The DPRU's body of work reveals a number of discernible strands: A long-standing focus on the empirics of household poverty and inequality dynamics in South Africa; A consistent and expansive research programme for a period close on 25 years on developing country labour markets; and more recently, a relatively new avenue of research on trying to undertake applied work in the area of economic complexity.  In each of the strands, our modus operandi is the application of econometric techniques to large survey datasets.

The DPRU is currently engaged in a variety of interesting and diverse projects and studies. Our research programme has recently been able to enter new terrain, principally through the availability of unique or new datasets. Be it the data on recipients of unemployment insurance, or dispute resolution, or even strikes, these novel datasets have opened up an entirely new and rich set of economic and econometric questions, which were not previously possible.

There are four key areas of research excellence which the DPRU is building, or has already built, a scientific foundation in:

1. Minimum Wage Analysis

a. The DPRU has become the international focal point for African work on understanding the impact of minimum wages in the region. Hence the South African National Minimum Wage Commission have requested Prof Bhorat and his team undertake the impact analysis of the National Minimum Wage (NMW). This work uses innovative econometric techniques, combining a Difference-in-Difference with a Regression Discontinuity Design. In addition, minimum wage analysis is being done for Mauritius, the Comoros, and other African countries. 

b. This work on minimum wages has also been extended via the development of a Multiple Index of Violation (MVI). The MVI is a novel index used to measure the extent and depth of minimum wage violation, and includes non-wage measures of violation. The MVI involves applying the Alkire-Foster method of measuring multi-dimensional poverty and also using principal components to robustness check the measure (see this British Journal of Industrial Relations article). The MVI has now been applied globally in 24 countries around the world. Read more...

2.The Application of Economic Complexity

The “Building Economic Complexity in Africa” project involved the first application of this novel methodology, using the analytical framework and empirical tools of economic complexity, to examine the nature and extent of structural transformation across a sample of four African economies. In turn, the methodology was applied to the economics project element of the “Towards Resilient Futures” Community of Practice: considering how economic complexity might be built on the basis of an understanding of local socio-economic linkages. This research involved building the first ever product space mapping from first principles (for fibrous plants) whilst also using new coding techniques (Python).The DPRU’s pursuit of this rich research agenda has attracted the interest of the AfDB, merSETA and others.

3. Skills, Tasks and the Implications for the Labour Market

The DPRU's research on inequality and structural transformation adds to the growing body of literature exploring trends in tasks and the skill content of jobs in developing countries. Specifically, we are the first in the country – and possibly the developing world – to apply the unique O*NET dataset's tasks coding system to an understanding of employment dynamics over time. 

4. New Analytical Frontiers in Economics

The DPRU continues to undertake research in several new areas, from the demographic dividend, and National Transfer Accounts (NTA), to Counting Women's Work (CWW). In 2019 this included the Employment Tax Incentive, a policy aimed at boosting youth employment; Temporary Employment Services, a new form of employment in South Africa. We have also conducted the first thorough integrative analysis of active labour market policies in South Africa.

2023 & 2024 Projects:

Supporting and expanding South Africa’s informal economy

South Africa’s unemployment crisis can partly be explained by the very small share of the working age population employed in the informal sector compared to other developing economies. The informal economy has the potential to provide a point of first entry into the labour market for many unemployed people in the context of a formal economy that is not large enough and not growing fast enough to absorb those looking for work.

In 2023, the DPRU collaborated with Harvard University’s GrowthLab on a project called ‘Supply-Side Economics of a Good Type’. This research makes a case for an approach to the informal sector that is appreciative of the role it could play in providing employment opportunities in a constrained economy. Specifically, we provide an analytical synthesis of some of the reasons that explain South Africa’s low informal sector activity in the face of such high levels of unemployment, and in turn, what policy options are available to encourage informal sector activity in the country.

Core to this work has been engagement with officials within local government to understand the constraints to informal sector activity, and how appropriate regulation and policy could be used to encourage economic participation within the informal sector.

