A key output for each of the REDI3x3 funded projects is the production of a publishable working paper. The papers below are those published by the project, since its inception in the later half of 2012.
A total of 78 papers were commissioned, most of which are in the process of being finalised. These will be added to the list below, as they are completed.
The high level of youth unemployment in South Africa has prompted investigation surrounding whether youth are holding reservation wages in excess of what they can expect to earn in the labour market, thereby ‘pricing’ themselves out of the market for employment. This paper examines arguments for this theory using data from Cape Town, South Africa. The focus is getting an appropriate measure of the actual reservation wage that features in labour-market decision-making by youth. This paper finds that self-reported reservation wages are unrealistically high for a substantial proportion of the sample when compared with what youth are predicted to earn in the labour market. However, this does not translate into diminished likelihood of employment for these youth. Further analysis indeed reveals that self-reported reservation wages are likely to be too high when compared with the wage at which youth are willing to undertake employment in reality. This is, at least in part, due to the way respondents interpret the question. In addition, self-reported reservation wages may fail to capture the nuances involved in reservation wage formation, in particular job taste considerations made when deciding whether to accept work. This supports the case for constructing a more accurate measure, i.e. of revealed reservation wages, in determining whether reservation wages indeed are unrealistic. When revealed reservation wages of youth are compared with predicted wages, a very small percentage of the youth in the sample are found to be holding unrealistic reservation wages. Therefore, evidence from the CAPS data, utilizing supplementary reservation-wage-inducing questions as well as additional interviews, does not support the claim that unrealistic reservation wages are contributing to the unemployment problem in Cape Town, South Africa. Furthermore, this analysis provides evidence against the standard use of self-reported reservation wage data in the examination of the relationship between reservation wages and employment outcomes.
This paper examines the wage structure and size of the public sector over the post-apartheid period. It does so both descriptively, examining the mean and median earnings in the public sector in the post-Apartheid period and the estimates of total public sector employment and wage bill using household survey data from the post-Apartheid Labour Market Series (PALMS). Trends in earnings and employment from the household survey data are also compared with the macro aggregates published by the South African Reserve Bank (SARB). The earnings premium for public sector workers is estimated using Ordinary Least Squares (OLS) Mincerian wage regressions and quantile regression techniques. This paper also investigates the effects of earnings imputation in the Quarterly Labour Force surveys on the estimates of the public sector earnings premium.
Comparing earnings in the tax assessment data to those in the QLFS, it appears that earnings of employees in the QLFS are underreported by perhaps 40%, with bigger gaps near the top of the distribution. Benefits and annual bonuses contribute substantially to the gap. In the case of self-employment incomes it is also the case that high earnings are missing or underreported in the QLFS, but the tax data seems to miss many mid- and low-income selfemployed earners. These differences make sense when one considers the incentives for reporting accurately to SARS versus to Statistics South Africa. These errors mean that earnings inequality as measured by the Gini coefficient is probably underestimated in the surveys by three percentage points.
How do poor households respond to the cessation of cash transfers in developing countries? South Africa’s generous social pension system results in most of the poor elderly being the primary ‘breadwinner’ in the household. I extract a longitudinal dataset using the rotating panel component of the nationally representative Quarterly Labour Force Surveys, and use fixed effects regression models to estimate the magnitude of changes in household composition and employment that coincide with the departure of a pensioner from the household. I find statistically significant changes in both of these outcome measures. Compositional changes include a decrease in the number of school going aged children, the number of teenagers, and the number of young adults; while the number of older adults increases. I also find significant increases in the number of employed prime aged adults and older adults. The combination of compositional changes and employment changes results in an increase in the mean proportion employed in all of the working age adult groups that we investigate. Overall, households respond by decreasing the number of dependents, increasing the number of potential caregivers, and increasing the proportion of adults engaged in income generating activities.
The South African youth unemployment rate is extremely high, at well over 50% of youth using the narrow definition of unemployment. This high unemployment rate has been a chronic problem and has been at these or similar levels since the democratic transition in 1994. Unemployment rates were probably also very high for a substantial period before 1994, but the lack of suitable data from that period makes precise measurement of the unemployment rates for that era quite impossible. This paper makes use of the first three waves of the nationally representative longitudinal dataset obtained from the National Income Dynamics Study, to explore the factors that assist school leavers in finding employment. By means of descriptive statistics and regression analyses, it estimates the differences in job finding rates by gender, geographical location, educational attainment, household structure and migration status. The results are not particularly surprising. Male youth, better educated youth, and youth who migrate from rural areas to urban areas tend to have better job prospects on leaving school.
