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Prospective Analysis of a Wage Subsidy for Cape Town Youth

  • James A. Levinsohn
  • Todd Pugatch

Recognizing that a credible estimate of a wage subsidy'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 examine the impact of a wage subsidy, we find that a R1000/month wage subsidy paid to employers leads to an increase of R660 in mean accepted wages and a decrease of 15 percentage points in the share of youth experiencing long-term unemployment.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17248.

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Date of creation: Jul 2011
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Publication status: published as Levinsohn, James & Pugatch, Todd, 2014. "Prospective analysis of a wage subsidy for Cape Town youth," Journal of Development Economics, Elsevier, vol. 108(C), pages 169-183.
Handle: RePEc:nbr:nberwo:17248
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  9. 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.
  10. Lancaster, Tony & Chesher, Andrew, 1983. "An Econometric Analysis of Reservation Wages," Econometrica, Econometric Society, vol. 51(6), pages 1661-76, November.
  11. Wolpin, Kenneth I, 1987. "Estimating a Structural Search Model: The Transition from School to Work," Econometrica, Econometric Society, vol. 55(4), pages 801-17, July.
  12. 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.
  13. 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.
  14. 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, vol. 16(4), pages 715-740, October.
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  17. 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.
  18. 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.
  19. Pugatch, Todd, 2012. "Bumpy Rides: School to Work Transitions in South Africa," IZA Discussion Papers 6305, Institute for the Study of Labor (IZA).
  20. 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.
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  22. 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.
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  24. 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.
  25. John Bound & Alan B. Krueger, 1989. "The Extent of Measurement Error In Longitudinal Earnings Data: Do Two Wrongs Make A Right?," NBER Working Papers 2885, National Bureau of Economic Research, Inc.
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  27. Burns, Justine & Edwards, Lawrence & Pauw, Karl, 2010. "Wage subsidies to combat unemployment and poverty," IFPRI discussion papers 969, International Food Policy Research Institute (IFPRI).
  28. 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.
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