 

Just Transition and the Labour Market in South Africa: Measuring Individual and Household Coal Economy Dependence

 

South Africa finds itself at the early stages of transitioning away from coal, but this is not devoid of socio-economic costs, as coal has a direct and indirect economic footprint. Driven by both endogenous forces – natural closure of coal-fired power plants – and exogenous forces – regulatory policy shifting energy production toward renewables – the transition is set to continue, and likely accelerate. Understanding the labour market implications associated with a transition is pivotal in shaping policy decisions linked to the Just Transition.

 

The DPRU in the Faculty of Commerce embarked on research in 2023 that contributes to the ongoing policy debate surrounding the just transition in South Africa, by carefully deriving a robust empirical estimate of the coal labour market in South Africa, and the related coal-based electrical utility industry in Mpumalanga.

 

We provide a quantitative estimate of jobs – both direct and indirect – associated with the coal sector, and in so doing, explore the labour market profile and characteristics of the individuals and households linked to the sector.  These initial empirical insights into the size and shape of the coal labour market can inform the scale and scope of these policy interventions. Given the heterogenous nature of the labour market, a diverse suite of policy interventions is likely to be required.

 

The labour market effects of cash transfers to the unemployed: Evidence from South Africa

Cash transfers (known as ‘social grants’ in South Africa’) are a key component of social protection systems around the world. Despite their well-established benefits, many policymakers express concern that they may discourage work. The underlying economic theory is, however, ambiguous, and existing empirical evidence is mixed. The literature suggests that the sign and magnitude of labour market effects may be driven by two specific factors: Firstly, the details of the programme design, and secondly, the underlying economic conditions. In an initial study in 2023 and a more extensive follow-up study thereafter, we consider the case in which both factors are explicitly characterised by unemployment, using the context of the new COVID-19 Social Relief of Distress grant (SRD) in South Africa, the first grant targeted at unemployed working-age adults in the country’s history. While the grant was initially intended to be temporary, it has since experienced several extensions and, at the time of writing, remained in place with no clear decision on whether it would be integrated permanently into the system in either its current or an alternative design. The potential labour market effects of doing so have been hotly contested. To our knowledge, this analysis is the first to provide causal evidence of the SRD grant’s effects on any outcome.

 

By applying a staggered difference-in-differences design on nationally representative household survey data, we find that, on average, receipt has positive effects on the probabilities of job search, trying to start a business, and employment. The latter effects are driven by effects on wage and informal sector employment. We show that employment effects are positive for the unemployed who are either actively searching for work or trying to start a business, as well as for those who are not, but they are substantially larger for the former. This indicates that the grant both encourages and improves the efficiency of labour market activity by addressing labour market constraints, but highlights the importance of active labour market engagement for improving employment prospects through the grant. However, and importantly, these employment effects are only evident in the short-term and quickly become and remain zero in the longer-term.

 

This analysis suggests that cash transfers, or social grants, can help reduce labour market constraints, but such gains need not translate into better longer-term employment prospects in high-unemployment contexts. These findings hold important policy implications for other high-unemployment lower-income countries, and directly contributes to the ongoing policy debate of the future of the SRD grant in South Africa and the appropriate form of support for the country’s large, working-age unemployed population.

 

 

Wage subsidies and job retention in a developing country: Evidence from South Africa

Wage subsidies served as a dominant labour market policy response around the world to mitigate job losses in response to the COVID-19 pandemic. However, no causal evidence of their effects exists for developing countries, which tend to be characterised by markedly different labour markets. In a study the DPRU completed in 2023, we made use of unique panel labour force survey data and a temporary institutional eligibility detail to estimate the causal effects of such a policy – the Temporary Employer-Employee Relief Scheme (TERS) – on job retention among formal private sector employees in South Africa.

 

Using a Difference-in-Differences design, within the context of an economy with one of the highest unemployment rates in the world, we find that the policy increased the probability of remaining employed in the short-term by 15.6 percentage points. This suggests that the policy saved 2.7 million jobs during April and May 2020, at a monthly cost of R13 195 (US$1 851 in Purchasing Power Parity terms) per job saved. This cost is large relative to the wage costs of jobs supported by the policy, however it compares favourably to more developed country contexts. However, two-thirds of TERS recipients were inframarginal – that is, they would have remained employed anyway in the policy’s absence. This is arguably due to prioritisation of rapid disbursement of relief over accurate targeting.

