Labour markets, human capital and inequality

Economic Assessment of South Africa 2008: Realising South Africa's employment potential


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The following provides a summary of chapter 3 of the Economic Assessment of South Africa  published on 15 July 2008.




There is considerable potential to increase living standards by raising employment

South Africa’s very low labour utilisation explains a large part of the gap of GDP per capita with the most advanced economies. Compared to other middle-income countries, South Africa has relatively strong average labour productivity, but extremely low employment (Figure 1). Although in the long-run sustained increases in living standards and convergence to the levels enjoyed by advanced countries will only be achieved via growth in labour productivity, this suggests that in the near term priority should be given to creating jobs for the millions of primarily low-skilled South Africans currently wanting work.

Figure 1. Sources of GDP per capita gap versus OECD economies


1.  Based on revised 2006 purchasing power parities (PPPs) from the World Bank.
2.  Labour resource utilisation is measured as the employment rate, based on national labour force surveys, except for India where it is an OECD estimate based on the National Sample Survey.
3.  Labour productivity is measured as GDP per employee.
Source: OECD.


Improving employment growth will require first and foremost unwinding some legacies of apartheid...

Some aspects of the unemployment problem are clearly related to legacies of the apartheid era. Notably, under apartheid the education system was not designed to provide the majority black population with the human capital necessary to perform skilled work. Blacks were even forbidden from some occupations, and were mainly recruited into manual labour or menial work. Although access to schooling for non-whites has commendably been increased and public financing per pupil largely has been equalised across the school system, serious defects remain which continue to impede the opportunities of historically disadvantaged groups and which contribute to the skills mismatch in the labour market. Also, too little has been done to unwind the spatial misallocation of workers – despite improvements, the marks of the homeland and township system remain visible in present settlement patterns. The long distances travelled for commuting and job search raise reservation wages and depress search activity. Another negative aspect of apartheid that has not been fully addressed in the past 14 years is the suppression of entrepreneurial initiative among the majority black population. In the formal sector, the attractiveness for skilled blacks of affirmative action positions in existing corporations under the BEE initiative hinders the creation of new small black-owned businesses. Meanwhile, the informal sector remains small for an economy of South Africa’s average income level, and has absorbed surprisingly little of the surge in the supply of less-skilled labour. Many restrictions persist making it hard for informal businesses to operate. While efforts to eliminate informality may be understandable in the sense that formal sector jobs provide better pay and conditions, the emphasis should be on facilitating formal sector employment rather than on suppressing the informal sector, which would cut against the imperative of making rapid progress in reducing unemployment.

... and perhaps also addressing some features of labour markets that inhibit job creation

Work on OECD member economies provides robust evidence that various aspects of labour market institutions and policies can lead to higher unemployment. While not all of these features are relevant in the case of South Africa – for example, tax wedges in South Africa are relatively low and unemployment insurance is limited – the extent and persistence of high unemployment suggest that labour market policies can play a role in tackling the problem. Prominent among the common complaints heard about South Africa’s labour market rigidities is the claim that firing costs are too high. While the computation of an OECD employment protection legislation (EPL) indicator suggests that in fact the laws are not particularly restrictive (Figure 2), it does seem that some aspects of the implementation of the regulations could be improved. Beyond EPL, the potentially negative labour demand consequences of strong trade unions (mainly focused on employed workers) and sectoral minimum wages, as well as possible disincentive effects on labour supply of the expanding system of social grants, warrant careful monitoring to ensure that social aims are being achieved without an undue negative impact on employment. Apart from actions to ease labour market rigidities, there may also be scope for more active measures to allow young less-skilled blacks to gain an employment foothold, such as lengthening maximum allowable probation periods during which normal labour regulations don’t apply, or expanding the system of wage subsidies for first-time workers.

Figure 2. Employment protection legislation
Overall score, indicator scale of 0 6 from least to most restrictive, 2006(1)


1.  2007 for South Africa, 2003 for Chile and 2004 for Brazil.
Source: OECD (2007), Going for Growth; OECD (2005); Economic Surveys: Brazil; and OECD (2007), OECD Economic Surveys: India.


How to obtain this publication                                                                                   

The Policy Brief (pdf format) can be downloaded in English. It summarises the OECD assessment. The complete edition of the Economic Assessment of South Africa 2008 is available from:



Additional information                                                                                                  


For further information please contact the South Africa Desk at the OECD Economics Department at  The OECD Secretariat's report was prepared by Geoff Barnard and Christian Gianella under the supervision of Andreas Wörgötter. Research assistance was provided by Corinne Chanteloup.




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