## 1. Employment Rates

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---

### I. Introduction and main findings
- Boosting employment from its very low level is key to lifting GDP per capita growth and reducing high income inequality in South Africa.
- The aggregate employment rate is very low in international comparison and the gap vis-à-vis peers has been growing over time.
- If the employment rate was equal to the OECD average or the average across the best emerging market (EM) performers, GDP per capita might be 50 to 60 percent above its current level, all else equal.
- Past IMF estimates suggest that a 10 percentage point reduction in the unemployment rate could lower the Gini index (after tax and transfers) by 3 percentage points.
- Introducing flexible opening clauses that enable individual firms to adjust wages and hours when facing hardship could speed up return to full employment after shocks and cut overall structural unemployment by a minimum of 2 percentage points.

### II. Covid-19 impact and cyclical dynamics
- The Covid-19 crisis fostered massive cyclical under-employment.
- Employment and participation dynamics:
  - The employment rate fell by 6 percentage points (to just 36%) between 2020Q1 and 2020Q2.
  - The labor force participation rate fell by 13 percentage points (to 47%) between 2020Q1 and 2020Q2.
  - The unemployment rate temporarily dropped by 7 percentage points (to just over 23%) in 2020Q2 as people stopped searching for jobs.
  - By 2020Q4 the employment rate remained over 4 percentage points below its pre-COVID rate, and the unemployment rate rose to over 32 percent—roughly 3 percentage points above its very high pre-COVID rate.
- Okun law estimates indicate unemployment in South Africa is more responsive to the business cycle than in the average EM and more responsive than in the average AE.

### III. Structural nature of unemployment
- Long-run levels:
  - South Africa’s unemployment rate never fell below 20 percent during the last two decades and rose to about 30 percent prior to the Covid-19 shock.
- Drivers:
  - Structural mismatch between existing labor supply and demand at prevailing market wages.
  - Supply-side contributors:
    - Low education and entrepreneurship reduce employability.
    - High commuting costs raise reservation wages.
    - Some grants may raise reservation wages indirectly and to a lesser extent.
  - Demand-side contributors:
    - Labor market institutions, such as wage-bargaining arrangements, further raise wages above levels needed to clear the labor market.

### IV. Historical and institutional drivers
- Legacies tracing to apartheid:
  - Low education among a large fraction of the working-age population.
  - Geographical remoteness of job seekers from job centers.
  - Corrective institutions and regulations emphasizing formal arbitration and legal procedures over informal social dialogue, with adverse effects on employment and economic efficiency.
  - Suppression of formal black entrepreneurship contributing to negative perceptions of informality.

### V. Policy recommendations — labor market institutions
- Reform objectives:
  - Strengthen coordination among social partners, accommodate firm heterogeneity, and reduce uncertainty.
- Collective bargaining:
  - Build stronger coordination: require representative bargaining parties, high trust, and some firm-level flexibility for sector-level bargaining to succeed; otherwise decentralize bargaining to the firm level.
  - Adopt a norm facilitating negotiation (productivity gains, inflation) and have government highlight employment costs of excessive wage growth.
  - Encourage more frequent negotiations to foster trust.
- Representativeness and administrative extensions:
  - Strengthen representativeness of bargaining councils by setting and enforcing clear quantitative criteria (for example, requiring bargaining parties to represent the majority of employees and employers in the industry).
  - Set clear criteria for administrative extensions of collective agreements (for example, signatory employers’ organizations representing at least the majority of the total number of employers); allow Ministerial rejection if not in the economy’s interest.
- Firm-level flexibility:
  - Introduce flexible opening clauses enabling individual firms to adjust wages and hours during hardship.
  - New analysis indicates such clauses could speed up return to full employment after shocks and cut structural unemployment by a minimum of 2 percentage points.
- Minimum wage setting:
  - Balance reducing in-work poverty and enhancing job prospects of disadvantaged groups.
  - South Africa’s minimum-to-median wage ratio is high in international comparison—above the vast majority of EMs and much higher than in any AE.
  - The National Minimum Wage (NMW) Commission’s annual review should be informed by independent evaluations of the NMW’s effects on job prospects of disadvantaged groups.
  - The Commission should be free to recommend upward and downward NMW adjustments depending on job prospects and macroeconomic conditions, including overall productivity growth.
  - Over the medium term, as fiscal space is restored, consider in-work tax credits targeted at low incomes in exchange for minimum wage moderation.
- Employment protection legislation (EPL):
  - Keep obstacles to economic layoffs moderate, simple, and efficiently enforced.
  - Reduce caseloads, shorten dispute resolution procedures, and strengthen predictability of settlements.
  - Streamline EPL enforcement to support productivity, income per capita, and reduce labor market dualism.
  - To minimize short-term layoff risks, enact EPL reform with delayed implementation or grandfathering (apply new rules only to new contracts).

### VI. Complementary reforms to raise returns to work
- Increase returns to work so job seekers take up employment even with improved institutions:
  - Pro-competition product market reforms, particularly in transport.
  - Strengthen entrepreneurship, including improved access to credit for SMEs.
  - Enhance education and apprenticeship schemes.
  - Consider activation measures for social benefit recipients.
- These reforms will disproportionately benefit the disadvantaged, notably youth.

### VII. Distributional and demographic patterns (2019 snapshots)
- Discouraged workers:
  - Discouraged workers accounted for about 12 percent of the labor force in 2019; including them would raise the broadly defined unemployment rate to over 40 percent.
- Unemployment by age:
  - The unemployment rate for ages 15-24 reached 57 percent in 2019.
  - The unemployment rate for ages 55-64 was 10 percent in 2019.
- Unemployment by education:
  - About 35 percent of labor force participants with basic education (primary or lower secondary education) were unemployed in 2019.
  - 25 percent of those without basic education were unemployed in 2019.
  - 13 percent of those with an advanced (tertiary) degree were unemployed in 2019.
  - Employment rates in 2019: 25 percent of those with basic education had a job; 30 percent of those without basic education had a job; 71 percent of the working-age population with an advanced degree had a job.
- Racial disparities:
  - Labor force participation gap in 2019 was about 10 percentage points (68 versus 58 percent).
  - The gap in unemployment rates was over 25 percentage points.
- Rising unemployment prior to the crisis concentrated among youth, the lower-middle skilled, and the black African population; shift-share analysis shows rising incidence within these groups rather than composition effects.

---

### Improving the functioning of key labor market institutions — Wage bargaining, minimum wages, and EPL

### Key features of wage bargaining and minimum wages in South Africa
- Bargaining system:
  - Combines industry- and firm-level bargaining, supplemented with minimum standards in some sectors.
  - Collective bargaining avenues: i) industry-region level (bargaining councils) as codified by the 1995 Labour Relations Act (LRA); ii) plant-level bargaining.
  - Plant-level agreements typically raise worker pay above centralized agreement levels when they overlap.
  - Where unions are under-represented, the 1997 Basic Conditions of Employment Act (BCEA) provides sectoral determinations for wages and work conditions.
- National Minimum Wage Act (NMWA):
  - NMWA enacted November 2018.
  - National minimum wage of R20.76 per hour from 1 March 2020, with sub-minimum wages for agricultural and domestic workers, as well as temporary exemptions (for up to a year—in principle).
  - The national minimum wage takes precedence over any collective bargaining agreement or sectoral determination.
  - The minimum wage stands above the prevailing median wage in most industries covered by sectoral determinations; gap largest in agriculture and domestic services.
- Coverage and unions:
  - Coverage of bargaining councils: in the order of one-third to two-thirds in manufacturing (close to two-thirds overall in 2013/2014), mining, transport and storage, and the public sector.
  - Coverage much lower in other industries: below 15 percent in the private sector and 25 percent overall.
  - Total union density now stands at around 27 percent.
  - Coverage of bargaining council agreements can be administratively extended to non-signatory parties; extensions have increased coverage by 50 percent in manufacturing.
  - Overall union coverage rate may be close to 30 percent, about 2 to 3 percentage points above the union density rate.
  - Sectoral determinations cover over a third of employees.

