dynamics, 27, No. 1: Spring, 2002  (an earlier version)

    Abstract:  This paper summarises the findings of four recent papers by the authors on different aspects of unemployment in South Africa.  Based on statistical analysis using household datasets, the papers are concerned with the impact of local unemployment on local wages; the appropriate definition and measure of unemployment in the particular circumstances of the South African labour market; the nature of unemployment, i.e. the extent to which it can be described as voluntary; and the pattern of incidence of unemployment, with particular focus on explaining the large racial gap in the unemployment rate.

  • Kingdon, G. and J. Knight. “Unemployment in South Africa, 1995-2003: Causes, Problems and Policies”, paper presented at the ‘10 year review of the South African Economy’ conference, Stellenbosch University, 28-29 October 2005.

    Abstract: The paper analyses changes in the dimensions of unemployment and informal sector employment that often disguises unemployment. Between 1995 and 2003,unemployment in South Africa rose by more than 12 percentage points to 41% on the broad definition. The paper finds that the increase in unemployment was the result of a great divergence in the growth of labour supply and labour demand, the latter growing slowly partly due to low economic growth and partly due to the effect of progressively tightening labour market regulations over the democratic period. It asks why the informal sector does not absorb many of the unemployed, as in most other developing and middle-income countries. The paper reviews government policies to alleviate unemployment, especially public works programmes and skills training programmes and concludes that there are important knowledge gaps about the impact of these programmes which deserve to be filled in order to increase the evidence base for better policy making in the future. It makes several policy recommendations.