 

Our analysis contributes to the now large literature on the labour market effects of the COVID-19 pandemic, but specifically contributes to the literature on the labour market effects of government interventions during a crisis. However, its key contribution lies in its provision, to our knowledge, of the first set of estimates of the job retention effects of wage subsidies during the COVID-19 pandemic in a developing country context. In doing so, we show that effects are in line with the developed country consensus that wage subsidies can be particularly useful during periods of large, transient shocks, despite tending to have only modest effects in non-crisis periods.

 

 

Education and South Africa’s waning demographic dividend

South Africa’s demographic dividend is waning, with the vast majority of the positive impact of the dividend estimated to lie in the past. This research by the DPRU considers the extent to which the expected changes in educational attainment of the population may impact favourably on the demographic dividend, by extending its duration, by amplifying its magnitude, or a combination of both.

 

The research considers improvements in education across the population and the potential impact of such improvements on the demographic dividend using the National Transfer Accounts (NTA) methodology and three sub-groups of the population defined according to educational attainment. The data suggests that simply accounting for rising educational attainment leads to a larger estimate of the demographic dividend, and that the effect of education is sufficiently strong to outweigh the negative effect of population ageing on the demographic dividend over the next five to six decades. More rapid improvements in educational attainment are estimated to yield a stronger demographic dividend, although the dividend period is slightly shortened.

 

The results point to the potential available to governments to boost the demographic dividend through improving access to education where more highly educated groups generate larger lifecycle surpluses in the prime working ages. The viability of this approach is, however, constrained by the extent to which governments are able to address issues with respect to educational quality and the ability of their economies to absorb these more educated workers into productive employment. Further, with the demographic dividend period slightly shortened by more rapid shifts in the population towards higher educational attainment, the pressure in terms of ensuring supportive policies are in place is reinforced. In each of these areas, South Africa faces important challenges.

 

The Labour Market Intelligence research programme (LMI)

 

The Department of Higher Education and Training (DHET) with support from the National Skills Fund (NSF) has approved the implementation of a new phase of the Labour Market Intelligence (LMI) research programme. The University of Cape Town (UCT), and specifically the Development Policy Research Unit (DPRU), will be acting as Project Managers. The aim of this programme is to establish a credible institutional mechanism for skills planning.

The LMI research programme comprises several research projects related to the identification of current and future skills needs and shortages, the identification of interventions required to address skills needs and shortages, and the exploration of ideological, philosophical and empirical approaches to understanding the relationship between education and the economy. Broadly speaking, the overarching work of the researchers undertaking this project will, over a five-year period, essentially involve identifying and measuring the extent of skills imbalances in the labour market. It will conduct research, collect information, track vacancies, analyse findings and inform labour market information users of ‘bottlenecks’ in skills demand and supply in the labour market.

The DPRU's research activity includes: 

  • 5a: The Fourth Industrial Revolution: researching the implications of the 4IR for skills supply and demand
  • 5b: Skills Supply & Demand: research and analysis on skills supply and demand in South Africa, and the 'imbalances'
  • 5c: Wage Analysis
  • 5d: Update on the Key Indicators for Skills Planning (KISP)
  • 5e: Conceptual framework for reporting on the performance of the PSET System

Outputs: 2019-2024.

Visit the LMI official website.

 

 

The National Minimum Wage

The DPRU continues to provide research assistance to the National Wage Commission, which is used to recommend a national minimum wage adjustment to the Minister of Labour for each upcoming year. We assist the Commission in understanding the labour market effects of minimum wage increases. In theory, an ideal minimum wage policy is able to raise the level of minimum wage and generate income gains for workers without any associated negative outcomes. In practice, setting the minimum wage level is complex, and must take a range of factors into account. Our research uses nationally representative household survey data, provided by Statistics South Africa, to examine how an increase in the National Minimum Wage (NMW) impacts on a few key outcomes for covered workers. Specifically, we follow a panel of workers in the data that we can observe over multiple time-period and, using a Difference-in-Differences approach, estimate the effect of the NMW on their earnings, employment prospects, and working hours.

