The unemployed and the formal and informal sectors in South Africa: A macroeconomic analysis

Abstract

Background: At 27.2% in the second quarter of 2018 the official unemployment rate in South Africa ranks as one of the highest in the world. However, depending on whether one uses the official or broad definition of unemployed, since 2008 there are on average between 2 and 3.3 times as many unemployed people as there are people in the informal sector.

Aim: This article seeks to explore empirically, using time-series data, the extent to which an increase in the number of unemployed leads to increased entry of workers into the informal sector.

Method: We use a Markov-switching vector error correction model.

Results: We find that such entrance is very limited, lending credence to the notion that significant entry barriers exist into the informal sector.

Conclusion: From a policy point of view these results suggest the need to consider measures that will ease entrance into the informal sector.