Wage Subsidy and Labor Market Flexibility in South Africa

45 Pages Posted: 20 Apr 2016

See all articles by Delfin S. Go

Delfin S. Go

Development Prospects Group, The World Bank

Marna Kearney

South Africa National Treasury

Vijdan Korman

World Bank

Sherman Robinson

International Food Policy Research Institute (IFPRI)

Karen Thierfelder

United States Naval Academy - Department of Economics

Date Written: March 1, 2009

Abstract

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.

Keywords: Labor Markets, Labor Policies, Economic Theory & Research, Access to Finance

Suggested Citation

Go, Delfin S. and Kearney, Marna and Korman, Vijdan and Robinson, Sherman and Thierfelder, Karen, Wage Subsidy and Labor Market Flexibility in South Africa (March 1, 2009). World Bank Policy Research Working Paper No. 4871, Available at SSRN: https://ssrn.com/abstract=1368077

Delfin S. Go (Contact Author)

Development Prospects Group, The World Bank ( email )

1818 H Street
Washington, DC 20433
United States

Marna Kearney

South Africa National Treasury ( email )

Pretoria
South Africa

Vijdan Korman

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Sherman Robinson

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

Karen Thierfelder

United States Naval Academy - Department of Economics ( email )

589 McNair Road
Annapolis, MD 21402
United States

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