Institutional wage-setting, labour demand and labour supply: causal estimates from a South African pseudo-panel

Stellenbosch Working Paper Series No. WP07/2016
 
Publication date: 2016
 
Author(s):
[protected email address] (Department of Economics, University of Stellenbosch)
 
Abstract:

Unemployment in South Africa has been attributed to multiple causes. Wages have grown faster than productivity to reduce labour demand; demographic shifts have increased labour supply. This paper uses a district pseudo-panel, constructed from household surveys, to estimate the elasticity of labour demand, labour supply and unemployment with respect to wages. The goal is to assess whether hiring decisions are more sensitive to increases in wages of low paid workers than high paid workers, and whether wage growth prompts entry into the labour market. Each of these channels combine to result in the positive causal effect of wage growth on unemployment. Furthermore, the research investigates whether these effects are dominated by districts in which unionization rates are high, and where workers are employed by large firms. In so doing, we quantify the role that institutional wage-setting has in raising wages (which in turn contribute to unemployment). The results illustrate that wages of middle to highly paid workers – as opposed to low paid workers - lead to depressed local labour demand and higher local unemployment; these effects can be explained by cross-district unionization rates and the distribution of large firms. Bargaining arrangements correspond closely to the spatial wage distribution; in turn, a large part of the impact that wage growth has on labour market outcomes is determined by these wage-setting institutions.

 
JEL Classification:

J31; J51; C21

Keywords:

South Africa; wage-unemployment elasticity; pseudopanel; unions; firm structure

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BER Weekly

13 August 2018
It was a quiet week on the domestic data front, with only manufacturing production for June released. However, there were significant moves on domestic financial markets in the holiday-shortened week, with the rand exchange rate under significant pressure. Increased geopolitical tension and a general risk-off trading environment weighed on emerging...

Read the full issue