### Challenges in bargaining and minimum wage framework
- Coordination and representativeness:
  - Bargaining system is not coordinated; no coordination between different bargaining councils or their members.
  - LRA lacks hard representativeness criteria in practice; declining trade union membership (from close to 40 percent in 2000 to about 27 percent in 2015) raises pressures.
  - Insufficient representativeness increases likelihood industry-level wage conditions are inadequate for many firms, notably SMEs.
- Administrative extensions:
  - Extension criteria do not require that a majority of employers be covered—only that signatory employers employ a majority of employees and that a majority of employees be members of signatory trade unions.
  - Weak extension rules can harm SME competitiveness and adjustment to shocks.
  - Agreements and extensions often do not cover non-standard forms of employment.
- Firm-level flexibility and trust:
  - Individual firms cannot readily opt out of an industry-level agreement in case of hardship; exemption applications exist with over 80 percent reported success for applications but deep distress outcomes unclear.
  - Collective bargaining has been consistently adversarial with high strike activity.
- Minimum wage concerns:
  - Minimum-to-median wage ratio at about 90 percent (of median formal worker wages—and 100 percent of the median wage across all workers) — higher than any OECD country and among the highest in EMDEs.
  - High relative minimum wage partly reflects lower absolute median wages.
  - Sub-minimum wages exist only for farm and domestic workers and public works programs.

### Reform options and priorities
- Enhance bargaining coordination to internalize economy-wide wage effects.
- Increase representativeness of bargaining parties; set transparent quantitative criteria with attention to SME representation.
- Tighten administrative extension rules: extend only agreements meeting representativeness criteria and retain Ministerial discretionary power.
- Introduce firm-level flexibility mechanisms (opt-out/opening clauses) allowing adjustment to firm-specific shocks.
- Address coverage gaps for non-standard employment while preserving flexibility.
- Consider calibrated minimum wage design (including sub-minima where appropriate) to protect disadvantaged groups, especially youth.
- As fiscal space is restored, introduce in-work tax credits targeted at low incomes alongside minimum wage moderation.

### Model-based assessment of firm-level bargaining flexibility
- Model setup:
  - Search-and-matching labor market model calibrated to South Africa with firm-specific productivity shocks.
  - Under firm-level bargaining wages fully adjust to firm-specific shocks; sector-level bargaining cannot accommodate within-sector heterogeneity.
- Quantitative findings:
  - Applying flexible opening clauses enabling individual firms to adjust wages and/or hours when facing hardship could cut overall structural unemployment by about 2 percentage points, accounting for sector-level bargaining covering only about a quarter of employees.
- Complementary reforms:
  - Allow adjustments to individual firm wages in industries not covered by sector-level bargaining through sectoral determinations and NMW setting.
  - NMW reviews should emphasize employment and be informed by regular, rigorous, independent evaluations.
  - Avoid de facto indexation of the NMW; consider sub-minimum wages for particular categories of workers, primarily youth, if the minimum-to-average ratio remains close to its currently high level.

### In-work tax credits and sequencing
- As fiscal space is restored, introduce in-work tax credits targeted at low incomes alongside minimum wage moderation.
- International evidence: several advanced economies combined in-work tax credits with moderate minimum wages with encouraging results for low-skilled job creation and in-work poverty reduction.

---

### Employment protection legislation (EPL) and enforcement

### Key features, costs, and enforcement realities
- EPL purpose: legal protection against discrimination and noneconomic layoff motives; focus on dismissal for economic reasons.
- Documented costs of stringent EPL:
  - i) weaker productivity and output per capita;
  - ii) reduced flows in and out of employment and longer unemployment duration;
  - iii) greater labor market dualism.
- Consensus on design:
  - Keep legal protection moderate, simple (moderate severance pay rather than cumbersome dismissal procedures), and efficiently enforced with short, predictable judicial procedures.
  - Well-functioning unemployment insurance (UI) is a more efficient protection against income loss than EPL severance pay.
- South Africa enforcement realities:
  - De jure EPL not particularly tight, but enforcement is burdensome and slow.
  - Dispute resolution institutions: CCMA, Labour Court, Labour Appeal Court.
  - Procedural burdens and delays:
    - Over 193000 cases (including conciliations) were referred to the CCMA in 2018/2019.
    - The CCMA’s caseload is over three times the annual caseload two decades ago and six times the level it was originally set up to handle.
    - CCMA arbitrations can take well over a year after initial referral, with an average of seven months for arbitrations to be completed.
    - 10 to 15 percent of CCMA arbitration awards are subject to further judicial review by the Labour Court.
    - A 24-months period for a review application to be heard in the Labour Court, and a 12 to 24 months delay between hearing and judgement dates at the Labour Appeal Court, are not uncommon.
  - Uncertainty regarding remedies:
    - Employees are ultimately reinstated in about 13 per cent of cases.
    - The CCMA may award up to 12 months’ remuneration as compensation; Labour Courts can decide whether compensation should be awarded but not the amount, leading them to award 12 months of compensation in most cases.

### EPL reform options
- Streamline enforcement to reduce caseloads and speed resolution:
  - Encourage earlier conciliation; allow agreements to come into force after a brief legal check by CCMA and be final.
  - Shorten dispute resolution procedures and consider simplifying or ending Labour Court reviews of CCMA arbitration awards.
- Make settlements more predictable:
  - Consider foregoing the possibility of worker reinstatement.
  - Allow Labour Courts to fine-tune compensation amounts subject to a (possibly lower) ceiling.
- Reduce hiring uncertainty:
  - Permit termination without justification at the end of the probation period to reduce employer hesitancy, particularly for SMEs.
- Equity and labor market structure impacts:
  - Streamlined EPL enforcement could reduce labor market dualism by making employers less hesitant to offer regular jobs and by reducing reliance on temporary contracts and labor brokers.
  - Note: a 2014 LRA amendment and a 2018 Constitutional Court ruling compel employers to insource after three months any employee employed through labor brokers, which may downsize temporary employment services over time.
- Timing and sequencing:
  - Easing EPL pays off quickly in good times but can entail short-term losses when enacted during depressed economic conditions.
  - Best practice: enact reforms now but delay implementation (for example, by a year) until economic conditions are stronger, or grandfather reforms so they apply only to new beneficiaries.

