SERIES: Africa Growth Initiative Working Papers | Number 6 of 17 « Previous | Next »

Do Industrial Disputes Reduce Employment? Evidence from South Africa

Employment protection and its impact on the operation of labor markets have been extensively researched since the seminal work of Lazear (1990). Through the use of a cross-country panel dataset, Lazear (1990) illustrated how employment protection raised unemployment levels while reducing participation and working hours. Theoretical work suggests that employment protection, particularly dismissal costs, operates as a tax on firms by constraining hiring and firing decisions. If dismissal costs increase, employers refrain from hiring or firing workers to avoid unnecessary expenditure. Efficiency levels might also be reduced as firms are forced to retain low-productivity workers or substitute labor with capital instead of hiring new workers (Autor, Kerr and Kugler 2007). Labor demand therefore, decreases as firms are more reluctant to hire new employees in the face of higher firing costs amidst rising labor supply.

Highlights

  • While South Africa is categorized as an upper middle-income country, the economy has one of the highest unemployment rates in the world—with an official estimate of 24.9 percent in the second quarter of 2012.
  • South Africa’s labor market is neither overregulated nor underregulated, yet South Africa’s indices for “difficulty of hiring” and “difficulty of firing” are above the sample mean, indicating that the cost of doing business within the labor market is above average when compared with estimates for similar countries.
  • Level and efficiency of resolution of labor disputes in South Africa matter significantly for employment creation.

While South Africa is categorized as an upper middle-income country, the economy has one of the highest unemployment rates in the world—with an official estimate of 24.9 percent in the second quarter of 2012. This distinctive feature, together with the fact that the economy is characterized by vocal and politically strong trade unions, means that the labor regulatory environment and framework remain significant within the policy arena in South Africa. In the South African context, the literature on labor regulation and worker protection focuses primarily on perception-based evidence with little empirical research. However, attempts have been made more recently to provide a more nuanced and empirical analysis of labor regulation within South Africa. For example, Benjamin, Bhorat and Cheadle (2010) provide empirical evidence of labor market rigidity using the World Bank’s Cost of Doing Business Survey (DBS) and the Investment Climate Survey (ICS). However, they do state that the DBS provides a useful, but not complete analysis of labor regulation within the economy.

In attempting to contribute to the expanding literature on the impact of employment protection on the operation of labor markets, this paper has two key objectives. Firstly, we utilize a unique administrative database to provide a more nuanced and empirically based measure of employment protection for the labor market in South Africa. We propose to measure employment protection as a function of the quantity and efficiency parameters of the country’s dispute resolution body. Secondly, we attempt to determine the impact of the employment protection measure (derived from the quantity of industrial disputes and the efficiency with which these disputes are resolved) on the South African labor market through the use of an augmented Lazear model. Regional and time-dependent data are utilized to predict the effect that increased industrial disputes have on employment in South Africa. We expect that our model will show that increased industrial disputes (reflecting higher levels of employment protection) decreases employment levels, complementing some of the cross-country work in this area (Grubb and Wells 1993; Nickell 1997; Elmeskov 1998; Heckman and Pagés 2000; Feldmann 2008).

The article is structured as follows: Section II provides a brief literature review while Section III gives a short overview of the CCMA and its function while also introducing the data utilized in this article. We present a descriptive overview of all variables used in the analysis in Section IV, while Section V describes the methodology. The econometric results are presented in Section VI. The final section, Section VII, concludes.

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SERIES: Africa Growth Initiative Working Papers | Number 6