Disequilibrium in the Labor Market in South Africa


WP/94/108-EA
Disequilibrium in the Labor Market in South Africa by Bankim Chadha

This paper characterizes wages, employment and unemployment in South
Africa from a macroeconomic viewpoint. Unemployment is decomposed into a
Keynesian or cyclical component that can be identified with deficient
aggregate demand, and a classical or structural component that can be
identified with aggregate supply. The evidence suggests that unemployment
is largely structural and associated with supply factors rather than due to
cyclical factors associated with the recent recession.

Alternative explanations for the persistence of deviations of market
wages from full-employment levels are explored. Three models are discussed:
a nutrition-efficiency-wage model; a wage-incentive model; and a model of
collective bargaining. Each is shown to be empirically capable of
generating the kinds of wage and employment gaps observed in South Africa.
While the models are, therefore, observationally equivalent at an aggregate
level, it is useful to examine the different models because they stress
alternative factors in creating a wage gap and thus unemployment.

The predictions of the models for wages and employment are discussed in
light of recent and prospective developments in South Africa. These
developments include: the effects of increases in the capital stock and
improvements in multifactor productivity; the redistribution of social
expenditures that is underway; reductions in effective transportation costs
associated with the removal of apartheid; structural measures that increase
labor market flexibility; and changes in union membership.