---

### Strengthening labor force employability — product markets, commuting, SMEs, social benefits, education, and youth

### Product market reform and commuting costs
- Product market reforms:
  - Easier product market regulation reduces structural unemployment and increases worker purchasing power.
  - IMF estimates: a product market reform package comparable to average historical reform in advanced economies could boost productivity and cut structural unemployment by about one percentage point in the coming years.
- Commuting costs:
  - Transportation costs can devour up to a quarter of a typical low-skilled worker’s wage.
  - Reducing commuting costs would increase take-home pay, foster wage moderation, raise low-skilled employment rates, and potentially raise attachment and productivity.
  - Suggested measures:
    - Assign management of rail and bus contracts to local governments in large cities to integrate public transport and land use planning.
    - Target transport subsidies to low-wage earners.
    - Public investments in transport infrastructure and social housing to cut commuting time and costs.

### Entrepreneurship and SME financing
- Problem: Most SMEs lack access to finance—under a third have a bank loan or a credit line.
- Model-based simulation results:
  - Reforms raising SMEs’ access to credit to levels seen in most advanced emerging market peers—such that the overall corporate-debt-to-GDP ratio would rise from about 40 to 60 percent over the medium term—could:
    - raise GDP by about 3 percent;
    - raise the share of formal workers in total employment by 6 percentage points.
- Concrete reforms:
  - Ease barriers to entry in the banking sector.
  - Consolidate and simplify government support to SMEs.
  - Target younger and more dynamic firms.
  - Create one-stop shops for SMEs regarding regulation, taxation, and access to government support.

### Social benefits and activation
- Role in Covid response:
  - Unemployment benefits and grants help insure workers against income loss and alleviate poverty; temporary extensions during Covid-19 are welcome.
- Design considerations:
  - Balance adequate safety net and strong work incentives.
  - Evidence for South Africa is inconclusive on labor supply effects of benefits.
  - Consider “activating” expenditures—making some benefits conditional on, or rising with, hours worked.
  - Example: shift emphasis from child support to childcare subsidies to incentivize female participation.
  - Consider shifting some spending on active labor market programs towards geographical mobility subsidies.
- Timing: Such measures should be considered only as the economy recovers and temporary grant extensions are rolled back.

### Education, apprenticeship, and youth employment
- Education challenges:
  - Basic education suffers from low quality and high inequality; average scores weaker and more unequal than in other emerging economies.
  - Very high private returns from tertiary schooling—found to exceed 18 percent per year of schooling.
- Policy priorities on tight fiscal space:
  - Focus on efficiency-enhancing reforms and gradual reallocation toward education.
  - Strengthen school principals’ management capacity and accountability.
  - Improve teacher monitoring and training.
  - Ease credit constraints to tertiary enrollment.
  - Improve vocational education quality and generalize apprenticeship.
- Lifting youth job prospects:
  - Key statistics:
    - Only one in nine young people (aged 15-24) have a job.
    - Half of the 15-24 year-olds seeking jobs are unemployed.
    - About one-third of youth are NEET.
  - Gender gaps:
    - Having children increases young women’s likelihood of being inactive by about 25 percentage points relative to young men.
  - Policies associated with higher youth employment:
    - lower minimum wages (ratio to mean),
    - easier employment protection legislation (EPL),
    - lower product market regulation (PMR),
    - stronger legal protection for women,
    - higher trade openness,
    - lower exposure to routinization.
  - Active labor market policies (ALMPs):
    - Prominent programs: EPWP, NYSP, YES.
    - Evaluation evidence: randomized studies highlight need to act on general barriers (notably EPL); ALMPs alone may have limited impact.
    - Promising interventions: well-designed job search support and monitoring integrated with benefit provision; geographical mobility subsidies; programs that assist with learning about job opportunities in different locations.

### Conclusion and sequencing
- The fallout from COVID-19 has further strained South Africa’s dysfunctional labor market.
- A multi-faceted approach addressing demand- and supply-side obstacles jointly through bold institutional reforms could put unemployment on a firm downward path and foster more inclusive growth.
- Prioritization, timing and sequencing must factor in very weak business cycle conditions and tight fiscal space.
- Start with reforms that could deliver quick job gains under broad labor market slack at little or no budget cost. Prime candidates include:
  - collective bargaining reform,
  - product market regulation reform,
  - reform of employment protection legislation and its enforcement (if adopted now but phased in or grandfathered),
  - improvements in the design of ALMPs to facilitate job reallocation and amplify post-COVID job recovery.

---

### Model-based analysis — key calibration and quantitative results

### Model purpose and setup
- Objective: Analyze potential impact of wage bargaining reform (sector-level to firm-level bargaining, or introducing flexible opening clauses) on structural unemployment using the Jimeno and Thomas (2013) model calibrated to South Africa.
- Core framework: Search and matching model (Mortensen and Pissarides (1994)) with endogenous job creation and destruction; wages set by Nash bargaining with credible threats under two regimes:
  - Firm-level bargaining: wages respond to firm-specific productivity z.
  - Sector-level bargaining: wages respond to sector-wide average productivity E(z|z≥R).

### Key calibration (quarterly model) — parameters and targets
- Discount rate β = .965. Target: Annual real interest rate = 3.62 percent.
- Implied quarterly interest rate: r = 0.008926.
- Exogenous separation rate ρ = .028. Target: 70% of all separations (JT, 2013).
- SD of idiosyncratic (log) productivity σ = 0.06.
- Mean idiosyncratic (log) productivity μ = −σ^2/2 so that E(z)=1.
- Elasticity of matching function ε = 0.5.
- Scale parameter of matching function m_0 = 0.24. Target/implication: Job finding rate = 11% p.q.
- Sum of disagreement payoffs δ+γ = 0.975. Target/implication: Total separation rate = 4% p.q.
- Vacancy posting cost κ = 0.134. Target/implication: Vacancy/Unemployment ratio = 1/4.
- Targeted steady state unemployment: 26 percent.
- Targeted job finding rates under sector-level bargaining: 0.11 and 0.04.

### Model expressions and steady state
- Labor market tightness: 휃 = v/u.
- Law of motion for employment n_t and unemployment u_t:
  - n_t = (1−F(R))(1−ρ)(n_{t−1} + θ q(θ) u_{t−1})
  - u_t = (ρ + (1−ρ) F(R)) n_{t−1} − θ q(θ) (1−ρ)(1−F(R)) u_{t−1}
- Steady state unemployment:
  - u_ss = [ρ + (1−ρ) F(R)] / [ρ + (1−ρ) F(R) + θ q(θ) (1−ρ)(1−F(R))]
- Wage formulas:
  - Firm-level: w_f(z) = z/2 + (δ+γ)/2.
  - Sector-level: w_s = E(z|z≥R)/2 + (δ+γ)/2.

### Quantitative results
- Baseline steady state unemployment under sector-level bargaining set to 26 percent.
- Under firm-level bargaining (universal coverage) calibrated estimates:
  - Job finding probability at a one-year horizon increases by 1.3 percentage points from 38.3 to 39.6 percent.
  - Job separation probability declines by 1.1 percentage points from 15.1 to 14.
  - Steady state unemployment rate declines by 8.6 percentage points to 17.5 percent.
- Coverage caveat:
  - Only about a quarter of employees work in two-digit industries with bargaining council coverage; accounting for limited coverage, estimated flexible wage bargaining could reduce the unemployment rate by about 2 percentage points.

### Interpretation and policy implications
- Allowing wages to respond to firm-specific productivity generates less job destruction and more job creation in the calibrated South African setting, lowering equilibrium unemployment substantially in the full-coverage calibration.
- Large estimated decline (8.6 percentage points) applies to universal firm-level bargaining coverage; limited real-world coverage implies much smaller aggregate effects (about 2 percentage points).
- Results should be interpreted with caution given heterogeneity in bargaining coverage and sectoral incidence.

