Unemployment in South Africa: The Nature of the Beast

Abstract

Unemployment in South Africa is so widespread that it demands an explanation. This paper examines a central question about South African unemployment. Why do the unemployed not enter the informal sector, as is common in other developing countries? The data do not support the idea that unemployment is largely voluntary. The policy implications––that government should diminish labor market segmentation and the obstacles to entering the productive informal sector––may be relevant also to other developing countries with high unemployment.

Introduction

Unemployment in South Africa is remarkably high, and rising. In 2002 it was officially measured at 41% on the broad definition and 30% on the narrow definition (StatsSA, 2002). This is different to the pattern that exists in most developing countries, where paucity of formal sector jobs manifests itself in large informal sectors rather than in high levels of open unemployment. Table 1 shows that South Africa is an international outlier in this respect: it has a small informal sector and widespread open unemployment so that its ratio of nonagricultural informal sector employment to urban unemployment is tiny compared to that in most developing countries.

Unemployment is potentially a matter of serious concern––for its effects on economic welfare, production, erosion of human capital, social exclusion, crime, and social instability. Some view the level of unemployment and its rise as the most serious threat facing South African society and its governance. The potential costs of unemployment depend however on the nature of the beast. The underlying question we address is this: Is unemployment in South Africa largely voluntary or involuntary? The answer has important ethical and policy implications. If unemployment is voluntary, it is arguable that its cure can be downgraded as a policy concern. Interest groups and ideologues have taken predictable stances but the issue has not been addressed rigorously in South Africa.

In Section 2 we explain the hypotheses to be investigated, placing them within the general and the South African literature. We go on to pose the question: why is informal sector employment so low and unemployment so high in South Africa? Section 3 examines whether the unemployed would have higher income, and be happier, in self-employment. Finding that they would, in Section 4 we consider possible barriers that might prevent them from entering the informal sector. Section 5 concludes, both for South Africa and more generally.

Whereas in the past, the absence of reliable nationally representative household-level data has prevented empirical analysis of such issues in South Africa, the recent availability of rich household survey data collected by the South African Labour Research Unit (SALDRU) and the Central Statistical Service (known as Statistics South Africa) allows us to explore these issues. We use survey data collected in 1993, 1994 and 1997, described in Kingdon and Knight (2004) and data from Labour Force Surveys up to 2002.