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

For more than a decade, South Africa has experienced falling labor force participation rates while maintaining relatively high unemployment rates, particularly among its youth. This paper examines the role of labor costs from the perspectives of employers and workers by combining information from national accounts and household surveys. To better understand the employer's perspective, we calculate the labor costs and set them in relation to productivity, thereby deriving unit labor costs. To analyze the worker's perspective, we disentangle the tax-wedge and further work-related costs borne by workers. The results show that labor costs in the South African economy increased disproportionally relative to productivity. This is largely due to labor cost growth in the manufacturing and industry sector. An international comparison of unit labor costs shows that other countries with similar unit labor cost levels have not registered such a strong increase over the same period. To identify causes for the increase in labor costs, we decompose the determinants using household data and follow the development of work-related costs over time. We compare the results for South Africa to a set of comparator countries and identify unionization, specific sectors and skill mismatch as particularly influential for South Africa. The results show that stagnating productivity may be associated with a lack of highly qualified workers, also in comparison with benchmark countries. This note was prepared as a background note to the South Africa Systematic Country Diagnostic