WP24/2009

Determining the Causes of the Rising South African Unemployment Rate: An Age, Period and Generational Analysis

Stellenbosch Working Paper Series No. WP24/2009

Author(s): Rulof Burger, Dieter von Fintel

JEL Classification: C4, J1, J2, J3

Keywords: Unemployment, Participation, Feminisation of Labour Force, Education Policy, Birth Cohort Panels, Age-Period-Cohort Decompositions

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Abstract:

This paper takes advantage of the wealth of cross-sectional household surveys conducted after South Africa’s political transition, in order to gain insights into the causes of the acceleration in the already high unemployment rate. A synthetic panel dataset is constructed to decompose unemployment and other labour market outcomes into cyclical, generational and life-cycle effects. This dynamic view isolates which groups are at risk across the period and allows a more nuanced understanding of the long-run and short-run impacts. Our results indicate that the higher unemployment rates faced by the young are predominantly due to the disadvantage of entering the labour market more recently, rather than being attributable to their age. We furthermore isolate what has driven this long-run increase in labour market participation. In particular, higher educational attainment and household formation decisions across generations fuel labour supply among the more recent entrants. We find some correspondence between the cyclical variation in unemployment and the business cycle. This suggests that jobless growth is not a relevant feature of the South African labour market. This paper confirms many of the causes of unemployment that are postulated in the literature. The dynamic nature of this study has furthermore allowed the separation of short-run and long-run aspects of unemployment. The decomposition approach adopted here has uncovered the linkages between the schooling system and the labour market across all generations, but, in particular, has isolated why the youngest generations have exhibited such distinct risks. The surge in labour supply amongst most recent generations (those aged 20 in 1995) can be explained by rapid exit rates from the education system resulting from over-age enrolment policies enacted in the post-apartheid period. This has pushed individuals into the labour market prematurely and without the adequate skills to be absorbed into the workplace. The importance of the generational aspects of unemployment relative to life cycle and business cycle impacts suggests that policies should address the structural issues affecting each of these birth cohorts, rather than focussing on age groups per se.