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Formal–Informal Economy Linkages And Unemployment In South Africa

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  • Rob Davies
  • James Thurlow

Abstract

South Africa's high involuntary unemployment and small informal sector are attributed to an underperforming formal sector and barriers to entry in the informal sector. This paper examines the economywide linkages between the formal and informal economies while accounting for different types of informal activities. A multiregion empirically calibrated general equilibrium model is developed capturing both product and labor markets. Three policy options are considered. First, results indicate that trade liberalization reduces national employment. At the same time, it increases formal employment, hurts informal producers, and favors informal traders, who benefit from lower import prices. Past liberalization may, therefore, partly explain South Africa's small informal sector and its concentration among traders rather than producers. Second, wage subsidies on low-skilled formal workers increase national employment but hurt informal producers by heightening competition in domestic product markets. This suggests that it is insufficient to examine unemployment policies by focusing only on labor markets. Third, unconditional cash transfers stimulate demand for informally produced products, thereby raising informal employment without undermining formal producers. The transfer does, however, place a large fiscal burden on the state and is less effective at reducing national unemployment than a wage subsidy. Overall, these findings underline the importance of distinguishing between the formal and informal sector implications of socioeconomic policies.

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Bibliographic Info

Article provided by Economic Society of South Africa in its journal South African Journal of Economics.

Volume (Year): 78 (2010)
Issue (Month): 4 (December)
Pages: 437-459

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Handle: RePEc:bla:sajeco:v:78:y:2010:i:4:p:437-459

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  1. Vimal Ranchhod, 2009. "Household responses to adverse income shocks: Pensioner out-migration and mortality in South Africa," SALDRU Working Papers 35, Southern Africa Labour and Development Research Unit, University of Cape Town.
  2. Daniela Casale & Colette Muller & Dorrit Posel, 2004. "'Two Million Net New Jobs': A Reconsideration Of The Rise In Employment In South Africa, 1995-2003," South African Journal of Economics, Economic Society of South Africa, vol. 72(5), pages 978-1002, December.
  3. Maloney, William, 2003. "Informality revisited," Policy Research Working Paper Series 2965, The World Bank.
  4. Thurlow, James, 2002. "Can South Africa afford to become Africa's first welfare state?," FCND briefs 139, International Food Policy Research Institute (IFPRI).
  5. Geeta Kingdon & John Knight, 2001. "Unemployment in South Africa: the nature of the beast," Economics Series Working Papers WPS/2001-15, University of Oxford, Department of Economics.
  6. Kalie Pauw & Lawrence Edwards, 2006. "Evaluating The General Equilibrium Effects Of A Wage Subsidy Scheme For South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 74(3), pages 442-462, 09.
  7. Schultz, T.P. & Mwabu, G., 1997. "Labor Unions and the Distribution of Wages and Employment in South Africa," Papers 776, Yale - Economic Growth Center.
  8. L Edwards, 2001. "Globalisation And The Skills Bias Of Occupational Employment In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 69(1), pages 40-71, 03.
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Cited by:
  1. Moreno-Monroy, Ana Isabel & Pieters, Janneke & Erumban, Abdul Azeez, 2012. "Subcontracting and the Size and Composition of the Informal Sector: Evidence from Indian Manufacturing," IZA Discussion Papers 6785, Institute for the Study of Labor (IZA).
  2. Maria S. Floro & Hitomi Komatsu, 2011. "Labor Force Participation, Gender and Work in South Africa: What Can Time Use Data Reveal?," Working Papers 2011-02, American University, Department of Economics.

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