Stellenbosch Working Paper Series No. WP07/2016

Unemployment in South Africa has been attributed to multiple causes. Wages have grown faster than productivity to reduce labour demand; demographic shifts have increased labour supply. This paper uses a district pseudo-panel, constructed from household surveys, to estimate the elasticity of labour demand, labour supply and unemployment with respect to wages. The goal is to assess whether hiring decisions are more sensitive to increases in wages of low paid workers than high paid workers, and whether wage growth prompts entry into the labour market. Each of these channels combine to result in the positive causal effect of wage growth on unemployment. Furthermore, the research investigates whether these effects are dominated by districts in which unionization rates are high, and where workers are employed by large firms. In so doing, we quantify the role that institutional wage-setting has in raising wages (which in turn contribute to unemployment). The results illustrate that wages of middle to highly paid workers – as opposed to low paid workers – lead to depressed local labour demand and higher local unemployment; these effects can be explained by cross-district unionization rates and the distribution of large firms. Bargaining arrangements correspond closely to the spatial wage distribution; in turn, a large part of the impact that wage growth has on labour market outcomes is determined by these wage-setting institutions.

JEL Classification:
J31; J51; C21

South Africa; wage-unemployment elasticity; pseudopanel; unions; firm structure