Wage Subsidy and Labor Market Flexibility in South Africa

Go, Delfin S.; Kearney, Marna; Korman, Vijdan; Robinson, Sherman; Thierfelder, Karen

Wage Subsidy and Labor Market Flexibility in South Africa

2009

Go, Delfin S. | Kearney, Marna | Korman, Vijdan | Robinson, Sherman | Thierfelder, Karen

In this paper, the authors use a highly disaggregate general equilibrium model to analyze the feasibility of a wage subsidy to unskilled workers in South Africa, isolating and estimating its potential employment effects and fiscal cost. They capture the structural characteristics of the labor market with several labor categories and substitution possibilities, linking the economy-wide results on relative prices, wages, and employment to a micro-simulation model with occupational choice probabilities in order to investigate the poverty and distributional consequences of the policy. The impact of a wage subsidy on employment, poverty, and inequality in South Africa depends greatly on the elasticities of substitution of factors of production, being very minimal if unskilled and skilled labor are complements in production. The desired results are attainable only if there is sufficient flexibility in the labor market. Although the impact in a low case scenario can be improved by supporting policies that relax the skill constraint and increase the production capacity of the economy especially towards labor-intensive sectors, the gains from a wage subsidy are still modest if the labor market remains very rigid.

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accounting agriculture commodities econometrics economic activities economic analysis economic growth economic sectors economic structure economics elasticity employment exchange rate exports gross domestic product household consumption household expenditure household income human capital imperfect competition income distribution income tax informal sector labour labour force labour market macroeconomics multipliers occupation occupations pension private investment production capacity productivity public services rural poverty sales savings senior social security structural change structural unemployment taxation trade liberalization trade policies unemployment value added wto

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Probabilities; Labor market situation; Self-employment income; Formal labor market; Earning; Adjustment process; Future research; Unemployment problem; Present study; Open economies; Labor market problems; Employment trends; Earnings; Labor market flexibility; Male workers; Economic management; Labor market institutions; Aggregate demand; Labor costs; Inequality; Income group; General equilibrium; Married couples; Employment policy; Unemployed; Minimum wage; Wage subsidy; High unemployment rates; Concentration ratios; Tax revenues; Total wage; Poverty rate; Skilled worker; Gdp; Employee; Subsidized job; Labor market rigidities; Labor market outcomes; Labor unions; Level of education; Economic research; Service sector; Labor policy; Family member; Production process; Present analysis; Female workers; Labor market; Labour demand; Macroeconomic adjustment; Labor market rigidity; Labor organization; Income groups; Benchmark; Wage subsidy scheme; Inventory; Unemployed individuals; New jobs; Household expenditures; Retail trade; Household incomes; Factor markets; Annual wage; Gini coefficient; Labor supply; Labor force; Wage bill; General equilibrium analysis; Average earnings; Economic activity; Employment impact; Real wages; Preliminary evidence; Unemployed individual; Econometric analysis; Union membership; Job search; Consumption expenditures; Beneficiaries; Self-employment; Sum of money; Tax rate; Economic performance; Development policy; Manufacturing industry; Service sectors; Income taxes; Financial sectors; Temporary workers; Real gdp; Wage differentials; Aggregate income; Employment impacts; Technical assistance; Paid workers; Unemployment rate; Training programs; Production increases; Unskilled workers; Econometric modeling; Semiskilled workers; Wage cost; Scale effects; Wage subsidies; Market wages; Calculations; Work force; Permanent workers; Discouraged workers; Annual earnings; Labor market issues; Productivity growth; Work experience; Economic framework; Labor cost; Working poor; Employment level; Wage employment; Wage increases; Total labor force; Macroeconomic management; Private savings; Poverty rates; Employment increases; Poverty levels; Annual income; Production function; Domestic workers; Employment growth; Financial services; Labor market conditions; Wage gains; High unemployment; Incomes; Skill groups; Total employment; Employment effect; Labour markets; Employment status; Informal sector workers; Firm survey; Skilled labor; Average wage; Informal economy; Unemployed people; Probability; Incentive effects; Average wages; Household survey; Wage level; Jobs; Labor relations; Lump sum; Labor demand; Voluntary unemployment; Labor force growth; Clerks; Public expenditures; Minimum wages; New job; Labor regulations; Labor markets; Elasticity of substitution; Employment effects; Wage flexibility; Labor mobility; Income sources; Skill type; Real wage; Per capita income; Vocational school; College degree; Average growth; Factor demand; Equilibrium unemployment; Contribution; Market wage

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Policy Research working paper ; no. WPS 4871http://creativecommons.org/licenses/by/3.0/us/World BankCreative Commons Attribution CC BY 3.0

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Policy Research working paper ; no. WPS 4871

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Wage Subsidy and Labor Market Flexibility in South Africa

2009

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