## South Africa’s Unemployment Puzzle

_IMF Blog, April 4, 2011_

## Source details

**Canonical URL:** [South Africa’s Unemployment Puzzle](https://www.imf.org/en/blogs/articles/2011/04/04/south-african-unemployment)

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## Bibliographic details
- Authors: Abebe Aemro Selassie
- Published: April 4, 2011

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### Overview and scale of the problem
- 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."

### Structural contributors and labor market dynamics ("Pieces to the puzzle")
- 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.

### Likely solutions and policy recommendations
- 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*

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## References

- [South Africa](http://www.imf.org/external/pubs/ft/fandd/2011/12/selassie.htm)
- [our work](http://www.imf.org/external/pubs/cat/longres.aspx?sk=24232.0)

_Source: https://www.imf.org/en/blogs/articles/2011/04/04/south-african-unemployment_