Employment Transitions, Informal Sector Heterogeneity and Recovery From Recessions

This paper examines employment transitions in the South African labour market. Using the Post-Apartheid Labour Market Series, it analyses flows between the formal sector, informal sector, and unemployment, paying specific attention to how these flows differ during recessions. It explicitly considers heterogeneity within the informal sector by separately accounting for wage employment and self-employment as well as upper-tier and lower-tier informal sector segments. Transition probabilities are estimated using dynamic discrete choice models, and the extent to which transitions affect changes in real wages is estimated using a linear model. The results provide evidence of heterogeneity within the informal sector and segmentation between wage employment and self-employment. They also show a lag in the employment impacts following a recession. Finally, the paper provides suggestive evidence that the upper-tier segment of the informal sector acts as a buffer during recessionary periods by absorbing labour that would otherwise be unemployed or relegated to precarious lower-tier informal employment.

The thesis is concerned with the construction and application of SAGE-H, a large-scale dynamic computable general equilibrium (CGE) model of the South African economy with a particular focus on HIV/AIDS. A key feature of the SAGE-H model is its detailed treatment of the labour market, with labour force participants distinguished by their labour market activity, age, gender, race and HIV status. The core theoretical structure of the SAGE-H model is based on the MONASH model (Dixon & Rimmer, 2002). SAGE-H describes the production of 28 commodities by 28 industries. It also defines factors of production, various technologies and preferences, taxes and margins, detailed descriptions of government accounts, the balance of payments accounts and net foreign liabilities. The model recognises a number of dynamic adjustment mechanisms, in particular, capital accumulation, net foreign liability accumulation and sticky wage adjustment. SAGE-H captures the structure and characteristics of the South African economy via the calibration of the model to South African Supply-Use Tables for 2002 (StatsSA, 2006c) and relevant South African parameter and elasticity values. The detailed modelling of the labour market in SAGE-H is based on that developed by Dixon and Rimmer (2009) to analyse the effects of immigration on the US economy. I adapt their theory of labour supply to enable it to treat the peculiar features of the South African labour market, particularly with respect to the influence of progressive stages of HIV on labour supply. The Dixon approach is to classify the working age population (WAP) at the start of each year into a number of labour market categories based upon their past labour market activities and end-of-year probabilities for transitioning between categories. I adopt the labour market function categories of employment (by occupation), unemployment and “permanently departed from the labour force” and add the HIV relevant additional classifications of age, gender, race and HIV status and stage. At the start of year t, people in each category decide to offer their labour to various labour market activities based upon relative wages and personal preferences/attributes. They make this decision by solving an optimisation problem. One invention of SAGE-H is that the supply of labour depends on the labour force participant’s HIV status and stage. For instance, a person who is HIV negative supplies labour more strongly to employment activities than a person who is HIV positive. Equilibrium in the labour market by occupation is determined by labour demand by all industries and labour supply by all categories. I carry out two simulations with the SAGE-H model to analyse the economy wide impact of an increase in condom use over the period 2002 to 2045. The first simulation is the baseline or business-as-usual simulation. This simulation models the growth of the South African economy and the HIV epidemic over time in the absence of the policy change under consideration. The second simulation conducted with the SAGE-H model is the policy simulation. This simulation generates a second forecast that incorporates all the exogenous features of the baseline forecast, but now also includes policy-related shocks reflecting the details of the policy under consideration. The impacts of a policy are typically reported in terms of percentage deviations away from the baseline simulation. In the absence of a cure for HIV/AIDS, preventing the transmission of HIV is the only known way of curbing the spread of the virus. Prevention is also important as it affects adults’ future health prospects. In this thesis, the policy under consideration is an increase in the proportion of sex acts protected by condom use via a publicly-financed program of condom distribution. More specifically, I analyse the impact of an increase in condom use on (1) the number of new HIV cases, (2) labour market adjustment via changes in the level of employment and the real wage and (3) the economy-wide impact of changes in the labour market. To get a better understanding of the impact of an increase in the proportion of sex acts protected from the HIV virus due to an increase in condom use, I first use the Actuarial Society of South Africa epidemiological model (the ASSA2003 model) (Actuarial Society of South Africa, 2005). This model suggests that an increase in the proportion of protected sex acts leads to a fall in the annual number of new HIV infections. In terms of the SAGE-H model, the prevention policy can be viewed as generating a decline in transition probabilities from HIV negative to HIV Stage 1, i.e. a fall in HIV incidence rates. In addition, I model government spending on the program via an increase in government demand which is financed by an equivalent decrease in private consumption in general. Over the simulation period, the policy leads to approximately 200,000 fewer HIV infections relative to baseline. Due to the staged transition path through the HIV stages, the results suggest that the number of people in Stage 1 falls prior to falls in Stages 2, 3 and 4. In the long run the total number of HIV positive adults is 0.82 per cent lower than baseline and the number of HIV negative adults is 0.46 per cent higher than baseline. Based on the underlying assumptions incorporated in the labour-market module, fewer people becoming HIV positive implies that labour market attachment increases i.e. labour offers to all employment activities increase. In the long run employment is 0.23 per cent higher than the baseline value and the real wage is 0.18 lower than the baseline value. The labour offers to employment activities depend largely on the age, gender and race-specific composition of these occupations. While all age, gender and race groups benefit from the prevention policy, the prevention policy has its largest initial impact on labour supply of young African adults. Hence, employment activities with a higher representation of young African adults in their labour force benefit the most from the prevention policy. In the long run the policy also generates an increase in capital stock and together with the increase in employment GDP is 0.17 per cent higher than in the baseline. Real private consumption, net of the cost of financing the program, is 0.15 percent higher than baseline in the long run. The framework presented in the thesis opens up a number of additional avenues for future research into HIV prevention programmes and treatment options. Two promising future avenues of research with the model are analysis of the labour market consequences of anti-retroviral treatment programmes, and detailed modelling of demand for and supply of finely-defined health services.

