South Africa: Labor Market Dynamics and Inequality

IMF Working Papers, July 11, 2016

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The paper analyzes determinants of high unemployment in South Africa using individual level panel data from the Quarterly Labor Force Survey.
Prior work experience and gender are important determinants of the job-finding rate.
Education attainment and race are important determinants of the job-exit rate.
Using stock-flow equations, counterfactual exercises quantify the role of different transition rates on unemployment.
The paper explores the contribution of unemployment to inequality.
A 10 percentage point reduction in unemployment lowers the Gini coefficient by 3 percent.
Achieving a similar reduction in inequality solely through transfers would require a 40 percent increase in government transfers.

Data source: Individual level panel data from the Quarterly Labor Force Survey.
Analytical approach: Estimation of job-finding and job-exit determinants; use of stock-flow equations and counterfactual exercises to quantify impacts of transition rates on unemployment.

Reducing unemployment is important for reducing inequality, as indicated by the estimated effects on the Gini coefficient.
Relying solely on transfers to achieve the same inequality reduction would imply a substantially larger fiscal effort (a 40 percent increase in government transfers) compared with lowering unemployment directly.