*Source: wpiea2021165-print-pdf.*

### 1. Employment Rates _______________________________________________________________________________________ 4

### 1. Employment Rates

### I. Introduction and summary of main findings
- Boosting employment from its very low level is key to lifting GDP per capita growth and reducing high income inequality in South Africa.
- The aggregate employment rate is very low in international comparison and the gap vis-à-vis peers has been growing over time.
- If the employment rate was equal to the OECD average or the average across the best emerging market (EM) performers, GDP per capita might be 50 to 60 percent above its current level, all else equal.
- Past IMF estimates suggest that a 10 percentage point reduction in the unemployment rate could lower the Gini index (after tax and transfers) by 3 percentage points.
- The paper finds that introducing flexible opening clauses that enable individual firms to adjust wages and hours when facing hardship could speed up return to full employment after shocks and cut overall structural unemployment by a minimum of 2 percentage points.

### II. Covid-19 impact and cyclical dynamics
- The Covid-19 crisis fostered massive cyclical under-employment.
- The employment rate fell by 6 percentage points (to just 36%) between 2020Q1 and 2020Q2.
- The labor force participation rate fell by 13 percentage points (to 47%) between 2020Q1 and 2020Q2.
- The unemployment rate temporarily dropped by 7 percentage points (to just over 23%) in 2020Q2 as people stopped searching for jobs.
- By 2020Q4 the employment rate remained over 4 percentage points below its pre-COVID rate, and the unemployment rate rose to over 32 percent—roughly 3 percentage points above its very high pre-COVID rate.
- Okun law estimates indicate unemployment in South Africa is more responsive to the business cycle than in the average EM and more responsive than in the average AE.

### III. Structural nature of unemployment
- South Africa’s unemployment rate never fell below 20 percent during the last two decades and rose to about 30 percent prior to the Covid-19 shock.
- High unemployment is structural, reflecting a mismatch between existing labor supply and demand at prevailing market wages.
- Supply-side contributors:
  - Low education and entrepreneurship reduce employability.
  - High commuting costs raise reservation wages.
  - Some grants may raise reservation wages indirectly and to a lesser extent.
- Demand-side contributors:
  - Labor market institutions, such as wage-bargaining arrangements, further raise wages above levels needed to clear the labor market.

### IV. Historical and institutional drivers
- Some forces trace back to apartheid:
  - Low education among a large fraction of the working-age population.
  - Geographical remoteness of job seekers from job centers.
  - Corrective institutions and regulations emphasizing formal arbitration and legal procedures over informal social dialogue, with adverse effects on employment and economic efficiency.
  - Suppression of formal black entrepreneurship contributing to negative perceptions of informality.

### V. Policy recommendations (labor market institutions)
- Reform collective bargaining and employment protection legislation, and carefully set minimum wages, to strengthen coordination among social partners, accommodate firm heterogeneity, and reduce uncertainty.
- Collective bargaining:
  - Build stronger coordination: require representative bargaining parties, high trust, and some firm-level flexibility for sector-level bargaining to succeed; otherwise decentralize bargaining to the firm level.
  - Adopt a norm facilitating negotiation (productivity gains, inflation) and have government highlight employment costs of excessive wage growth.
  - Encourage more frequent negotiations to foster trust.
- Representativeness and administrative extensions:
  - Strengthen representativeness of bargaining councils by setting and enforcing clear quantitative criteria (for example, requiring bargaining parties to represent the majority of employees and employers in the industry).
  - Set clear criteria for administrative extensions of collective agreements (for example, signatory employers’ organizations representing at least the majority of the total number of employers); allow Ministerial rejection if not in the economy’s interest.
- Firm-level flexibility:
  - Introduce flexible opening clauses enabling individual firms to adjust wages and hours during hardship.
  - New analysis indicates such clauses could speed up return to full employment after shocks and cut structural unemployment by a minimum of 2 percentage points.
- Minimum wage setting:
  - Balance reducing in-work poverty and enhancing job prospects of disadvantaged groups.
  - South Africa’s minimum-to-median wage ratio is high in international comparison—above the vast majority of EMs and much higher than in any AE.
  - The National Minimum Wage (NMW) Commission’s annual review should be informed by independent evaluations of the NMW’s effects on job prospects of disadvantaged groups.
  - The Commission should be free to recommend upward and downward NMW adjustments depending on job prospects and macroeconomic conditions, including overall productivity growth.
  - Over the medium term, as fiscal space is restored, consider in-work tax credits targeted at low incomes in exchange for minimum wage moderation.
- Employment protection legislation (EPL):
  - Keep obstacles to economic layoffs moderate, simple, and efficiently enforced.
  - Reduce caseloads, shorten dispute resolution procedures, and strengthen predictability of settlements.
  - Streamline EPL enforcement to support productivity, income per capita, and reduce labor market dualism.
  - To minimize short-term layoff risks, enact EPL reform with delayed implementation or grandfathering (apply new rules only to new contracts).

### VI. Complementary reforms to raise returns to work
- Increase returns to work to ensure job seekers take up employment even with improved institutions:
  - Pro-competition product market reforms, particularly in transport.
  - Strengthen entrepreneurship, including improved access to credit for SMEs.
  - Enhance education and apprenticeship schemes.
  - Consider activation measures for social benefit recipients.
- These reforms will disproportionately benefit the disadvantaged, notably youth.

### VII. Distributional and demographic patterns
- Discouraged workers (would like to work but not actively looking) accounted for about 12 percent of the labor force in 2019; including them would raise the broadly defined unemployment rate to over 40 percent.
- Unemployment by age (2019):
  - The unemployment rate for ages 15-24 reached 57 percent in 2019.
  - The unemployment rate for ages 55-64 was 10 percent in 2019.
- Unemployment by education (2019):
  - About 35 percent of labor force participants with basic education (primary or lower secondary education) were unemployed in 2019.
  - 25 percent of those without basic education were unemployed in 2019.
  - 13 percent of those with an advanced (tertiary) degree were unemployed in 2019.
  - Employment rates in 2019: 25 percent of those with basic education had a job; 30 percent of those without basic education had a job; 71 percent of the working-age population with an advanced degree had a job.
- Racial disparities (2019):
  - Labor force participation gap in 2019 was about 10 percentage points (68 versus 58 percent).
  - The gap in unemployment rates was over 25 percentage points.
- Rising unemployment prior to the crisis was concentrated among youth, the lower-middle skilled, and the black African population; shift-share analysis shows rising incidence of unemployment within these groups rather than composition effects.

*Source: wpiea2021165-print-pdf - 1. Employment Rates.*

### 13.      Overall, these trends underscore both the urgency of policy action and the need

### 13.      Overall, these trends underscore both the urgency of policy action and the need for it to enhance the job prospects of disadvantaged groups

### Summary of argument and focus
- The trends documented underpin both the urgency of policy action and the need for that action to enhance the job prospects of disadvantaged groups.
- For youth, this focus is explicit (see section “Lifting Youth Job Prospects” in the source).

