It is time South Africa faced an honest question: What if the formal economy cannot provide the jobs needed?
I am an economist working together Administrative tax data of South Africa This is probably the best way to track progress in the formal sector – over the last five years.
The serious truth is that the country has gone backward. And the youth are having to bear the brunt of this decline. The scale of the jobs crisis is now so great that even decades of strong economic growth will not be enough to end it.
As reported, looking at data on formal sector jobs over the last 10 years (2013/14 to 2023/24 tax years) local tax panel – a database constructed from employer-employee tax returns – South Africa managed to create only 130,000 net new full-time equivalent work opportunities per year. This rate of job creation works out to a growth of just less than 1% per year – not enough to keep pace with the country's growing population.
Official data from the Quarterly Labor Force Survey confirms this. The number of unemployed job seekers in South Africa has increased from about 8 million to almost 12 million Between 2014 and 2024. The reported number of formal sector jobs is also around 12 million.
Perhaps more worrying is that even if formal sector employment grew at 3% per year, it would still take more than 50 years to reduce unemployment substantially.
The crisis of unemployment among youth is deepening
The problem is not just the pace of employment generation, the problem is also who is being left behind. The next group of young job seekers is worse off than ever, according to the latest tax data.
Figure 1 shows how formal employment has shifted across age groups in cities, compared to the pre-Covid baseline. This is taken from our recent report on performance Economic outlook for South African cities.
Figure 1: Percentage change in employment by age group across all metropolitan municipalities
The key message is that the pandemic had a divisive impact on labor market outcomes for young and older workers.
Workers over the age of 35 were surprisingly resilient to the shock. The numbers dropped only slightly. They soon reached their pre-pandemic levels – and even surpassed them.
It was the younger age groups – either 15–25 or 25–35 years old – who suffered the worst layoffs. There was a 5% decrease in the 15-25 group and a 15% decrease in the 25-35 group.
Neither of the younger partners showed much sign of recovery. The number of jobs reduced greatly.
Apparently, employment generation has moved further away from the youth. This trend is not unique to tax data; many others studies confirm it.
Limitations of Standard Economic Instruments
What do mainstream economic theory and related empirical work say about the resolution of this crisis?
The economist's toolbox is powerful when it comes to changes in incentives, prices, and market functioning around existing equilibrium. Increases in data availability and computational power have also made analysis more accurate and useful.
But South Africa's unemployment crisis is not that kind of problem. It doesn't require just a small adjustment.
When the required changes are large, the assumptions underpinning the model become less reliable. Attempts to estimate the scale of unemployment in South Africa require further guesswork.
South Africa faces the prospect of multiple generations having very slim chances of finding employment. This requires more than just policy change.
The constraints of standard economic logic are illustrated in the debates surrounding the minimum wage and the cost of labor. In its simplest form, economic theory suggests that if you can be flexible about wage setting then unemployment should almost disappear. problem solved.
The problem is that the empirical evidence on this is mixed. Employment tax incentives and regional minimum wage laws, intended to encourage hiring, showed little impact on employment.
What if the South African market cannot eliminate surplus labor at even half the current wage level?
This is further complicated by spatial constraints. For many poor people, high transportation costs mean they can't get to work, even when low-wage jobs are available.
policy options
There are other options also.
Policy attention to the informal economy is increasing. While I do not want to romanticize the precarity of many micro and small enterprises, there is reason to believe that this sector could generate far more employment in the future.
According to the Quarterly Labor Force Survey, the informal economy is already Employs more workers than formal manufacturing.
Another advantage of expanding informal sector employment is that it often coincides with marginalized communities and spaces, including township economies, women's, and black-owned enterprises.
Yet despite this potential, South Africa still has no coherent strategy to support small and informal businesses on a large scale.
Another widely discussed alternative is some form of basic income grant.
The appeal of this option is that the public sector already has the administrative capacity to do this. Its outline is in social relief of crisis grant.
The main constraints are fiscal costs and risks associated with public finances.
Another set of ideas concerns large-scale infrastructure-led incentives. This could be complemented by a minimum employment guarantee, such as expanded community work or public employment program.
It is possible that the answer lies in some combination of these approaches.
Yet the fundamental challenge in all of them is the financial cost required to take them to the level where they can make a meaningful difference. Will global financial markets punish South Africa for expanded public spending, or worse, will it destabilize the broader economy?
I am sympathetic to the difficult balancing act faced by the National Treasury.
some strategic moves are underway
Does South Africa still need the formal sector to create millions of jobs?
without a doubt. But the size of formal employment cannot double overnight.
It is difficult to accept a future in which millions of South Africans willing and able to work go hungry while the country waits for the formal sector to grow.
It is time to make some bold and strategic bets.
This article was originally published by Econ3x3 under the heading, What if the formal economy cannot provide the jobs we need?
The authors would like to acknowledge financial support from the UK Overseas Commonwealth and Development Office in sponsoring related research through the Spatial Tax Panel periodization and spatial economic activity data: South Africa
By Justin Visagie, Associate Professor at the Center for Southern Inequality Studies, University of the Witwatersrand