We find that, despite relatively limited enforcement in South Africa, wages of workers covered by the NMW rise substantially after the legislation takes effect. At the same time, we note mixed evidence on employment and working hours, which suggests that in the current low growth economy consistent, above-inflation increases may not be possible without some trade-offs at the margin. Our research suggests that while the minimum wage is a crucial policy tool to ensure an acceptable wage floor, there are limits to what it can achieve in isolation.

2022 & 2023 Research Projects:

Investigating Wage Trends in South Africa: An Assessment of the Public Sector Wage Bill

This project on the drivers of South Africa’s public sector wage bill, makes use of administrative, payroll data from the public sector to assess changes in the wage bill over time. Of interest is that they are making use of disaggregated, individual-level data from government’s payroll database, covering the population of all national and provincial government employees since 2007.

The DPRU was given access to files from the Government's Personnel and Salary Administration System (PERSAL) data, from 2007-2020, and managed to transform this into a large, individual-level dataset. Given the size of the dataset, which contains millions of observations in each period, we used the University of Cape Town’s High Performance Computing (HPC) centre to analyse the data. Our initial focus is to understand the underlying drivers of the public sector wage bill over the period and examine how employment and wage composition has changed.

For example, for the public service, we plot employment, average wages and the overall wage bill, where values are indexed to 2007. The figure shows how changes in employment and wages contributed to the total wage bill over the period. For example, by 2020 the total wage bill had increased by 78% in real terms, relative to 2007. Comparatively, the mean wage increased by 42%, while public service employment had increased by 25%. 

This research involves work for the Financial and Fiscal Commission (FFC), and outputs are expected to be published in 2022.

Community of Practice: Towards Resilient Futures - Phase 2:
(extension of CoP 1: Use of Fibre-rich Biomass in the Remediation of Degraded Land)

In the first phase, this CoP developed an intellectual and analytical approach to solving environmental, economic and social challenges in a holistic multi-disciplinary manner: an approach dubbed the Multidisciplinary Micro Industrial Policy Approach (MMIP). In the next phase from 2021 to 2022, CoP2 aims to leverage off these analytical developments. By understanding the engineering, material and environmental basis behind a frontier product and its multi-product value chains, one is better able to develop a more deliberate set of regulatory and economic policy interventions. These interventions may raise the overall economic complexity of the economy, thereby generating inclusive and sustainable economic growth. Furthermore this can be done within a framework where intensification of the feedstock production and its associated value-enhancement through manufacturing is linked to the mitigation of environmental legacies bedevilling, for e.g. post mining regions among others.

Visit the Towards Resiliant Futures website.

Assessing Fiscal Employment Measures in Middle-Income Countries

This work for the ILO considers how countries responded to COVID-19 by funding various forms of employment stimulus programmes.

The COVID-19 pandemic had a devastating global impact that will have severe long-term socio-economic implications, with particularly large negative effects borne by less developed economies. Policy responses have been varied but most governments around the world reacted by introducing a variety of economic stimulus programmes, where a major component has been some form of employment protection and support. Broadly, these programmes have aimed to limit the immediate negative labour market consequences of COVID-19, while also trying to aid a post-pandemic recovery in employment. Importantly, such policy responses have not been confined to high-income countries, with almost every middle-income country introducing additional employment-support spending in some form. 

Indeed, we show that COVID-19 sparked the rapid and extensive introduction of fiscal stimulus programs in both lower- and upper-middle-income country economies around the world. The specific programmes that have been funded are wide-ranging in nature and scope, but what is clear at the outset is that middle-income countries have been allocating significant resources towards heterogenous forms of employment protection and support. This necessarily raises important questions about the kinds of programs that have been adopted, and their relative effectiveness both in the short term and going forward. 

For example, to begin to understand the relationship between COVID-19 stimulus spending and country income level, we plot per capita GDP against the amount spent no employment stimulus. This includes information on various stimulus programmes introduced across 110 middle-income countries, identifying lower and upper-middle-income countries separately. The data suggests that at the country level spending magnitudes differ widely, but reinforces a key point -  that overall spending on COVID-19-related employment support programmes in 2020/21 has been significant. The mean level of spending for upper-middle-income countries was 5.5% of GDP, while for lower-middle-income countries it is 2.7%. And the figure does suggest a positive relationship between country income level and the proportion of GDP allocated to employment stimulus, where higher income countries allocated larger shares in 2020. Overall, we observe a widespread response with almost all countries in our sample funding some form of employment support.

