Search, Transport Costs, and Labor Markets in South Africa

South Africa’s labor market exhibits a unique equilibrium with one of the highest unemployment rates in the world and yet a low level of informal employment. Theunemployment rate has remained high and persistent over recent decades, in spite of the formal demise of the apartheid regime and subsequent transition to democracy in 1994. This paper uses a matching model of the labor market to argue that spatial considerations combined with low productivity of informal work may be responsiblefor such an outcome. Spatial dispersion inherited from the apartheid regime thins the labor market, creating exclusion and perpetuating spatial desegregation. In mostdeveloping countries, the result would be higher employment in informal or own account employment. However, with low productivity in the informal sector, the high rate ofexclusion shows itself in higher unemployment rates instead. Transportation costs and housing deregulation may become key factors in improving the working of the labormarket in South Africa especially if it is not possible to raise informal productivity