Search, transport costs and labour markets in South Africa

Abstract South Africa's labour market exhibits a unique equilibrium with one of the highest unemployment rates in the world and yet a low level of informal employment. The unemployment rate has remained high and persistent over recent decades, in spite of the formal demise of the apartheid regime and subsequent transition to democracy in 1994. This paper uses a matching model of the labour market to argue that spatial considerations combined with low productivity of informal work may be responsible for such an outcome. Spatial dispersion inherited from the apartheid regime thins the labour market, creating exclusion and perpetuating spatial segregation. In most developing countries, the result would be higher informal employment. However, spatial dispersion also reduces productivity in the informal sector so that workers prefer to look for a low probability job in the formal sector rather than move to informality. This produces high and persistent unemployment rates. As a result, transportation costs and housing deregulation may become the key factors in improving the working of the labour market in South Africa.