Where to for the South African Labour Market?Some 'Big Issues' Miriam Altman and Imraan Valodia The labour market landscape has changed dramatically over the first decade of democratic governance in South Africa. Of course, the most obvious change is extremely high and rising rates of open unemployment. This was partly caused by restructuring and capital intensification in traditional resource-based industries, without a concomitant growth in manufacturing or services. Historically, South Africa's formal work places were dominated by large public sector, industrial, mining and agricultural employers. This changed dramatically over the 1990s due to a combination of factors such as globalisation, product market liberalisations, intensified domestic competition arising from easier market entry, and greater alignment of labour market regulation. Services sectors, whether formal or informal, have been an important source of employment growth. People in part-time, temporary, home-based and externalised working situations can no longer be seen as 'atypical', but rather as the norm. There is now a 'diversity' of workplaces, and continuous movement of workers between work states - 'core' formal, 'non-core' formal, informal and unemployed. In the initial years of the political transition, the labour market was at the centre of economic policy processes. Very soon after the political transition, government appointed a Labour Market Commission to research and review options and to propose a framework for policy. Related to this, the International Labour Organisation (ILO) embarked on a comprehensive review of the South African labour market. Over this period, research interest was focused very much on 'big issues' - active labour market programmes, fair employment practices, affirmative action, workplace democratisation, fair labour legislation, and appropriate labour market institutions. This period was also characterised by far-reaching changes in labour policy with the enactment of the Labour Relations Act, the Basic [End Page 1] Conditions of Employment Act, the Skills Development Act, and the Employment Equity Act. Partly as a result of the availability of survey data, such as the Labour Force Surveys, research on the South African labour market in the latter parts of the 1990s and the early years of the new millennium tended to focus more on quantitative research, rather than on specific policy questions. Substantial attention was devoted to making sense of the seeming rise in open unemployment, growing labour force participation and the expansion of informal employment; and there has been much debate about the accuracy of the data. We would argue that there has not been sufficient work on broader strategic issues such as the institutional trajectory of the labour market since democracy, and the options for inclusive and sustainable reform. The papers in this special issue of Transformation were prepared for an initiative led by the Employment and Economic Policy Programme of the Human Sciences Research Council (HSRC) and Swedish International Development Agency (Sida) to explore these broader debates. We begin with a paper by Gus Edgren that situates South Africa in a global context, with comparisons drawn to Brazil, Mexico, Malaysia, Poland, Turkey and Slovakia. South Africa appears to differ in some important respects - particularly in relation to the slow rate of urbanisation despite the lifting of apartheid legislation, and the relatively small informal sector. Relative to these countries, SA experienced very slow per capita GDP growth rates in the 1990s, which partly explains the extremely high rate of open unemployment. Generally labour market analysis distinguishes the formal sector and the informal sector, with studies rarely considering them together. This project explicitly recognises the fluid boundaries between low-wage formal and informal work. The paper by Valodia et al reviews the character of low-wage formal and informal work, and then considers transitions between the two. This category of worker comprises the majority of the workforce: approximately 65 per cent of South African workers earn less than R 2,500 per month and 50 per cent earn less than R 1,500 per month. They are almost evenly divided between formal and informal employment. The paper by Miriam Altman shows that low waged formal workers have experienced a fall in real earnings since the mid 1990s. Valodia et al's paper shows substantial churning between employment states. While some workers experienced a positive upward move into the...