### Shift-share evidence on unemployment (Figure 8)
- Decompositions rely on a shift-share analysis of unemployment rates by age/education/population group starting from 2008 (from 2000 by population group):
  - ∆ UR_t = ∑ ω_i,t−1 * ∆UR_i,t + ∑ UR_i,t−1 * ∆ω_i,t
  - UR denotes unemployment rate in a given year and ω_i is the share of labor force population in demographic group i.
  - The first and second terms represent the within- and between-group components of changes in the aggregate unemployment rate in South Africa, respectively.
  - Results are cumulated over years to show the effects from 2008 to 2019.
- Source data: South Africa Statistics LFS (2000-2007), QLFS (2008-2019); ILO STAT; IMF staff calculations.

### III. IMPROVING THE FUNCTIONING OF KEY LABOR MARKET INSTITUTIONS — A. Wage bargaining and minimum wages

Key features of wage bargaining and minimum wages in South Africa
- South Africa’s bargaining system:
  - Combines industry- and firm-level bargaining, supplemented with minimum standards in some sectors.
  - Collective bargaining avenues: i) industry-region level (bargaining councils) as codified by the 1995 Labour Relations Act (LRA); ii) plant-level bargaining.
  - Plant-level agreements typically raise worker pay above centralized agreement levels when they overlap.
  - Where unions are under-represented, the 1997 Basic Conditions of Employment Act (BCEA) provides sectoral determinations for wages and work conditions (e.g., wholesale and retail sector, domestic services).
- National Minimum Wage Act (NMWA) and recent minimum wage:
  - NMWA enacted November 2018.
  - National minimum wage of R20.76 per hour from 1 March 2020, with sub-minimum wages for agricultural and domestic workers, as well as temporary exemptions (for up to a year—in principle).
  - The national minimum wage takes precedence over any collective bargaining agreement or sectoral determination.
  - The minimum wage stands above the prevailing median wage in most industries covered by sectoral determinations; gap largest in agriculture and domestic services, motivating sub-minimum wages for these industries.
  - Effect on bargaining councils is uncertain given that median wage levels set by collective agreements had exceeded the new minimum wage already before its introduction.
- Coverage of industry-level bargaining and unions:
  - Coverage of bargaining councils has traditionally been high—in the order of one-third to two-thirds—in manufacturing (close to two-thirds overall in 2013/2014), mining, transport and storage, and the public sector.
  - Coverage much lower in other industries: below 15 percent in the private sector and 25 percent overall.
  - Total union density (union membership as a share of employed workers) now stands at around 27 percent (Figure 9 and Visser, 2019).
  - Coverage of bargaining council agreements can be administratively extended to non-signatory parties; extensions have increased coverage by 50 percent in manufacturing (Godfrey, 2018).
  - Overall union coverage rate may be close to 30 percent, about 2 to 3 percentage points above the union density rate.
  - Sectoral determinations also have significant coverage—the share of employees they cover has been put at over a third (Godfrey and others, 2006; Godfrey, 2018).

### Challenges identified for South Africa’s bargaining and minimum wage framework

- Role of collective bargaining generally:
  - Well-designed collective bargaining can support inclusive growth by improving job quality, compressing wage schedules, improving productivity, and dampening employment effects of macro shocks.
- Preconditions for collective bargaining to deliver high and stable employment (international evidence):
  - Macroflexibility and microflexibility.
  - Two successful country groups: decentralized bargaining countries; more centralized bargaining countries with:
    - Strong bargaining coordination.
    - Firm-level flexibility (e.g., opening/opt-out clauses).
    - Representativeness of bargaining parties (including active SME representation).
    - Careful use of administrative extensions (extensions only when agreements meet stringent union and employer association representativeness criteria; retain discretionary authority to limit extensions when rapid macro adjustment is needed).
    - High trust between social partners.
- Taxonomy (simplified) places South Africa with Southern EU countries and Argentina under “Centralized (industry/region/national)” with lower representativeness, coordination, and firm-level flexibility.

- How South Africa falls short (key points):
  - Degree of coordination:
    - The bargaining system is not coordinated; no coordination between different bargaining councils or their members (Figure 10).
    - Lack of coordination implies parties lack incentives to internalize adverse economy-wide effects of wage decisions on employment and inflation.
  - Representativeness of bargaining parties:
    - LRA requires trade unions and employers’ organizations to be “sufficiently representative” for establishment of a bargaining council, but no hard criterion exists in practice—ample discretion remains.
    - Declining trade union membership (from close to 40 percent in 2000 to about 27 percent in 2015) increases pressure on representativity and on the administrative extension process.
    - Insufficient representativeness raises the likelihood that industry-level wage conditions are inadequate for a significant fraction of firms, notably SMEs.
  - Administrative extensions:
    - Extension criteria do not require that a majority of employers be covered—only that signatory employers employ a majority of employees and that a majority of employees be members of signatory trade unions.
    - This weakens SME competitiveness and the ability to adjust to adverse shocks (e.g., Covid-19) that may warrant renegotiation of work conditions to save jobs.
    - Agreements and extensions often do not cover non-standard forms of employment (e.g., independent contractors, temporary employment services), which have risen and can be used to circumvent bargaining council agreements with adverse implications for job quality and inclusiveness.
  - Firm-level flexibility:
    - Individual firms cannot readily opt out of an industry-level agreement in case of hardship.
    - Firms can apply for exemptions (both signatory and non-signatory firms), which are often granted by bargaining councils themselves; Godfrey (2018) reports a success rate of over 80 percent for exemption applications, though outcome for deeply distressed firms is unclear.
  - Trust and adversarial relations:
    - Collective bargaining in South Africa has been consistently adversarial, reflected by high (and rising) strike activity and conflictual labor relations (Figures 11 and 12).
  - Wage moderation:
    - Several features of the bargaining system are not conducive to wage moderation and high employment.
    - Union wage premia have been high in South Africa—"in the order of one fourth on average" (OECD, 2008).

- Minimum wage concerns:
  - South Africa’s minimum wage is high in international comparison:
    - Minimum-to-median wage ratio at about 90 percent (of median formal worker wages—and 100 percent of the median wage across all workers) — higher than any OECD country and among the highest in EMDEs (Figure 13).
    - Partly reflects lower absolute median wages, requiring a high relative minimum wage to meet antipoverty objectives.
  - Evidence and risks:
    - Evidence suggests minimum wages likely had only small effects on overall employment at historically prevailing levels in most countries, but if set too high they can undermine job prospects of disadvantaged groups in the labor market, including youth.
    - Some OECD countries apply lower minimum wages to less productive categories, including youth.
    - In South Africa, sub-minimum wages only exist for farm and domestic workers, as well as for workers employed on public works programs.

### Options for reform (as introduced in the source)
- The source signals the need for reform to foster greater firm-level flexibility, at a time when firms are hit differently by the ongoing economic downturn.
- Reform priorities implied by the analysis include (drawing from the identified challenges and international experience):
  - Enhance bargaining coordination mechanisms to internalize economy-wide effects of wage decisions.
  - Increase representativeness of bargaining parties, with particular attention to SME representation and transparent, hard criteria for representativeness.
  - Make administrative extension rules more stringent—extend only agreements that meet representativeness criteria and retain discretionary power to limit extensions when needed for macro adjustment.
  - Introduce firm-level flexibility mechanisms (e.g., opt-out or opening clauses) that allow adjustment to firm-specific shocks without large job losses.
  - Address coverage gaps for non-standard employment forms to avoid circumvention of bargaining protections while preserving flexibility.
  - Consider calibrated minimum wage design (including sub-minima where appropriate) to protect against adverse employment effects for disadvantaged groups, especially youth.

