Structural Determinants of South African Labour Market Conditions

Transcription

1 Structural Determinants of South African Labour Market Conditions September 2011

2 Outline Data issues and constraints Structure of economy and labour market Rigidities: Output markets Labour supply Labour demand Suggested further questions: Two economies Political economy

3 Data Issues Fairly extensive data sources on the supply side of the labour market: October Household Surveys Labour force surveys National Income Dynamics Survey Paucity of Demand Side Data on Labour Market: Manufacturing Census: Large Sample Survey: 2001, 2005, (2008) Quantec

4 Of necessity: comparatively heavy research focus on supply side, relatively little (and indirect) research focus on demand side of labour market = partial understanding of full functioning of the labour market at best

5 Structural Features of South African Economy Structure of South African economy unusual for its level of development: Preponderance of service sector in output Preponderance of service sector in employment And Finance, Insurance and Business Services in particular

6 Structure of output in South Africa - Source Fedderke (2010):

7 Structure of employment in South Africa - Source Fedderke (2010):

8 Atypical:

9 Impact of Rigidities Structural rigidities in the South African economy: Labour market Output market = Interaction between the two

10 Output Markets Output Market Rigidities - Fedderke, Kularatne and Mariotti (2007): Mark-ups (Price - marginal cost): approximately 2-3 times as high as in the US

11 Output market rigidities - persistent - Aghion, Braun and Fedderke (2008): Worldscope: Net Income/Sales Large vs. Small Firms Years Large Small

12 Table 2.1: Average Manufacturing Sector Mark-up Mark-up

13 With costs to: Productivity growth (annual): 10% increase in mean margin = productivity growth cost of 1.6% - 2.4% 0.1 unit increase in Lerner = productivity growth cost of 1%

14 Interaction: Output and Labour Markets Can derive an interaction between product market competition (the mark-up) and the degree of labour market flexibility (Fedderke and Hill, 2010). To obtain: Elasticity of substitution between capital and labour: σ Measure of the proportion of the labour force not associated with labour market rigidities: L L L

15 Using TIPS data, we obtain : Labour Flexibility sigma Year Lab Flex sigma Poly. (Lab Flex) Poly. (sigma)

16 = Steadily rising rigidity in labour market = Steadily rising elasticity of substitution between capital and labour

17 Policy Issues In Fedderke, Kularatne & Mariotti (2007): Mark-ups are driven by: Concentration = industry structure & competition policy Import & export penetration = trade liberalization

18 On trade policy - Aghion et al (2011) confirm: Reduction in trade protection raises productivity growth Directly More in sectors closer to the technological frontier Sectors that benefit most from trade liberalization have: Low product market competition Smaller size Pricing power: continued negative impact on productivity growth ABF-08: 0.1 unit increase in Lerner resulted in loss of 1% in productivity growth. Here: 0.1 unit increase in Lerner results in loss of 2 3% in productivity growth. Trade liberalization lowers negative impact of pricing power

19 On competition policy - Fedderke (2010) and Fedderke and Naumann (2011):

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21 And with labour market consequences:

22 And note regulatory burden:

23 Labour Markets: Supply Side Three sources of rigidities here: market segmentation participation costs skills mismatch

24 Labour Market Segmentation: Though note evidence of significant churning across labour market status: Chichello et al (2005); Banerjee et al (2008).

25 Evidence highlights the significance of labour market rigidities: between the formal and the informal sector within the formal sector within the informal sector Hence diminished probability of market clearing.

26 Participation Costs:

27 Evidence highlights the significance of labour market rigidities: existence of opportunity cost of labour market participation: impact of pensions presence of significant search costs Hence diminished probability of market clearing.

28 Education:

29 Evidence highlights the significance of labour market rigidities: the inadequate education system does not provide suitable skills/signalling non-linearity requires high level of investment (particuarly for rural poor) Hence diminished probability of market clearing. Interaction with non-clearing wage rate: requires level of skills educational system does not/cannot provide.

30 Labour Markets: Demand Side Banerjee et al (2008) - for : Employment grew at 1.3% per annum. Population grew at 2.7% per annum. = demand side of the labour market is of the essence. Here focus on three core issues: Wage elasticity Output elasticity Trade Impact

31 Wage Elasticity Range of Estimated values: "greater than" -1

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34 But consider the following evidence for manufacturing employment and real unit labour cost:

35 Output Elasticity Labour has been brake on growth:

36 Impact of growth on employment - varied elasticity coeffi cients: > 1

37 Trade Impact Impact of trade - Fedderke, Shin and Vaze (2011); Stolper-Samuelson consistent: favoured L over K, unskilled over skilled Real wage increase: Mandated: +0.5% per annum Actual +1.0% annum Technological change: negative impact BUT: trade structure of South Africa changing: from developed to emerging markets - implies negative impact on unskilled labour, and continued rising capital intensity.

38 Further Questions Number of rigidities relate to market segmentation - "two economies": But there is little understanding of the source of these rigidities in South Africa Some possibilities point away from current policy orientation: eg. Acemoglu & Zilibotti (1997) indivisibilities in investment limit opportunity for risk diversification (even in presence of capital flows). Political economy questions: missed opportunities emerging populist pressures