Purpose of the paper: The purpose of this paper is to revisit the dual labour market theory as far as the informal sector in South Africa is concerned. The hypothesis is that the dual labour market theory must be extended in order to be applicable to the informal sector of the South African economy. It is our view that within some informal occupations a further segmentation exists. Problem investigated: Among South Africa ’s grave socio-economic problems, unemployment is one of the most serious and intractable. An increase in informal and self-employment was experienced during the last decades. Traditional dual labour market theory maintains that jobs can be roughly divided into two groups: those with low wages, bad working conditions, unstable employment and little opportunity for advancement; and those with relatively high wages, good working conditions and opportunities for advancement. The problem that confronts researchers is that even within informal employment, further segmentation is possible. Approach: To determine whether the dualism, that described by the dual labour market theory, is also present within the informal sector itself, available data on a typical informal sector activity, namely car guarding, is analysed. This provides the evidence to achieve the objective of this paper. Findings and implications: The case study of car guards confirms that the dual labour market theory can also apply within the informal sector on the condition that it is expanded to make provision for a further segmentation of the periphery sector. This finding presents several important policy implications. A basket of policies is needed to address the problem of unemployment as effectively as possible. Value of the research: The paper provides further knowledge on informal employment in South Africa. This is an area that requires a lot of attention, given the importance of the informal sector in South Africa and Africa at large. It goes further than the traditional implications stemming from the dual labour market theory. Conclusion: The South African labour market is fragmented, consisting of a well-paid formal sector and the periphery that consists of workers in the informal sector, subsistence agriculture and the unemployed. Within the periphery, there is the possibility that a certain degree of dualism exists. The case study of car guards confirms that the dual labour market theory can be extended to make provision for this dualism, even within the informal sector.

The South African labor market is characterized by a high degree of inflexibility and complexity which poses significant challenges for both indigenes and migrants looking to be integrated into the labor market. These challenges are likely to be more poignant for international migrants as they face additional barriers owing to a chronically high employment rate, xenophobic sentiments, and racial exclusion. For female tied migrants, gender bias, expressed through migration policies and legislation, adds yet another layer of complexity to long-term aspirations of settling in South Africa. How well tied migrants fare in the South African labor market is an important matter for consideration. Using an intersectional approach and the theory of governmentality, this study sought to deconstruct the labor market subjectivities of tied migrants in South Africa. This paper used a qualitative approach, with a narrative and interpretivist research paradigm, on female tied migrants from Sub-Saharan Africa who either accompanied their husbands or followed them to South Africa in a process of family reunification. Although 13 interviews were carried out in total, as part of a broader study, the narratives of six participants were included in this study, to zone in on labor market experiences. The study found that despite their high human capital, tied migrants are not likely to be well integrated into the South African labor market. Their inequality in the South African labor market was attributed to their gender, ethnicity, race, migrant status and locality and various intersections thereof through which they are subjected to informality, immobility and precarity.

