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Prospective analysis of a wage subsidy for Cape Town youth

Listed author(s):
  • Levinsohn, James
  • Pugatch, Todd

Persistently high youth unemployment is one of the most pressing problems in South Africa. We prospectively analyze an employer wage subsidy targeted at youth, a policy recently enacted by the South African government to address the issue. Recognizing that a credible estimate of the policy's impact requires a model of the labor market that itself generates high unemployment in equilibrium, we estimate a structural search model that incorporates both observed heterogeneity and measurement error in wages. Using the model to simulate the policy, we find that a R1000/month wage subsidy paid to employers leads to an increase of R596 in mean accepted wages and a decrease of 12 percentage points in the share of youth experiencing long-term unemployment.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304387814000261
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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 108 (2014)
Issue (Month): C ()
Pages: 169-183

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Handle: RePEc:eee:deveco:v:108:y:2014:i:c:p:169-183
DOI: 10.1016/j.jdeveco.2014.02.006
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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  1. Abhijit Banerjee & Sebastian Galiani & Jim Levinsohn & Zoë McLaren & Ingrid Woolard, 2008. "Why has unemployment risen in the New South Africa?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 16(4), pages 715-740, October.
  2. 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.
  3. Esther Duflo, 2003. "Grandmothers and Granddaughters: Old-Age Pensions and Intrahousehold Allocation in South Africa," World Bank Economic Review, World Bank Group, vol. 17(1), pages 1-25, June.
  4. Zvi Eckstein & Kenneth I. Wolpin, 1995. "Duration to First Job and the Return to Schooling: Estimates from a Search-Matching Model," Review of Economic Studies, Oxford University Press, vol. 62(2), pages 263-286.
  5. Dinkelman, Taryn & Ranchhod, Vimal, 2012. "Evidence on the impact of minimum wage laws in an informal sector: Domestic workers in South Africa," Journal of Development Economics, Elsevier, vol. 99(1), pages 27-45.
  6. Christensen, Bent Jesper & Kiefer, Nicholas M., 1991. "The Exact Likelihood Function for an Empirical Job Search Model," Econometric Theory, Cambridge University Press, vol. 7(04), pages 464-486, December.
  7. Anne Case, 2004. "Does Money Protect Health Status? Evidence from South African Pensions," NBER Chapters,in: Perspectives on the Economics of Aging, pages 287-312 National Bureau of Economic Research, Inc.
  8. Christensen, Bent Jesper & Kiefer, Nicholas M, 1994. "Measurement Error in the Prototypal Job-Search Model," Journal of Labor Economics, University of Chicago Press, vol. 12(4), pages 618-639, October.
  9. Nicoli Nattrass & Richard Walker, 2005. "Unemployment And Reservation Wages In Working-Class Cape Town," South African Journal of Economics, Economic Society of South Africa, vol. 73(3), pages 498-509, 09.
  10. Eckstein, Zvi & van den Berg, Gerard J., 2007. "Empirical labor search: A survey," Journal of Econometrics, Elsevier, vol. 136(2), pages 531-564, February.
  11. David Lam & Murray Leibbrandt & Cecil Mlatsheni, 2008. "Education and Youth Unemployment in South Africa," SALDRU Working Papers 22, Southern Africa Labour and Development Research Unit, University of Cape Town.
  12. Delfin Go & Marna Kearney & Vijdan Korman & Sherman Robinson & Karen Thierfelder, 2010. "Wage Subsidy and Labour Market Flexibility in South Africa," Journal of Development Studies, Taylor & Francis Journals, vol. 46(9), pages 1481-1502.
  13. Gerard J. van den Berg, 1990. "Nonstationarity in Job Search Theory," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 255-277.
  14. Wolpin, Kenneth I, 1987. "Estimating a Structural Search Model: The Transition from School to Work," Econometrica, Econometric Society, vol. 55(4), pages 801-817, July.
  15. Bound, John & Krueger, Alan B, 1991. "The Extent of Measurement Error in Longitudinal Earnings Data: Do Two Wrongs Make a Right?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 1-24, January.
  16. Edmonds, Eric V., 2006. "Child labor and schooling responses to anticipated income in South Africa," Journal of Development Economics, Elsevier, vol. 81(2), pages 386-414, December.
  17. Tom Hertz, 2005. "The Effect of Minimum Wages on the Employment and Earnings of South Africa’s Domestic Service Workers," Working Papers 05099, University of Cape Town, Development Policy Research Unit.
  18. Lancaster, Tony & Chesher, Andrew, 1983. "An Econometric Analysis of Reservation Wages," Econometrica, Econometric Society, vol. 51(6), pages 1661-1676, November.
  19. Amar Hamoudi & Duncan Thomas, 2014. "Endogenous Co-residence and Program Incidence: South Africa's Old Age Pension," NBER Working Papers 19929, National Bureau of Economic Research, Inc.
  20. Pugatch, Todd, 2012. "Bumpy Rides: School to Work Transitions in South Africa," IZA Discussion Papers 6305, Institute for the Study of Labor (IZA).
  21. Volker Schöer & Murray Leibbrandt, 2006. "Determinants Of Job Search Strategies: Evidence From The Khayelitsha/Mitchell'S Plain Survey," South African Journal of Economics, Economic Society of South Africa, vol. 74(4), pages 702-724, December.
  22. Burns, Justine & Edwards, Lawrence & Pauw, Karl, 2010. "Wage subsidies to combat unemployment and poverty," IFPRI discussion papers 969, International Food Policy Research Institute (IFPRI).
  23. Justine Burns & Lawrence Edwards & Karl Pauw, 2013. "Revisiting wage subsidies: How pro-poor is a South African wage subsidy likely to be?," Development Southern Africa, Taylor & Francis Journals, vol. 30(2), pages 186-210, June.
  24. Cameron,A. Colin & Trivedi,Pravin K., 2005. "Microeconometrics," Cambridge Books, Cambridge University Press, number 9780521848053, September.
  25. Jeremy R. Magruder, 2012. "High Unemployment Yet Few Small Firms: The Role of Centralized Bargaining in South Africa," American Economic Journal: Applied Economics, American Economic Association, vol. 4(3), pages 138-166, July.
  26. Hamoudi, Amar & Thomas, Duncan, 2014. "Endogenous coresidence and program incidence: South Africa's Old Age Pension," Journal of Development Economics, Elsevier, vol. 109(C), pages 30-37.
  27. Flinn, C. & Heckman, J., 1982. "New methods for analyzing structural models of labor force dynamics," Journal of Econometrics, Elsevier, vol. 18(1), pages 115-168, January.
  28. Lynch, Lisa M, 1983. "Job Search and Youth Unemployment," Oxford Economic Papers, Oxford University Press, vol. 35(0), pages 271-282, Supplemen.
  29. repec:pri:rpdevs:dinkelman_ranchhod_minwages_0710 is not listed on IDEAS
  30. Justine Burns & Lawrence Edwards & Karl Pauw, 2010. "Wage Subsidies to Combat Unemployment and Poverty: Assessing South Africa’s Options," SALDRU Working Papers 45, Southern Africa Labour and Development Research Unit, University of Cape Town.
  31. James Levinsohn, 2008. "Two Policies to Alleviate Unemployment in South Africa," CID Working Papers 166, Center for International Development at Harvard University.
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