What were the effects of a 52% increase in the minimum wage in the agricultural sector in South Africa in 2013? This paper estimates the short run effects of this policy change on the employment and income of farmworkers, using both repeated cross-sectional data as well as individual level longitudinal data from the Quarterly Labour Force Surveys (QLFS). It finds that the law had a substantial effect on the earnings of farmworkers who remained employed after the law came into effect, but that there was also a small and gradual decrease in agricultural employment. The descriptive evidence from the cross-sections indicates an increase in mean income per month of 17.9% about a year after the law came into effect. This coincided with a mean decrease in adult employment by this industry of about 8.2% over the same time period. Establishing causality empirically is challenging, though. The difference in differences estimates indicate substantial increases in wages in this industry after the law, but this increase is not systematically related to an individual’s wage rate prior to the law. There is also only very limited evidence that employment losses were statistically significant after the law. One explanation for the lack of a systematic relationship between pre-existing wages and subsequent job loss is that the wage gains following the law are observed to be more likely amongst workers who were earning relatively higher wages to begin with. Thus, endogenous compliance or partial compliance may make conventional estimators using a wage gap variable statistically invalid, and may also mitigate against unemployment effects. Overall, the most coherent interpretation of our results is that the law did cause significant increases in income for farmworkers, but did not cause substantial employment losses – although our regression models and data limitations make us cautious about these claims.
The paper shows that responses to a traditional, open-ended reservation-wage question are susceptible to a high degree of overestimation and response noise when individuals are rarely confronted with actual wage offers. It argues that, for individuals with weak labor market attachment, a sequence of increasing hypothetical wage offers can more reliably elicit individual preferences: it contains more information about future decisions; it is less sensitive to irrelevant priming effects and more responsive to the economic circumstances of respondents. This has implications for a variety of empirical models in labour economics.
Very little work has been done on the substitutability of capital and labour at the firm level in South Africa. This paper updates Behar (2010), the first South African paper to examine this issue at a micro-level. The results confirm Behar’s broad finding – capital and labour are substitutes. This means that relative increases in the price of labour, through either higher wages or lower capital costs, encourage a substitution away from labour. The paper also finds that all types of labour, except managerial workers and unskilled production labour, are substitutes. Lastly, this paper investigates the association between firm-level estimates of own and cross-price elasticities of capital and the different type of labour, and firms’ perceptions of obstacles. These estimates find no significant relationship between the cost of financing and the elasticity of capital and the types of labour in most cases. One interpretation of this is that the cost of finance is not a constraint for firms who want to become more capital intensive.
A substantial literature has evolved in South Africa over the last twenty years that has estimated the levels and trends in income and earnings inequality. The evidence is overwhelming that South Africa both was, and remains, one of the most unequal societies in the world, although most of these measures are obtained using cross-sectional data. We contribute to this literature by investigating a dynamic measure of earnings inequality, using the nationally representative QLFS panel. These are high frequency data where individuals are surveyed up to four times in a twelve month period. The key mechanism by which these might differ from cross-sectional measures is through labour market churning. Our estimates of inequality in earnings drop by a small but meaningful amount when we move from a static measure, with an average Gini coefficient of 0.626, to a one-year average earnings measure with a Gini coefficient of 0.608. The decrease is not larger because, while the South African labour market does display a substantial amount of churning, this churning is concentrated amongst unskilled and low wage earners who fluctuate between unemployment and low-earnings employment. In contrast, well paid and highly skilled individuals tend to have much greater levels of job security, which mitigates the potential differences between the two measures.
The paper examines the role that informal sector employment plays in poverty reduction using data from the National Income Dynamics Study (NIDS). Using a Shapley decomposition approach, it finds that government transfers and formal sector jobs are the dominant drivers of aggregate poverty reduction. Informal sector jobs currently play a limited role in poverty reduction at the national level. This is primarily driven by the fact that there are relatively few informal sector jobs compared to formal sector jobs. On a per-job basis, the poverty reduction associated with formal sector jobs and informal sector jobs is quite similar. The poverty reduction associated with one informal sector job is generally between 50 to 100 per cent of the poverty reduction associated with one formal sector job (depending on the poverty measure, poverty line and year chosen). Therefore, from a poverty reduction standpoint, policy makers are encouraged to view job gains and losses in the informal sector approximately on par with gains and losses of formal sector jobs.