The South African labour market has performed extremely badly in recent years in terms of creating employment. In the second half of the 1980s, for example, only 7 per cent of school-leavers could expect to find formal sector jobs. This has meant that increasing numbers have had to enter the informal sector in order to eke out some sort of a living. It has been estimated that average income in the informal sector was under R500 per month in 1989 as against R830 for Africans in the non-primary modern sector. Moreover, the distribution of income in the informal sector was highly skewed, with 27 per cent earning less than R150 and 44 per cent less than R250 per month. Taking into account also poor working conditions and insecurity, it is safe to assume that the majority would have preferred formal sector jobs. It should also be borne in mind that the informal sector includes criminal activities such as car theft and drug peddling, and that many of those drawn into these areas may be permanently lost to society as productive contributors to its net wealth. The poor performance of the labour market, therefore, has meant the economic marginalisation of an increasing proportion of the population. Dealing with this problem, and preventing its further growth, is perhaps the most serious challenge facing South Africa today. Without a solution, even Pacific Rim-type growth will at best provide the means to buy off the discontented and disillusioned masses with hand-outs of various types. Without such growth, the future is bleak indeed.

Wage trends in South Africa were influenced by apartheid labour market regulation and by market forces emanating from the growth process. Up until the mid-1980s, rising African wages were driven by rising skilled wages. From the mid-1980s onwards, this trend was reversed, with wage rates for Africans in much of manufacturing rising, especially for the least skilled. As this coincided with the rise in African trade union power, it is argued that these wage trends reflect the growing influence of trade unions on wage setting. This has resulted in a new form of segmentation in the South African labour market where the main cleavages are between the unionised and non-unionised parts of the formal sector, and between the formal and informal sectors.

The South African labour market is characterised by sharp segmentation, high unemployment and apparently limited informal sector employment. Recent work has focussed on the importance of the Micro-evidence on day labourers and the thickness of labour markets in South AfricaThe South African labour market is characterised by sharp segmentation, high unemployment and apparently limited informal sector employment. Recent work has focussed on the importance of the quality of education while others have argued that the rigidity of the labour market constrains employment growth. This paper considers the spatial aspects of the day labour market and argues that the size and proximity of economic activity found in agglomerations ensure a thick labour market that allows for better matching between workers and jobs. The results indicate that the day labourers who were hired by the same employer more often received higher earnings. Once workers have a matric qualification they receive earnings above the average, as do workers who have completed vocational training. Skills, as well as factors associated with a thicker labour market are positively associated with wages. The thicker metropolitan labour market allows workers to become more specialised and receive higher earnings. This has important policy implications and calls for the development of people and places.

Labour market analysis in the South African context provides a relatively robust understanding of the individual characteristics that influence wage differentials across workers (i.e. supply-side characteristics), but provides relatively little insight into the firm-level characteristics influencing these differentials (i.e. demand-side characteristics). This is largely due to the relative paucity of firm-level data in South Africa. Therefore, the availability of micro firm-level data derived from anonymous corporate and individual tax data, presents an opportunity to explore this relatively uncharted and important territory in the South Africa labour market. Therefore, this paper examines the firm-level (demand-side) characteristics that explain wage differentials across formal private sector workers in South Africa. Using the FEiLSDVj method, we measure the relative contribution of firm (demand-side) and individual (supply-side) characteristics in explaining wage formulation in the South African formal sector labour market, which advances the existing literature by including a developing country case. Consistent with results for the French and Austrian labour markets, approximately 61 per cent of wage variance is due to individual effects, while at least 13 per cent is due to firm-level effects. Overall, our results suggest that firms that are profitable, older, more capital-intensive, more productive, and involved in international trade pay higher wages, on average. Interestingly, and contrary to the literature, our results indicate a negative relationship between firm size and wages.

