Does Employing Workers or Accepting Work Pay? Analyzing Labor Costs in South Africa

Abstract

The contribution of this paper to the literature is threefold. First, it examines the three main explanations of high labor costs in South Africa brought forward in the literature, namely high living costs, skills mismatch, and the collective bargaining mechanism. 2 Second, it compares the results found for South Africa to a set of benchmark countries, thereby determining the magnitude of the effects in an international comparison. Third, it links macro-economic growth diagnostic tools to labor force surveys. This allows zooming in from a macro-economic perspective to individuals and hence, identify the determinants and developments of labor costs, earnings, and structural change.This paper addresses the question whether employing workers pays in South Africa from the perspective of the employer and whether working pays from the perspective ofespecially skilledworkers. The analysis starts from a national overview on important indicators for South Africa using national accounts data and calculates productivity measures as well as labor costs and unit labor costs. For an international perspective, unit labor costs are compared to a set of countries similar to South Africa. Moving from the aggregate view of the national accounts to the individual level, we calculate employers' labor costs, employees' gross income and the respective social contributions, effectively yielding the tax wedge. Following the argument of the living wages, we analyze work related expenditures and determine the share of such expenditures on the net income for all employed. In a second step, wage determinants are examined with a focus on the role of unionization in South Africa. As the degree of unionization differs by sectors, we interact the two with each other and relate the results to South Africa's collective bargaining approach. Comparisons between South Africa and comparator countries with data available help to determine the role of unions on labor costs and earnings from an international perspective. Similarly, we calculate the returns to education for South Africa for a broader set of comparator countries but with fewer variables involved.Results from national accounts data confirm the increases in labor costs that were, however, not in tandem with productivity increases. This led to higher unit labor costs over time in comparison to other, similar countries. High living expenditures and union density are factors contributing to the growing labor costs but in an international comparison it is the skills mismatch that increases the labor costs disproportionally. Overall, the results point at the need for fostering the process of structural change in South Africa.The paper is structured as follows. The next section describes the data used for the analysis within South Africa and the benchmark countries. Section three presents the methodology, while section four shows the results. The last section concludes. Data Data for South AfricaTo understand the determinants of wages and expenditure patterns in South Africa in detail two differen...