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Wage subsidy and labor market flexibility in south Africa

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  • Go, Delfin S.
  • Kearney, Marna
  • Korman, Vijdan
  • Robinson, Sherman
  • Thierfelder, Karen

Abstract

In this paper, the authors use a highly disaggregate general equilibrium model to analyze the feasibility of a wage subsidy to unskilled workers in South Africa, isolating and estimating its potential employment effects and fiscal cost. They capture the structural characteristics of the labor market with several labor categories and substitution possibilities, linking the economy-wide results on relative prices, wages, and employment to a micro-simulation model with occupational choice probabilities in order to investigate the poverty and distributional consequences of the policy. The impact of a wage subsidy on employment, poverty, and inequality in South Africa depends greatly on the elasticities of substitution of factors of production, being very minimal if unskilled and skilled labor are complements in production. The desired results are attainable only if there is sufficient flexibility in the labor market. Although the impact in a low case scenario can be improved by supporting policies that relax the skill constraint and increase the production capacity of the economy especially towards labor-intensive sectors, the gains from a wage subsidy are still modest if the labor market remains very rigid.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4871.

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Date of creation: 01 Mar 2009
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Handle: RePEc:wbk:wbrwps:4871

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Keywords: Labor Markets; Labor Policies; Economic Theory&Research; Access to Finance;

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References

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  1. Rodrik, Dani, 2006. "Understanding South Africa's Economic Puzzles," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5907, C.E.P.R. Discussion Papers.
  2. Stephen Nickell & Luca Nunziata & Wolfgang Ochel & Glenda Quintini, 2001. "The Beveridge Curve, Unemployment and Wages in the OECD from the 1960s to the 1990s - Preliminary Version," CEP Discussion Papers, Centre for Economic Performance, LSE dp0502, Centre for Economic Performance, LSE.
  3. D. Boccanfuso & F. Cabral & F. Cissé & A. Diagne & L. Savard, 2003. "Pauvreté et distribution de revenus au Sénégal: une approche par la modélisation en équilibre général calculable micro-simulé," Cahiers de recherche, CIRPEE 0333, CIRPEE.
  4. Philippe Aghion & Matias Braun & Johannes Fedderke, 2007. "Competition and Productivity Growth in South Africa," Working Papers 54, Economic Research Southern Africa.
  5. Harris, Richard, 1984. "Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," American Economic Review, American Economic Association, American Economic Association, vol. 74(5), pages 1016-32, December.
  6. Abhijit Banerjee & Sebastian Galiani & Jim Levinsohn & Zo� McLaren & Ingrid Woolard, 2008. "Why has unemployment risen in the New South Africa?," The Economics of Transition, The European Bank for Reconstruction and Development, The European Bank for Reconstruction and Development, vol. 16(4), pages 715-740, October.
  7. Taryn Dinkelman & Farah Pirouz, 2002. "Individual, Household And Regional Determinants Of Labour Force Attachment In South Africa:," South African Journal of Economics, Economic Society of South Africa, Economic Society of South Africa, vol. 70(5), pages 865-891, 06.
  8. Geeta Kingdon & John Knight, 2004. "Unemployment in South Africa: the nature of the beast," Labor and Demography, EconWPA 0409003, EconWPA.
  9. Essama-Nssah, B. & Go, Delfin S. & Kearney, Marna & Korman, Vijdan & Robinson, Sherman & Thierfelder, Karen, 2007. "Economy-wide and distributional impacts of an oil price shock on the south African economy," Policy Research Working Paper Series 4354, The World Bank.
  10. Morné Oosthuizen & Haroon Bhorat, 2005. "The Post-Apartheid South African Labour Market," Working Papers, University of Cape Town, Development Policy Research Unit 05093, University of Cape Town, Development Policy Research Unit.
  11. 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, Economic Society of South Africa, vol. 74(3), pages 442-462, 09.
  12. Löfgren, Hans & Harris, Rebecca Lee & Robinson, Sherman, 2001. "A standard computable general equilibrium (CGE) model in GAMS," TMD discussion papers, International Food Policy Research Institute (IFPRI) 75, International Food Policy Research Institute (IFPRI).
  13. L Edwards, 2001. "Globalisation And The Skills Bias Of Occupational Employment In South Africa," South African Journal of Economics, Economic Society of South Africa, Economic Society of South Africa, vol. 69(1), pages 40-71, 03.
  14. Go, Delfin S. & Kearney, Marna & Robinson, Sherman & Thierfelder, Karen, 2005. "An Analysis of South Africa's Value Added Tax," Policy Research Working Paper Series 3671, The World Bank.
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Cited by:
  1. Levinsohn, James & Pugatch, Todd, 2014. "Prospective analysis of a wage subsidy for Cape Town youth," Journal of Development Economics, Elsevier, Elsevier, vol. 108(C), pages 169-183.
  2. Devarajan, Shantayanan & Robinson, Sherman, 2013. "Contribution of Computable General Equilibrium Modeling to Policy Formulation in Developing Countries," Handbook of Computable General Equilibrium Modeling, Elsevier, Elsevier.
  3. Bourguignon, François & Bussolo, Maurizio, 2013. "Income Distribution in Computable General Equilibrium Modeling," Handbook of Computable General Equilibrium Modeling, Elsevier, Elsevier.
  4. Devarajan, Shantayanan & Go, Delfin S. & Robinson, Sherman & Thierfelder, Karen, 2009. "Tax policy to reduce carbon emissions in south Africa," Policy Research Working Paper Series 4933, The World Bank.

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