The COVID-19 pandemic has significantly disrupted employment markets globally and nationally, posing unique challenges to Indonesia’s labor force. In response, the Indonesian government launched the Pre-Employment Card (PEC) as part of the National Economic Recovery (PEN) initiative to mitigate rising unemployment and facilitate transitions to sustainable employment. This study examines the effectiveness of Indonesia’s Pre-Employment Card (PEC) policy in facilitating employment transitions during the COVID-19 pandemic. The effectiveness of the PEC policy is measured through key indicators such as labor absorption rates, reduction in unemployment, and the likelihood of securing formal employment over informal alternatives. This study introduces a novel perspective by employing a dual labor market approach, which highlights the distinct roles and interactions of formal and informal sectors in Indonesia’s labor market. Specifically, it examines how the presence of informality affects job transitions and the effectiveness of the Pre-Employment Card (PEC) policy in facilitating movement toward formal sector employment. To analyze employment transitions, this research employs a multinomial logit model, selected for its ability to estimate the probability of multiple, categorical employment outcomes, making it especially suitable for evaluating the diverse pathways individuals might take from unemployment to formal or informal employment, and from informal to formal sectors. The findings reveal that the PEC policy significantly increases the likelihood of unemployed individuals securing formal sector jobs rather than informal ones, with participants who completed the initial PEC training showing a 30% higher probability of transitioning to formal employment compared to those without PEC support. Additionally, the policy supports transitions within the labor market by facilitating movement from the informal to the formal sector, with an observed 25% increase in formal employment uptake among informal workers participating in PEC. These results underscore the PEC policy’s effectiveness in promoting formal employment pathways, contributing to workforce stabilization amid economic recovery efforts.

Against the backdrop of workplace restructuring globally, post-apartheid South Africa is experiencing consistently high levels of unemployment, the deterioration of employment security and limited improvements in earnings. This article investigates the changing nature of labour-intensive production in the South African labour market and the gendered individualisation of risk associated with precarious or non-standard forms of employment. The article expands on the critical theoretical narrative about the challenges of labour under neo-liberalism by applying a gendered political economy analysis to the experiences of precariousness among workers in the South African manufacturing sector. By focusing on the interconnections between gender and political economy, this article delinks questions about the crisis of labour from a narrow focus on skills and refocuses our understanding in terms of the structural determinants of vulnerabilities in the labour market. The article argues that the gender composition of informal and precarious work in the post-apartheid labour market has significant implications for addressing the persistent racialised and gendered inequalities in the South African economy. KEYWORDS: labour market restructuring; informal employment; precarious work; gender JEL CLASSIFICATION: J21; J30; J71; J80

