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Unemployment Insurance in South Africa: A Descriptive Overview of Claimants and Claims

INTRODUCTION

Highlights

  • South Africa has a long history of unemployment insurance with the promulgation of the first Unemployment Insurance Act (Act No. 30 of 1966) during the apartheid years.
  • The data shows that women, youth, poorer claimants and contract employees face the lowest potential claim days when claiming their benefits, while youth, poorer claimants and claimants with relatively short potential claim periods are eligible to claim a relatively larger proportion of their previous employment salaries as replacement benefits.
  • In the period between 2005 and 2011, those with the lowest potential claim periods were also subject, on average, to lower absolute benefits compared to their wealthier counterparts.

The South African economy suffers from the debilitating effects of very high unemployment rates, with African workers, women, youth and those with incomplete schooling disproportionately affected (DPRU, 2011). Not only are official unemployment rates astoundingly high—standing at 25 percent in the third quarter of 2011 (DPRU, 2011)—but many of the unemployed in the South African economy have also never worked before (Banerjee et al., 2008). The unemployment insurance system is a system offering subsistence income to eligible recipients to alleviate the harmful economic and social effects of income loss due to unemployment shocks. It is prevalent in many industrialized economies in the world but much less so in developing countries. In South Africa, both employers and employees contribute to the Unemployment Insurance Fund (UIF), and this fund is then used to provide income replacement benefits such as unemployment, illness, maternity, adoption and dependant’s benefits. In this descriptive overview, we are only concerned with the unemployment insurance aspect of the UIF. The UIF system plays a key role in South Africa’s social security architecture, particularly since it is the only arm of South Africa’s social security that caters for the unemployed—more specifically, the portion of the unemployed that were previously employed. Administratively, unemployment insurance is collected by the UIF, which falls under the auspices of the Department of Labour.

While unemployment insurance is meant to smooth consumption, importantly, it is also meant to improve the transition process of labor market participants from unemployment to employment.1 This research mainly considers the impact of the unemployment insurance system on the labor market through a descriptive analysis of claimants and claims. The administrative data utilized in this paper—and obtained from the UIF—covers all UIF claimants quarterly from 2005Q1 to 2011Q3. The paper is organized into three sections: Section 2 provides an institutional overview of the unemployment insurance system in South Africa, highlighting the main aspects of this system in South Africa as well as changes to the system over time. In Section 3 we undertake a four-part descriptive overview of UIF claimants and claims between 2005 and 2011: First, we briefly dwell on the data and some challenges with it before considering the evolution of the claimant pool over time. Then, we analyze how different subsects of claimants are represented in the claimant pool in comparison to potential contributors. In the final subsection we consider access to the UIF system, potential moral hazard effects and system incentives through an analysis of potential benefits days, credit exhaustion rates and average income replacement rates. Section 4 concludes.

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SERIES: Africa Growth Initiative Working Papers | Number 8