*Source: IMF staff summary of chapter content (wpiea2021165-print-pdf).*

### 21.      Collective bargaining reform should either aim to enhance coordination between

### 21.      Collective bargaining reform should either aim to enhance coordination between

### Collective bargaining: goals and international lessons
- Coordinated bargaining can strengthen the responsiveness of labor costs to macroeconomic conditions and raise average employment.
- Options if coordination is too difficult:
  - Strengthen coordination through a negotiation norm (inflation, productivity gains, or a combination).
  - Have the government highlight employment costs of excessive wage growth in the negotiation process.
  - If trust between employers and workers cannot be built, decentralize bargaining at the firm level altogether.
- Frequent negotiations between social partners can build trust over time (see Hijzen, Martins and Parlevliet, 2017).

### Design features to improve representativeness and firm-level flexibility (from paragraph 22)
- Introduce opt-out clauses in collective agreements, with clear criteria for opting out based on whether the firm requesting an opt-out faces hardship.
- Strengthen representativeness of bargaining councils by setting and enforcing clear quantitative criteria for whether they are “sufficiently representative”.
  - One suggested criterion: bargaining parties must represent the majority of employees and employers in the industry for a bargaining council to be established.
  - Implementing this requires detailed and reliable firm-level employment data within each industry.
- Add criteria for administrative extensions of collective agreements:
  - Require that signatory employers’ organizations represent at least the majority of the total number of employers.
  - Conditional on all criteria being met, retain Ministerial discretionary power to grant an extension based on a meaningful test of public interest.

### Model-based assessment of firm-level bargaining flexibility (paragraphs 23–24)
- Model setup:
  - A search-and-matching labor market model calibrated to the South African economy with firm-specific productivity shocks.
  - Under firm-level bargaining wages fully adjust to firm-specific shocks; sector-level bargaining cannot accommodate within-sector heterogeneity.
  - Sector-level bargaining leads to more job destruction and less job creation than firm-level bargaining, on average, resulting in higher average unemployment.
- Quantitative finding:
  - Accounting for sector-level bargaining covering only about a quarter of employees, model simulations imply that applying flexible opening clauses enabling individual firms to adjust wages and/or hours when facing hardship (a negative shock) could cut overall structural unemployment by about 2 percentage points (Figure 14).
- Complementary reforms for amplification:
  - Allow adjustments to individual firm wages in industries not covered by sector-level bargaining through sectoral determinations and national minimum wage (NMW) setting.
  - Minimum wage determination should remain flexible and emphasize job prospects of disadvantaged groups.
    - Chapter 2 of the NMW Act of 2018 states the annual review should promote reduced poverty and wage differentials, while considering inflation, productivity and the operation of small firms, among others.
  - Employment should play a central role in NMW reviews in practice and be informed by regular, rigorous, independent evaluations of the NMW’s effects on job prospects of disadvantaged groups.
  - The Commission should be free to recommend, and the government to consider, both upward and downward NMW adjustments depending on job prospects and macroeconomic conditions, including aggregate productivity growth.
  - Avoid de facto indexation of the NMW to retain flexibility needed to smooth employment effects of macroeconomic shocks.
  - Consider introducing sub-minimum wages for particular categories of workers, primarily youth, if the minimum-to-average ratio remains close to its currently high level.

### In-work tax credits and medium-term policy sequencing (paragraph 25)
- As fiscal space is restored, introduce in-work tax credits targeted at low incomes alongside minimum wage moderation.
- Rationale and international evidence:
  - Several advanced economies have combined ramped up in-work tax credits with moderate minimum wages to meet employment and in-work poverty objectives over the last three decades, with encouraging results for low-skilled job creation and in-work poverty reduction (see e.g. OECD, 2018).
- In South Africa, greater reliance on in-work tax credits would ease the burden on the NMW and support job creation.

---

### B. Employment protection legislation and enforcement

### Key features and challenges (paragraphs 26–27)
- Purpose:
  - EPL provides legal protection against discrimination and noneconomic layoff motives; main policy focus is how EPL should address dismissal for economic reasons.
- Documented costs of stringent EPL:
  - i) weaker productivity and output per capita;
  - ii) reduced flows in and out of employment and longer unemployment duration;
  - iii) greater labor market dualism (stronger job stability for prime-age male workers but greater difficulty for disadvantaged workers to find regular jobs).
- Consensus on design:
  - Keep legal protection against economic layoffs moderate, simple (relying on moderate severance pay rather than cumbersome dismissal procedures), and efficiently enforced with short, predictable judicial procedures.
  - Well-functioning unemployment insurance (UI) is a more efficient protection against income loss from layoffs than EPL severance pay.
- Enforcement realities in South Africa:
  - De jure EPL is not particularly tight, but enforcement is burdensome and slow, increasing uncertainty.
  - Dispute resolution institutions: Commission for Conciliation, Mediation and Arbitration (CCMA), Labour Court, Labour Appeal Court.
  - Procedural burdens and delays:
    - Over 193000 cases (including conciliations) were referred to the CCMA in 2018/2019.
    - The CCMA’s caseload is over three times the annual caseload two decades ago and six times the level it was originally set up to handle.
    - CCMA arbitrations can take well over a year after initial referral, with an average of seven months for arbitrations to be completed (Bhorat and Stanwix, 2018).
    - 10 to 15 percent of CCMA arbitration awards are subject to further judicial review by the Labour Court.
    - A 24-months period for a review application to be heard in the Labour Court, and a 12 to 24 months delay between hearing and judgement dates at the Labour Appeal Court, are not uncommon.
  - Uncertainty regarding remedies:
    - Employees are ultimately reinstated in about 13 per cent of cases (Benjamin, 2013).
    - The CCMA may award up to 12 months’ remuneration as compensation; Labour Courts can decide whether compensation should be awarded but not the amount, leading them to award 12 months of compensation in most cases.

### Options for EPL reform (paragraphs 28–30)
- Streamline enforcement to reduce caseloads and speed resolution:
  - Encourage earlier conciliation between employers and laid-off workers; agreements could come into force after a brief legal check by CCMA and be final.
  - Shorten dispute resolution procedures and consider simplifying or ending Labour Court reviews of CCMA arbitration awards.
- Make settlements more predictable:
  - Consider foregoing the possibility of worker reinstatement.
  - Allow Labour Courts to fine-tune compensation amounts subject to a (possibly lower) ceiling to ensure commensurateness with employer noncompliance.
- Other measures to reduce hiring uncertainty:
  - Permit termination without justification at the end of the probation period to reduce employer hesitancy, particularly for SMEs.
- Equity and labor market structure impacts:
  - Streamlined EPL enforcement could reduce labor market dualism by making employers less hesitant to offer regular jobs and by reducing reliance on temporary contracts and labor brokers.
  - Note: a 2014 LRA amendment and a 2018 Constitutional Court ruling compel employers to insource after three months any employee employed through labor brokers, which may gradually downsize temporary employment services.
- Timing and sequencing:
  - Easing EPL pays off quickly in good times but can entail short-term losses when enacted during depressed economic conditions.
  - Best practice: enact reforms now but delay implementation (for example, by a year) until economic conditions are stronger, or grandfather reforms so they apply only to new beneficiaries.