Reviewed by: Fighting Poverty: labour markets and inequality in South Africa Benjamin J Roberts (bio) Haroon Bhorat, Murray Leibbrandt, Muzi Maziya, Servaas van der Berg and Ingrid Woolard (eds) (2001) Fighting Poverty: labour markets and inequality in South Africa. Cape Town: UCT Press. Bhorat et al's book, Fighting Poverty, represents a timely and welcome contribution to the burgeoning literature documenting the extent and nature of poverty and inequality in South Africa that has emerged over the past decade. Its publication occurs at a time when there is much public concern over the rising incidence, depth and severity of poverty. This is evident at the level of the state, as indicated by the government's commitment to eradicating poverty and underdevelopment by means of, for example, its commitment to the Millennium Development Goals and the New Partnership for Africa's Development (NEPAD). It is also a critical issue amongst civil society, as reflected by the Speak Out on Poverty Hearings (1998) and the War on Poverty declaration. It is also worthwhile mentioning that the book's release comes on the eve of the 20th anniversary of the Second Carnegie Inquiry into Poverty and Development, which in the words of the authors themselves represented 'a daunting benchmark of the mountain that had to be climbed' (2001:15), especially in terms of the enormity of the country's poverty and inequality challenge. The book's focus on the intersections between labour markets, poverty and inequality is also germane given rising unemployment trends and the continued decline in formal sector employment growth in spite of government's anti-poverty strategies, including the Poverty Alleviation Fund, Integrated Rural Development Programme and Public Works Programmes (Department of Social Development 2002, Aliber 2002). [End Page 105] This book, which is based on a collection of working papers (some of which were published elsewhere earlier), provides an excellent account of the relationship between poverty, inequality and labour markets in South Africa. The study's genesis dates back to the African Economic Research Consortium's (AERC) training workshop on Poverty, Inequality and Labour Markets held in Kampala in August 1997. The country study, which was jointly funded by the AERC and the South African Department of Labour, partly involved the twinning of the research team with an international researcher and university, in this instance Gary Fields of Cornell University. This collaboration exposed the authors to a range of eminent labour and development economists, which resulted in an awareness of the limitations of the South African literature and the prospects for the application of various 'new' techniques. The circumstances surrounding the book's creation and publication has meant that it has an appeal not only to students and academics interested in the field being studied, but that it also has immediate relevance to policy makers. The overarching purpose of the book is to: make a contribution to the analysis of poverty and inequality in South Africa by addressing four major issues that are pertinent to this policy milieu, namely: household inequality and poverty; vulnerability in the South African labour market; labour market participation and household poverty; and labour market and social policy interventions. (2001:16) The structure of the book is arranged according to these four research themes. The initial section, comprising Chapters 1 and 2, attempts to develop a deeper understanding of the nature of household-level inequality, with specific reference to the labour market, and construct a profile of poverty in contemporary South Africa. In so doing, the authors have sought to complement existing descriptive research on poverty and inequality with a clear but methodologically rigorous approach. This is achieved partly by applying recently developed techniques in poverty and inequality decomposition analysis to several nationally representative data sets. For instance, in the inequality chapter, various categorical decomposition techniques (Theil-T, Theil-L and Atkinson measure) are employed, allowing for an in-depth exploration of the racial dimensions of South African inequality, in particular the relative importance of inequality between the different race groups on the one hand and inequality within race groups on the other. The authors additionally conduct income source analysis, a form of decomposition analysis that exposes the income sources that dominate [End Page...

Using the October Household Survey of 1995 (OHS95), this paper seeks to understand the determinants of indigence in the South African labour market. To this end the study presents a description of the labour market, focusing on how covariates such as race, gender, education and location help explain the poverty observed in the labour market. A key innovation of the paper is the application of traditionally household poverty measures to individuals in the labour market. Hence through utilising cumulative distribution functions drawn from the Foster, Greer, Thorbecke (FGT) class of poverty measures, we are able to understand the distribution of earnings within a stochastic dominance framework. Such distribution functions are then derived for a series of labour market categories ranging from employment by race to employment by sector and occupation. In addition, by setting two individual poverty lines, specific measures of poverty are also determined according to the different labour market cohorts. Some of the key results of the study are that farm workers and household domestic workers constitute the most vulnerable individuals amongst the employed. In addition, apart from race, gender and education are crucial determinants of low or zero earnings. Rural labour markets also surface as a key component of poverty in the labour force. Finally, there is sufficient evidence to suggest that a different labour market seems to be operating for Africans and Coloureds on the one hand, and Asians and Whites on the other.

The segregation policies of the Apartheid era in South Africa resulted in low levels of education, suppressed entrepreneurialism and spatial inequalities among the African population. Though Apartheid was dismantled in 1994, economic and social outcomes in this country continue to be heavily influenced by its historical legacy. This is no more apparent than in the labour market, which is characterized by some of the highest unemployment rates and lowest employment—population ratios in the world. At the same time, the informal sector is relatively small, which can be argued to be a manifestation of Apartheid policies that stymied entrepreneurship.

This study revisits the definition of informal employment, and it investigates the puzzle of high open unemployment co‐existing with relatively limited informal employment in South Africa. We estimate earnings equations using data from the September 2004 Labour Force Survey and present evidence of persistent earnings differentials not only between formal and informal employment, but also between types of informal employment. These persistent earnings differentials are suggestive of complex segmentation in the South African labour market and challenge the presentation of informal employment as an undifferentiated residual with no barriers to entry or mobility.