Outputs: Expected: 2022-23.

A research study for the Manufacturing Engineering and Related Service Sectors: Understanding Economic Complexity in the merSETA Space with a Focus on SMMEs

The transition to higher levels of economic development is driven by the process of structural transformation, whereby a country shifts from economic activities characterised by low levels of productivity, toward high productivity economic activities. The standard evolutionary pattern involves shifting from low productivity agricultural activities toward high productivity manufacturing activities (including high productivity services activities). This pattern of structural transformation has certainly been evident in the economic development trajectories of recent industrialisers, such as Japan, Korea, and China.

While there is some debate on whether manufacturing remains the only engine for development, it is widely agreed that manufacturing remains a key element in the structural transformation process. The concept of economic complexity is drawn from a fairly recent literature examining patterns of economic growth and development, in order to provide an alternative approach to thinking about how countries undergo structural transformation. Economic complexity refers to the productive capabilities or productive knowledge embedded in an economy. Embedded within each product (or service) that a country produces, is an array of productive capabilities (or tacit knowledge) held within complex networks of economic agents that are brought together by markets. The notion of economic complexity describes the process of structural transformation as a path dependent process that involves the shift from less complex products toward an increasingly diverse and complex set of products.

Of key importance to this project is the notion that skills are one of the sets of capabilities which are important in determining the success of building economic complexity and thus growing the economy through this process of shifting production into ‘nearby’ products. Certainly, evidence has shown a strong relationship between the availability of skills and economic development.

Read more about the project here.

Outputs:

Addressing Africa’s Youth Unemployment through Industries Without Smokestacks

 

With the advent of technology and the trend towards a completely integrated global economy, certain sectors have risen to the fore in terms of their relative importance for economic development in African countries. These industries are dubbed Industries Without Smokestacks (IWOSS): and they present an opportunity for African economies to address high and growing rates of unemployment among the youth in particular. This research, in collaboration with the Brookings Institution, focuses on assessing the extent to which youth unemployment can be addressed through employment creation in these IWOSS in South Africa. We present a methodological framework for assessing the skills required for individuals to be absorbed into these industries. While we focus specifically on four of these industries (tourism, horticulture, agro-processing, and transit trade), this framework will be readily applicable to other sectors as well.

 

Outputs: Book chapter due in late-2021.

The Rise of the ‘Missing Middle’ in an Emerging Economy: the Case of South Africa

Empirical evidence indicates that the South African labour market has been characterized by a U-shaped earnings growth pattern over the post-apartheid period. The bottom and top percentiles of the wage distribution have experienced higher wage growth relative to those in the middle. This pattern, or ‘missing middle’, is similar to what has been termed ‘wage polarization’ in the developed world. Research on the topic of wage polarization, however, has focused almost exclusively on industrialised countries making this work a contribution towards the characterization of wage polarization in an emerging economy. Further to this, we may expect the manifestation of and processes behind wage polarization to differ in emerging compared to industrialised economies because of key differences in their labour markets. In the literature on wage inequality in developed economies, the impact of technology on tasks and the occupational demand for labour plays a key role in explaining variation in wage growth along the distribution.

We investigate the relevance of this framework for South Africa along with three other competing and complementary explanations for a U-shaped earnings growth pattern. These include broad-based change in sectoral composition, such as the decline of manufacturing and the emerging dominance of services; skills-biased job growth in a context of high inequality in schooling quality; and, the role of labour market institutions, such as minimum wages, unions and public sector employment. We investigate the relative importance of each of these factors using a Recentered Influence Function regression on a harmonised series of South African labour force datasets merged with the Occupational Information Network (O*NET) for 2000 to 2015. Different explanations prove more or less pertinent at different portions of the distribution. Minimum wages have been key to shoring up wage growth at the bottom of the distribution. Workers in the middle of the distribution have suffered from an oversupply of similarly educated entrants, as well as, the decline of manufacturing and negative returns to the routine type work carried out by the typical worker in this portion of the distribution. Strong growth at the top end has been reinforced by skills-biased developments in all four frameworks.

Outputs: Papers and journal articles due 2021.

