Unemployment is extremely high in South Africa – and the figures are rising. It is possibly the biggest threat to society and governance of the country. Whereas in most countries those unable to find formal jobs take up informal employment, leading typically to low levels of open unemployment, in South Africa a large proportion of workers are openly unemployed rather than taking up informal sector work. What are the reasons behind high South African unemployment and why do the unemployed not enter the informal sector?

A report by Oxford University looks at whether unemployment in South Africa is largely voluntary or involuntary, as unemployment that is largely voluntary can be downgraded as a policy concern. The research sheds light on the nature of unemployment by asking whether unemployed people choose to remain outside the informal sector (which includes self-employment and casual waged jobs such as domestic work). The research shows that the unemployed would have higher incomes and be happier if they were self employed. Lack of participation in the informal sector is not due to choice but rather due to barriers that prevent people from entering.

Unemployment can have disastrous consequences for a country’s economic welfare, crime rate, social stability and production rate. According to official statistics, in 2002 broadly 41 per cent of the South Africans were jobless (this includes all jobless persons saying they want a job, whether they were actively in search of work or not). In comparison the informal sector comprises about 19 per cent of the broadly defined workforce.

The report found that:

• Unemployed people are far worse off in income and expenditure than people employed informally: the average monthly household income of unemployed people is only one-third of the income of the informally employed.
• Unemployment lowers general life satisfaction.
• In most cases unemployment is likely to be involuntary and many would accept work in the formal sector and in the productive part of the informal sector if they could get one.
• Relatively low wages in the informal sector discourages unemployed people from taking jobs that are available: the average individual earnings in the informal sector are less than one-third of those in the formal sector.

People remain unemployed in South Africa because of the lack of formal jobs (low labour demand) and because they come up against barriers to entering informal employment. There are various possible reasons why the informal sector has been unfriendly to newcomers. Among the barriers are licensing controls and restrictive by-laws in urban centres. Moreover, labour market institutions such as Bargaining Councils and Wage Boards extend sectoral minimum wages to all firms in the industry and region, including small firms, and penalize those who do not comply, thus imposing a burden of high labour costs on small firms.  Such measures may seriously inhibit the entry and growth of small firms. Furthermore, black South Africans were severely repressed under apartheid and may not have developed the entrepreneurial and social skills necessary for confidence to enter and be successful in self employment. Other obstacles to informal sector entry are a high crime rate, poor infrastructure and a lack of credit facilities

Three main policy recommendations arise from the findings.

• Economic policies should be centrally concerned to promote investment in physical and human capital (such as promoting business confidence, developing infrastructure; promoting education and training, etc.) and thus the rapid growth of the economy; this will increase the number of jobs available.
• The South African government should address the causes of the sharp division of the labour market into formal and informal sector employment and address the factors that create large gaps in labour incomes between them.
• The government should address the obstacles to entry to the productive informal sector, by means of expanded training and credit programmes and the removal of all artificially created barriers.

This would help in reversing the upward trend in unemployment seen over the last decade and make begin to make progress in tackling the big employment problem.

Source(s):
Unemployment in South Africa: The Nature of the Beast’, World Development Vol. 32, No. 3, pp. 391–408, Great Britain, 2004 Full document.

Funded by: Department for International Development, UK

id21 Research Highlight: 8 July 2004

Further Information:
Geeta Kingdon
Center for the Study of African Economies
Institute of Economics and Statistics
University of Oxford
St. Cross Building
Manor Road
Oxford OX1 3UL
UK

Tel: 44 1865 271065
Fax: 44 1865 281447
Contact the contributor: geeta.kingdon@economics.ox.ac.uk

University of Oxford, UK

Other related links:
Informalisation of labour in South Africa’s fruit export industry

Globalisation and manufacturing employment: contrasting impacts in Asia and Africa

'Staying poor in South Africa'

International Labour Organisation (ILO)

Eldis poverty and employment guide