---

### IV. Strengthening labor force employability (selected points)

### Barriers to returns to work and policy levers (paragraph 31)
- Factors depressing returns to work:
  - Low education levels weakening productivity and prospective wages.
  - Low entrepreneurship limiting high-value formal job opportunities.
  - High side costs of performing jobs (notably high transportation costs) that reduce net take-home pay.
  - Social benefits, while mitigating income risks, may weaken job-takeup incentives if not activated appropriately.
- Required policy mix:
  - Pro-competition product market reforms (particularly in transport).
  - Greater activation of social benefits.
  - Enhanced efficiency of education and apprenticeship schemes.
  - Stronger entrepreneurship and improved access to credit for SMEs.

### Product market reform to raise employment and take-home pay (paragraphs 32)
- Effects of product market deregulation:
  - Easier product market regulation reduces structural unemployment by encouraging firm and job creation and increases worker purchasing power.
  - Increased purchasing power can facilitate wage moderation and further employment gains.
- Evidence and estimates for South Africa:
  - Employment is lower, and transitions from unemployment into employment are more difficult, in district municipalities where jobs are concentrated in high-markup industries (Amodio et al., 2020).
  - Wages are lower in local labor markets where dominant employers hold monopsony power (Bassier, 2019).
  - IMF estimates imply a product market reform package comparable in ambition to the average historical reform in advanced economies could boost productivity and cut structural unemployment by about one percentage point in the coming years (Bouis, Duval and Eugster, 2020; Duval and Furceri, 2018).
- Areas for reform:
  - Cut administrative burdens on start-ups (licenses and permits).
  - Reduce barriers to competition in services and network industries, which are high even compared to EM peers.

*Source: wpiea2021165-print-pdf - 21.      Collective bargaining reform should either aim to enhance coordination between*

### 33.      Cutting commuting costs is especially important, given that transportation costs

### Cutting commuting costs is especially important, given that transportation costs 

### Commuting costs and labor market effects
- Transportation costs can devour up to a quarter of a typical low-skilled worker’s wage (Ngarachu, Schimmelpfennig and Schöer, 2014).
- Reducing commuting costs would:
  - increase the financial return from taking up a job,
  - foster wage moderation,
  - raise low-skilled worker’s employment rates,
  - potentially raise low-skilled workers’ attachment to their jobs, employment duration and productivity (van der Merwe and Krygsman, 2020).
- Suggested measures:
  - assign the management of rail and bus contracts to local governments in large cities to better integrate public transport and land use planning (National Treasury, 2019);
  - target transport subsidies to low-wage earners;
  - public investments in transport infrastructure and social housing to cut commuting time and costs.

### Entrepreneurship / SMEs financing
- Problem statement:
  - Most SMEs lack access to finance—under a third of them have a bank loan or a credit line, much less than in many other EMs.
- Model-based simulation results (model captures co-existence of large formal firms and small informal firms, heterogeneity, financial constraints, and large formal-entry costs):
  - Reforms raising SMEs’ access to credit to levels seen in most advanced emerging market peers—such that the overall corporate-debt-to-GDP ratio would rise from about 40 to 60 percent over the medium term—could:
    - raise GDP by about 3 percent;
    - raise the share of formal workers in total employment by 6 percentage points.
  - Mechanism: greater access to finance enables high-productivity credit-constrained SMEs to grow and stimulates entry of new firms in the formal sector.
- Concrete reforms to enhance SMEs’ access to finance:
  - ease barriers to entry in the banking sector;
  - consolidate and simplify government support to SMEs (e.g. through the Department of Small Business Development);
  - target primarily younger and more dynamic firms;
  - create one-stop shops for SMEs regarding regulation, taxation, and access to government support (see e.g. OECD, 2017).

### Social benefits
- Role in Covid response:
  - Unemployment benefits and grants help insure workers against income loss and alleviate poverty; temporary extensions during Covid-19 are welcome and in line with IMF advice (IMF, 2020a,b).
- Design considerations:
  - Benefit levels and design must balance providing an adequate safety net and maintaining strong work incentives.
  - Evidence for South Africa is inconclusive on labor supply effects of benefits:
    - Some studies document a negative impact of elderly grants on the labor force participation of prime-age men in recipient families (Bertrand, Mullainathan and Miller, 2003).
    - Other studies find a positive effect on prime-age women (Edmonds, Mammen and Miller, 2005).
  - International experience suggests room for “activating” expenditures—making some benefits conditional on, or rising with, hours worked.
  - Example: shifting emphasis from child support to childcare subsidies to incentivize female participation (Guner, Kaygusuz and Ventura, 2020).
  - Consider shifting some spending on active labor market programs towards geographical mobility subsidies to ease spatial legacies behind high unemployment.
- Timing:
  - Such measures should be considered only as the economy recovers and recent temporary grant extensions are rolled back.

### Education and apprenticeship
- Problem statement:
  - South Africa has progressed on educational attainment but basic education suffers from low quality and high inequality.
  - Average scores in international scholastic achievement tests are weaker and more unequal than in other emerging economies (OECD, 2013).
  - Very high private returns from schooling at tertiary level—found to exceed 18 percent per year of schooling (Branson and Leibbrandt, 2013).
- Causes:
  - Insufficient resources (infrastructure and equipment, number and quality of teachers, and their distribution) and cost inefficiencies.
- Policy priorities given tight fiscal space:
  - focus on efficiency-enhancing reforms and gradual reallocation of public spending toward education;
  - strengthen school principals’ management capacity and accountability;
  - improve teacher monitoring and training;
  - ease credit constraints to enrollment in tertiary education (OECD, 2013);
  - improve quality and attractiveness of vocational education by strengthening staff training and resources and generalizing apprenticeship as part of vocational curricula.

### Lifting youth job prospects
- Key statistics and challenges:
  - Youth inactivity is stubbornly high: only one in nine young people (aged 15-24) have a job (Figure 19).
  - Half of the 15-24 year-olds seeking jobs are unemployed.
  - About one-third of youth are neither in employment, nor in education or training (NEET).
- Gender gaps:
  - Empirical analysis spanning almost 90 million individuals and 47 countries points to a gender gap in youth inactivity rates of over 10 percentage points in South Africa—below the EMDE average, but larger than in AEs.
  - Decomposition shows the gap stems from differences in the impact of characteristics rather than differences in characteristics themselves.
  - Having children increases young women’s likelihood of being inactive by about 25 percentage points relative to young men, all else equal.
  - Young women face larger employment losses from the ongoing crisis due partly to concentration in contact-intensive jobs.
- Cross-country correlations:
  - Youth employment rates correlate strongly with adult employment rates; South Africa’s youth employment is disproportionately weak even given very low adult employment.
- Structural policy associations (individual-probability model results):
  - Policies associated with higher youth employment include:
    - lower minimum wages (ratio to mean),
    - easier employment protection legislation (EPL),
    - lower product market regulation (PMR),
    - stronger legal protection for women,
    - higher trade openness,
    - lower exposure to routinization.
  - Effects are particularly strong for young women.
  - Easier EPL and PMR are also associated with higher youth job quality (higher likelihood of obtaining a regular job contract).
  - Greater exposure to routine jobs is particularly detrimental to youth employment prospects—lower exposure yields potential gains, especially for young men.
  - Strengthening legal protections for women could improve young women’s prospects, particularly on return from maternity leave and at entry to reduce hiring discrimination.
- Active labor market policies (ALMPs):
  - Prominent youth ALMPs in South Africa:
    - Expanded Public Works Programme (EPWP) — temporary work opportunities in four public sectors;
    - National Youth Service Programme (NYSP) — youth development activities, technical and on-the-job practical training for one year;
    - Youth Employment Service (YES) — private-sector joint initiative creating one-year paid positions, qualifies as ALMP since employers benefit from the employment tax incentive (ETI) created in 2014.
  - Evaluation evidence:
    - Recent randomized studies highlight the need to act on general barriers to employment (notably EPL) and not to expect too much from ALMPs alone (Bertrand and Crepon, 2020; Levinsohn et al., 2014).
    - Other evaluations provide mixed results on effectiveness of existing programs (Aflagah 2020 on the ETI; Meth 2011 on the EPWP).
    - International meta-studies show ALMPs must be carefully designed to pass cost-benefit analysis; many existing programs are not.
  - Promising lessons:
    - Well-designed job search support and monitoring integrated with benefit provision (“one-stop shops”) can help.
    - Geographical mobility subsidies have been effective in randomized studies in EMDEs and are promising for South Africa where many disadvantaged households do not live where the jobs are (McKenzie, 2017).
    - Successful programs have assisted with learning about job opportunities in different locations (Jensen, 2012) or subsidized job search in different parts of the city (Abebe et al. 2016 on Ethiopia; Bryan et al. 2014 on Bangladesh).

