Unemployment in South Africa: the nature of the beast

Unemployment in South Africa is so widespread that it demands an explanation. This paper examines two questions about South African unemployment. Firstly, why do the unemployed not enter the informal sector, as is common in other developing countries? Secondly, why do the unemployed not enter wage employment more readily? The findings provide little support for the idea that unemployed people choose to be unemployed: the unemployed are substantially worse off, and less satisfied with their quality of life, than they would be if informally employed. Various impediments to entry into the informal sector increase open unemployment. The test of the hypothesis that the unemployed have unrealistically high wage aspirations suggests that the commonly reported high reservation wages (relative to predicted wages) are not to be interpreted as reflecting unwillingness to work. Acknowledgements This paper has benefited from the comments of Sam Bowles, Angus Deaton, Marcel Fafchamps, and Francis Teal as well as from comments made by participants at the Trade and Industrial Policy Secretariat Conference, South Africa, September 2000, the American Economic Association’s Annual Meeting, January 2001, and the Labour Economics Seminar, University of Oxford, February 2001. The research was supported by a research grant from the U.K. Department for International Development. Correspondence: Geeta Kingdon, Department of Economics, University of Oxford, OX1 3UQ, U.K. Tel: 44-1865-271065; Fax: 44-1865-281447; email: [email protected]