It’s time South Africa faced up to an honest question: what if the formal economy can’t deliver the jobs that are needed?
I am an economist who has been working closely with South Africa’s administrative tax data over the past five years – arguably the best way to track progress in the formal sector.
The sobering reality is that the country has gone backwards. And young people are bearing the brunt of the deterioration. The scale of the jobs crisis is now so large that even decades of strong economic growth won’t be enough to eliminate it.
Looking at the last 10 years (2013/14 to 2023/24 tax years) of formal sector jobs data, as reported in the Spatial Tax Panel – a database constructed from employer-employee tax returns – South Africa managed to create only about 130,000 net new full-time equivalent work opportunities per year. This rate of job creation works out at just under 1% growth per annum – which isn’t enough to keep pace with the country’s growing population.
The official statistics from the Quarterly Labour Force Survey confirm this. The number of unemployed job seekers in South Africa has risen from about 8 million to almost 12 million between 2014 and 2024. The reported number of formal sector jobs is also around 12 million.
What is perhaps more alarming is that even if formal sector employment were to grow at 3% per annum, it would still take more than 50 years to substantially reduce unemployment.
The crisis of unemployment youth is deepening
The problem is not only the pace of job creation, it is also who is being left behind. The next cohort of young job seekers is faring worse than ever, according to the latest tax data.
Figure 1 shows how formal employment has shifted across age cohorts in cities, compared with the pre-COVID baseline. It’s drawn from our recent report on the performance and economic outlook for South African cities.
Figure 1: Percentage change in employment by age group across all metropolitan municipalities
The main message is that the pandemic had a dividing effect on labour market outcomes across younger and older workers.
Workers aged above 35 years were surprisingly resilient to the shock. Numbers fell only slightly. They soon reached – and even surpassed – their pre-pandemic levels.
It was younger age groups – either aged 15-25 or 25-35 years – that faced the worst of the layoffs. The 15-25 cohort contracted by 5% and the 25-35 cohort by 15%.
Neither of the younger age cohorts showed much sign of recovery. Job numbers levelled off much lower.
Job creation has apparently shifted even further away from young people. This trend isn’t unique to the tax data; a number of other studies confirm it.
The limits of standard economic tools
What do mainstream economic theory and related empirical work have to say about addressing this crisis?
The economist’s toolbox is powerful when it comes to tweaking incentives, prices and market functioning around an existing equilibrium. The rise in data availability and computational power has also made analysis more precise and useful.
But South Africa’s unemployment crisis is not that kind of problem. It doesn’t need just a small adjustment.
When the required changes are large, the assumptions underpinning the models become less reliable. Attempting to move the dial on unemployment at the scale South Africa requires pushes us into guesswork.
South Africa is facing the prospect of multiple generations with little chance of finding employment. This calls for more than just policy tinkering.
The constraints of standard economic reasoning are illustrated in the debate around minimum wages and the costs of labour. In its simplest form, economic theory suggests that unemployment should all but disappear if you could be flexible about setting wages. Problem solved.
The trouble is that empirical evidence about this is mixed. The employment tax incentive and sectoral minimum wage laws, intended to encourage hiring, showed little effect on employment.
What if South Africa’s market can’t clear out surplus labour even at half the current wage level?
This is further complicated by spatial constraints. For many poorer people, high transport costs mean they can’t get to work even when low-wage jobs are available.
Policy choices
There are other options.
The informal economy is receiving growing policy attention. While I do not want to romanticise the precariousness of many micro and small enterprises, there is reason to believe that this sector could generate far more employment in the future.
According to the Quarterly Labour Force Survey, the informal economy already employs more workers than formal manufacturing.
Another advantage of expanding informal sector employment is that it is often well matched to marginalised communities and places, including township economies, women, and black-owned enterprises.
Yet despite this potential, South Africa still does not have a coherent strategy for supporting small and informal businesses at scale.
Another widely discussed option is some form of basic income grant.
The appeal of this option is that the public sector already has the administrative capacity to do it. It has the blueprint in the Social Relief of Distress grant.
The main constraint is fiscal cost and the associated risks to public finances.
A further set of ideas relates to large-scale infrastructure-led stimulus. This might be complemented by a minimum employment guarantee, such as expanded community works or public employment programmes.
It is likely that the answer lies in some combination of these approaches.
Yet the fundamental challenge across all of them is the financial cost required to scale them to a point where they can make a meaningful difference. Would global financial markets punish South Africa for expanded public spending, or worse, would it destabilise the broader economy?
I am sympathetic to the difficult balancing act faced by the National Treasury.
Taking some strategic bets
Does South Africa still need the formal sector to create millions of jobs?
Without a doubt. But formal employment can’t double in size overnight.
It is difficult to accept a future in which millions of South Africans who are willing and able to work go hungry while the country waits for the formal sector to grow.
It is time to take some bold and strategic bets.
This article was originally published by Econ3x3 under the headline, What if the formal economy can’t deliver the jobs we need?
The author would like to acknowledge financial support from the UK’s Foreign Commonwealth and Development Office in sponsoring the curation of the Spatial Tax Panel and related research through Spatial Economic Activity Data: South Africa
