South Africa’s Unemployment Puzzle

IMF Blog, April 4, 2011

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Unemployment in South Africa now stands at some 24 percent.
Youth unemployment is phenomenally higher still at some 50 percent.
By comparison, unemployment in the United States "continues to hover around 9 percent."
South Africa lost proportionately as many formal sector jobs (1 million) during 2008-09 as those countries at the center of the global financial crisis.
The government’s target: creating 5 million jobs by 2020 requires annual growth "of the order of 6‑7 percent."
Current growth referenced as "3½ percent."

Pre-crisis structural factors contributing to high unemployment include:
- mismatches between the kinds of jobs available and workers’ skills,
- large distances between population centers and where businesses are located.
Labor market dynamics observed:
- During the mid-2000s growth upswing, the country was very good at creating jobs; but when the economy hits a rough patch, job losses also tend to be very high.
- For each 1 percentage point increase in growth, employment growth tends to increase by more than 1 percentage point. Unfortunately, the same is true when growth declines.
- Wages do not respond much to changes in the demand for labor; when there is an adverse shock to demand, it is the level of employment rather than wages that adjust.
- In 2009 there were large economy-wide increases in real wages—wages rising faster than inflation—during a recession, an unusual outcome that contributed to employment losses.
Institutional observations:
- The author does not attribute the main cause to employment protection laws and states a belief that "the country’s labor legislation provides important and necessary—and hard won—protection for workers."
- The author suggests re-examining the wage bargaining framework to ensure that "most of the adjustment in the labor market does not continue to fall mainly on the number of jobs."
- The author endorses "wage moderation during downturns" as a reasonable trade-off.

Higher growth:
- Doubling growth "—from the current 3½ percent—" is characterized as "the first order of business."
- Growth should be private investment and export led; promoting private investment needs to be "firmly on the reform agenda."
- Concerns noted about sustaining higher growth once macroeconomic policies become less supportive to rebuild policy buffers.
Making growth more labor intensive:
- Targeted interventions to address problem areas such as youth unemployment.
- Current wage setting mechanisms do not allow differences in wages that would fully reflect productivity differences between young and old workers.
- A wage subsidy scheme "along the lines recently announced by the government" is recommended to make it cheaper for firms to employ young workers, provided the subsidy is carefully designed to:
- avoid the displacement of existing workers, and
- minimize substitution away from older workers.
More competitive product markets:
- South Africa has a relatively high cost structure in many markets for goods and services, contributing to higher input costs and inhibiting external competitiveness of manufacturing and other tradable sectors.
- Enhancing domestic competition should lower costs for companies and for consumers.
Overall prescription:
- Change the incentives facing firms and employees to support growth and employment creation.

Author: Abebe Aemro Selassie — April 4, 2011