### Conclusion
- The fallout from COVID-19 has further strained South Africa’s dysfunctional labor market.
- A multi-faceted approach addressing demand- and supply-side obstacles jointly through bold institutional reforms could put unemployment on a firm downward path and foster more inclusive growth.
- Prioritization, timing and sequencing must factor in very weak business cycle conditions and tight fiscal space.
- Start with reforms that could deliver quick job gains under broad labor market slack at little or no budget cost. Prime candidates include:
  - collective bargaining reform,
  - product market regulation reform,
  - reform of employment protection legislation and its enforcement (if adopted now but phased in or grandfathered),
  - improvements in the design of ALMPs to facilitate job reallocation and amplify post-COVID job recovery.

*Source: Excerpt from IMF staff analysis (wpiea2021165-print-pdf).*

### References

### References and Appendix I — Model-Based Analysis of Wage Bargaining Reform in South Africa

### Model purpose and key mechanisms
- Objective: Analyze potential impact of wage bargaining reform—moving from sector-level bargaining to firm-level bargaining, or introducing flexible opening clauses—on structural unemployment using the Jimeno and Thomas (2013) model calibrated to South Africa.
- Core framework: Search and matching model (Mortensen and Pissarides (1994)) with endogenous job creation and destruction; wages set by Nash bargaining with credible threats under two regimes:
  - Firm-level bargaining: wages respond to firm-specific productivity z.
  - Sector-level bargaining: wages respond to sector-wide average productivity E(z|z≥R).
- Job destruction/creation determined by productivity threshold R and negotiated wages; unemployment rate results from equilibrium of job-finding and separation processes.

### Model description (formulation and key expressions)
- Labor market tightness: 휃 = v/u.
- Probability a worker matches depends on 휃 via 휃 q(휃).
- Probability a job survives exogenous destruction: (1−휌).
- Probability a match draws productivity ≥ R: (1−F(R)).
- Flow return to a matched job with productivity z: z − w(z).
- If negotiation fails: firm disagreement cost 훾; worker disagreement payoff equals flow value of unemployment 훿.
- Wage formulas:
  - Firm-level: w_f(z) = z/2 + (δ+γ)/2. (presented in source as 푤_f(푧)=푧/2+훿+훾 2 — preserved phrasing means wage depends on z, δ, γ as in text)
  - Sector-level: w_s = E(z|z≥R)/2 + (δ+γ)/2. (presented in source as 푤_s = 𝐸(푧|푧≥푅)/2 + 훿+훾 2)
- Law of motion for employment n_t and unemployment u_t:
  - n_t = (1−F(R))(1−ρ)(n_{t−1} + θ q(θ) u_{t−1})
  - u_t = (ρ + (1−ρ) F(R)) n_{t−1} − θ q(θ) (1−ρ)(1−F(R)) u_{t−1}
- Steady state unemployment:
  - u_ss = [ρ + (1−ρ) F(R)] / [ρ + (1−ρ) F(R) + θ q(θ) (1−ρ)(1−F(R))]

### Calibration (quarterly model) — parameters and targets
- Discount rate β = .965. Target: Annual real interest rate = 3.62 percent.
- Implied quarterly interest rate: r = 0.008926.
- Exogenous separation rate ρ = .028. Target: 70% of all separations (JT, 2013).
- SD of idiosyncratic (log) productivity σ = 0.06. Source: Hlatshwayo et al (2020).
- Mean idiosyncratic (log) productivity μ = −σ^2/2. So that E(z)=1.
- Elasticity of matching function ε = 0.5. Source: Petrongolo and Pissarides (2001).
- Scale parameter of matching function m_0 = 0.24. Target/implication: Job finding rate = 11% p.q.
- Sum of disagreement payoffs δ+γ = 0.975. Target/implication: Total separation rate = 4% p.q.
- Vacancy posting cost κ = 0.134. Target/implication: Vacancy/Unemployment ratio = 1/4 (JT, 2013).
- Targeted steady state unemployment: 26 percent (an estimate of NAIRU in South Africa).
- Targeted job finding rates under sector-level bargaining: 0.11 and 0.04 (both transition probabilities aligned with Quarterly Labor Force Survey estimates between 2008Q1 and 2014Q3 in Anand, Kothari, and Kumar (2016)).

### Quantitative results (calibrated outcomes and policy-relevant projections)
- Baseline steady state unemployment under sector-level bargaining: set to be 26 percent.
- Under firm-level bargaining (firms bargain on firm-specific productivity shocks), calibrated model estimates:
  - Job finding probability at a one-year horizon increases by 1.3 percentage points from 38.3 to 39.6 percent.
  - Job separation probability declines by 1.1 percentage points from 15.1 to 14. (source text truncation preserves provided numbers: decline by 1.1 percentage points from 15.1 to 14.)
  - Steady state unemployment rate declines by 8.6 percentage points to 17.5 percent.
- Coverage adjustment/caveat:
  - Magruder (2012) observation: only about a quarter of employees work in two-digit industries in places with bargaining council coverage.
  - Accounting for limited coverage, estimated flexible wage bargaining could reduce the unemployment rate by about 2 percentage points.

### Interpretation and policy implications
- Ambiguity ex ante: wage compression in presence of firm heterogeneity can both increase job destruction (if wages cannot adjust to negative firm-specific shocks) and incentivize job creation (if wages do not fully incorporate positive productivity shocks, raising firm profits).
- Model finding: allowing wages to respond to firm-specific productivity (firm-level bargaining) generates less job destruction and more job creation in the calibrated South African setting, lowering equilibrium unemployment substantially in the full-coverage calibration.
- Important policy caveats:
  - Large estimated decline in unemployment (8.6 percentage points) applies to the hypothetical economy where firm-level bargaining coverage is universal; real-world limited coverage implies much smaller aggregate effects (estimated about 2 percentage points).
  - Results should be interpreted with caution given heterogeneity in bargaining coverage and sectoral incidence.

*Source: wpiea2021165-print-pdf - References (IMF staff content provided).*

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