South Africa has a jobs crisis. In the fourth quarter of 2018, 6.14 million people were out of work, an unemployment rate of 27.1 percent, which is one of the highest rates in the world, along with sub-Saharan African countries like Lesotho, Mozambique, and Namibia.
South Africa’s labor market has another important distinction. Only about three million people who are working – about 18 percent of all employed (16.53 million) – are in the informal sector. That’s much lower than other developing countries. For example in India and Ethiopia, up to 50 percent of those with jobs are employed in the informal sector. The figure is as high as 90 percent in Ghana and Mali.
There are two schools of thought around the role and value of a country’s informal sector. Some argue that it’s an important alternative to the limited opportunities available in the formal sector; a survivalist strategy that allows those without much formal education to work and earn money. In addition, others argue, the informal sector is also an important space for entrepreneurs.
South Africa has 38 million people of working age. 16.4 million people are employed, 6 million are unemployed and 15 million are not economically active.
But there are some who disagree, arguing that employment in the informal sector tends to be poorly paid and precarious. A mere 20 percent of informal sector employees are hired permanently, compared to 70 percent of those in the formal sector.
Little is known about how many people transition between the two sectors, a phenomenon called “churning”. Addressing this knowledge gap is important for a number of reasons. These include the fact that informal workers may be spending some time in the formal sector, getting valuable skills and work experience to boost their chances at formal employment, with the hope that they eventually settle permanently in the formal sector, which would be good news.
Conversely, knowing whether there’s a high rate of transition from the formal to the informal sector would be cause for concern because it would suggest high rates of retrenchment and fewer formal job opportunities.
The data
We set out to understand “churning” between South Africa’s formal and informal sectors. To do this we analyzed data from the country’s National Income Dynamics Study – a study that was conducted four times between 2008 and 2015 by the Southern Africa Labour and Development Research Unit based at the University of Cape Town’s School of Economics.
[perfectpullquote align=”right” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Black women without school leaving certificates aged between 25 and 44 years were most likely to remain in the informal sector. Highly educated white men living in the urban areas of Gauteng and KwaZulu-Natal provinces were most likely to successfully transition from the informal to the formal sector.[/perfectpullquote]
We found there was a lot of movement between the informal and formal sectors during these years. But there were very few instances of people making successful, lasting transitions from informal to formal sector employment.
This emphasizes South Africa’s skills mismatch. The formal sector requires skills that those in the informal sector simply don’t have. More education and support is necessary to bridge this gap.
Our data were drawn from the National Income Dynamics Survey, which is the first national household panel study in South Africa. It examines the living standards of individuals and households over time.
By analyzing data from the four waves of the study we were able to make some key findings of churning, and about the informal sector more broadly. These included:
- Only 8 percent of those surveyed were inactive (7 percent) or unemployed (1 percent) in all four waves – that is, throughout the seven-year period. About 54 percent were employed in one to three waves, meaning they worked transitorily but not continuously;
- only 3 percent worked in the informal sector in all four waves;
- only 12 percent always worked in the formal sector during the seven years under review; and,
- 8 percent of individuals worked throughout the seven years under review but transitioned between the two sectors.
[perfectpullquote align=”left” bordertop=”false” cite=”” link=”” color=”” class=”” size=””][T]he government should continuously alleviate the numerous barriers to the informal economy. These include limited credit and training opportunities, poor infrastructure and the red tape that makes it difficult to start a business.
[/perfectpullquote]
These results clearly indicate that a high proportion of the labor force participants have been in and out of employment (which is not surprising, given the country’s high unemployment rate), some workers enjoy the privilege of always working in the formal sector, and most importantly, churning between the informal and formal sectors definitely takes place to some extent.
The findings also emphasized how precarious the informal sector is. For instance, 67 percent of those who started off working in the formal sector in 2008 remained there seven years later. This suggests that for those who initially secured work in the formal sector, retrenchment likelihood is not as high as perhaps anticipated. The retention figure in the informal sector was just 39 percent. Only 27 percent of those in the informal sector successfully transitioned to the formal sector.
The country’s many social inequalities were evident in the data. Black women without school leaving certificates aged between 25 and 44 years were most likely to remain in the informal sector. Highly educated white men living in the urban areas of Gauteng and KwaZulu-Natal provinces were most likely to successfully transition from the informal to the formal sector.
Filling the gaps
Given what we’ve learned from this research, how might the government and policymakers deal with those who “churn”?
First, the country’s education system must do more to produce skilled labor in the areas the economy requires. Formal firms could help here, by providing assistance and information on what skills are needed and how to develop these. This implies that strengthening the partnership between industry and universities is important, as this would help those who are able to access higher education.
Those who don’t go on to higher education, or don’t complete their secondary schooling, also need to be helped. The government should more actively provide workshops and specialized assistance to enhance entrepreneurship skills and advise small informal firms on growth strategies. These incentives will assist in their growth, long-term sustainability and successful transition to the formal sector.
In addition, larger, more established formal firms can also play a role by helping to develop and train informal sector workers and providing expert guidance to informal firms. This assistance can be incentivized through tax reductions and the prospects of a larger collective market via the informal sector.
Lastly, the government should continuously alleviate the numerous barriers to the informal economy. These include limited credit and training opportunities, poor infrastructure and the red tape that makes it difficult to start a business.
Moegammad Faeez Nackerdien is a Lecturer at the University of the Western Cape and Derek Yu is an Associate Professor of Economics also at the University of the Western Cape.
First appeared in The Conversation.