Working Paper 106 - Does Human Capital Protect Workers against Exogenous Shocks? South Africa in the 2008 - 2009 Crisis
AbstractThe financial and economic crisis of 2008 and 2009 took a heavy toll on the South African economy. The economy contracted for the first time since 1998 and entered recession during the fourth quarter of 2008. The GDP contraction was soon transmitted to the labor market. Between the second quarters of 2008 and 2009, employment fell by 3.8 percent. However, not all individuals were hit with the same intensity. Using panel data from a quarterly labor force survey unique to the African context, we find that human capital (i.e. education as years of schooling and workforce experience) provided a buffer against the shock. After controlling for observable characteristics, education and experience showed the potential to entirely offset the effect of the recession on the likelihood of employment. This has important policy implications, as it strengthens the case for strategic investments in human capital and helps identify the unskilled as having the greatest need for social safety net interventions during a recession. Like the rest of Africa, South Africa took a battering from the global financial and economic crisis of 2008 and 2009 (African Development Bank 2009). By the fourth quarter of 2008, the South African economy was in recession. This translated into large job losses for a labor market already characterized by unemployment rates of around 25 percent. We use unique Labor Force Survey (LFS) data covering the period before and during the crisis to investigate the role of human capital, embodied in education and experience, as a buffer against external shocks. The contribution is novel as we are among the first to exploit the longitudinal nature of the Quarterly LFS (QLFS) to build a large panel of individuals. This allows us to quantify the effects of the crisis on individuals while controlling for time-invariant unobservable characteristics. In doing so, we contribute to the understanding of South Africa’s labor market dynamics across the business cycle. We are also the first to investigate the distribution of employment gains and losses over the business cycle, and quantify the worker flow dynamics at business cycle frequencies in Africa.� In particular, we look at the likelihood of becoming non-employed and gaining employment during a recession and how this varies with the differences across the age and education distribution of the labor force. Our results indicate that, over the first year of the crisis, the overall likelihood of being employed dropped by 3.8 percent. The economy had a net loss of 360,000 jobs between the second quarters of 2008 and 2009, driving the employment rate among the working-age population down from 44.7 to 43 percent. At the same time, the unemployment rate recorded a misleadingly small increase from 23.1 to 23.6 percent, as about 349,000 individuals left the labor force. After controlling for individual characteristics, education and experience both worked as an insurance mechanism, completely offsetting the probability of losing a job. Finally, the large informal sector failed to provide a buffer against the crisis. In addition, we find that the distribution of employment gains and losses over the business cycle in South Africa is similar to that of OECD countries in which employment volatility is higher for the workers with low human capital. However, the worker flow dynamics are dissimilar to that found in OECD countries in which economic slowdowns are characterized by a sharp but brief increase in outflow from employment into non-employment and a persistent decline in the outflow from non-employment back into employment. In South Africa’s case, the economic downturn of 2008 – 09 has been characterized by an acute but brief drop in inflows into employment. These findings on worker flows are a first for African economies.
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Bibliographic InfoPaper provided by African Development Bank in its series Working Paper Series with number 243.
Date of creation: 06 May 2010
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