Untangled 

 

UNTANGLED is a three-year interdisciplinary Horizon 2020 research project that seeks to examine the interconnected trends of globalisation, demographic change and technological transformation, and their effects on labour markets in the European Union and beyond.

 

Based on a series of research papers and market scenarios,  researchers will develop policy recommendations to help governments cushion the negative impacts of these trends, promoting fairness and prosperity, and ensure their benefits are enjoyed fairly across regions and sectors. And by engaging a broad range of stakeholders, including companies and civil society organisations, we will develop practical policy proposals. Untangled has 14 partners from across Europe, South America, Asia and Africa, and receives funding from the European Union’s Horizon 2020 research and innovation programme.

The DPRU is a key research partner, and will participate in Work Packages 3 & 4:

  • WP3 aims to measure the aggregate, country-level effects of technological transformations, globalisation and demographic changes across the EU, including by measuring their effect on gaps in labour market outcomes between younger and older people; on wage and income inequality; on supply of and demand for skills; and on reshoring and trade flows.
  • WP 4 will assess the impacts of technology, globalisation and demography on social welfare and employment at the industry and regional level, determining their impact on various dimensions of employment, explaining the role of industry-specific tangible and intangible capital on income distribution, evaluating the role of regional differentiation in inequalities and zooming in on specific industries and regions.

Visit the Untangled project website here.

Outputs: Expected 2022.

Inequality and Structural Transformation

Funded by UNU-WIDER, this project aims to add to the growing body of literature exploring trends in the skill content of jobs as a function of trade and processes of structural transformation in developing countries. Specifically, each (team of) author(s) is expected to prepare an empirical case study investigating the labour market effects of structural transformation in form of measurable changes in the composition of jobs and tasks in one specific developing country, and its impact on the earnings distribution.

Outputs: Papers and journal articles due 2021.

The Developer’s Dilemma: Structural Transformation, Inequality Dynamics, and Inclusive Growth

Funded by UNU-WIDER, this research activity will focus on the “developer’s dilemma”: How countries are to manage the trade-off between sustaining high economic growth rates that require structural change and put upward pressure on income inequality disparities whilst at the same time making growth inclusive, which entails steady or even falling inequality to maximise the rate of poverty reduction. The DPRU is contributing the South African chapter to the larger book project: https://www.wider.unu.edu/about/developer%E2%80%99s-dilemma-%E2%80%94-collaborating-researchers.

Outputs: Book Volume due 2022.

The Covid-19 Country Report for South Africa

This project was commissioned by the late Minister Jackson Mthembu, the Minister in the Presidency, with the aim to record measures and interventions adopted by government in partnership with social partners to manage, respond to and combat the spread of Covid-19, as well as its socio-economic impacts. It is jointly implemented by the NRF, the Government Technical Advisory Centre (GTAC), and the Department of Planning Monitoring and Evaluation (DPME). The DPRU contributed to Chapter 5 of the report documenting and analysing the expansion of social protection in response to the pandemic, drawing on representative survey data, administrative data, and existing research (read here).

Outputs: The 1st edition was finalised and published in the public domain in 2021, and the 2nd edition is expected to be published in early 2022.

UNFPA, DPRU and AFIDEP

 

 

Africa’s youthful population and significant development challenges have focussed the attention of researchers and policymakers on the demographic dividend—the potential boost to economic growth and living standards that may arise as the large youth population enters the prime working ages—and the type of supportive policy required to realise it. Policymaking in this area is challenging for a number of reasons: policies in key areas have long lead times, policymakers continually face the prospect of a variety of shocks over which they may have little to no control, and aggregate measures and statistics are unable to reflect the wide range of experiences, conditions and contexts within society.

This research provides an overview of some of the common tools and methodologies that are used to estimate and analyse the demographic dividend, while also reviewing the extent to which some of these methodologies are able to respond to the types of issues confronted by policymakers in the Eastern and Southern Africa region. Secondly, the paper provides a more detailed look at two of the key methodologies used to analyse the demographic dividend in the region, namely the DemDiv model and National Transfer Accounts (NTA).

Outputs: Morné Oosthuizen and Joshua Magero (2021). Modelling the Demographic Dividend: A Review of Methodologies; UNFPA report 30 March 2021.