unemployment and household formation in south africa minimum wages in kenya

Thi Minh Hanh Kieu Emanuel Ules

Unemployment and household formation in South AfricaMinimum Wages in Kenya

OUTLINE

21.04.23Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules2

1. Unemployment and Houdholdformation in South AfricaI. Literature ReviewII. Data/MethodIII. Interpretations of Unemployment and Houshold FormationIV. Conclusions

2. Minimum Wages in KenyaI. Minimum WagesII. Research QuestionIII. Various Important IssuesIV. Conclusions

3. Discussion

Unemployment and household formation in South Africa

21.04.23Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

3

Paper by:Stephan Klasen and Ingrid Woolard, Presentation by:

Thi Minh Hanh Kieu

Background


• A middle income country, economy depends considerably on mining and mineral activities, a sizeable manufacturing sector, a large service sector, and a very low-productivity, small-scale agricultural sector

• Apartheid system in place until the transition to black majority rule in the early 1990s impact:˃˃

→ unemployment increased very rapidly in the 1980s and, by the 1990s → unemployment, employment, and earnings continue to differ greatly by race → the uneven population distribution of Africans

• the one source of social security comes in the form of fairly generous non-contributory means-tested old-age pensions.

• South Africa - one of the highest reported unemployment rates in the world.

• Unusual are the higher rural unemployment rates - far higher than anywhere in the developing world.

Main research questions


• How do the unemployed sustain themselves in a country where only about 3% of the unemployed are receiving unemployment support?

• How can it be that unemployment is so high in rural areas?

Literature Review


• Edmonds et al. (2005) and Bertrand et al. (2003): household formation in South Africa.

→ find that the presence of an old-age pensioner alters the household composition of the household housing that pensioner

→ that the presence of an old-age pensioner is correlated with a reduction in labour supply of prime-age individuals in that household

• Rosenzweig and Wolpin (1993, 1994): the resource allocation of parents in the US towards their children in the form of transfers and co-residence.

→ there exists a limited trade-off between parental and government aid to children and that unemployment significantly increases the chance of staying with one’s parents or receiving a transfer.

• Börsch-Supan (1986), Ermish and Di Salvo (1997) study on household formation:

→ housing prices significantly influence the formation of households. → own income increases household formation, parental income reduces it,

and unemployment also serves to reduce household formation of young people in Britain

Empirical Framework


Descriptive Statistics using a person-level and household-level analysis


Findings:• The unemployed are

relatively widely distributed across households

• The most important source of resources for the unemployed are labour incomes of other household members

• Burden of unemployment on the unemployed and the households hosting them has increased over time

• The burden is divided unequally

Household formation patterns


The link between unemployment and household formation


Results


• Unemployment prevents the setting up of an independent household

• Many unemployed stay and remain unemployed in rural areas ˃˃ provide a disincentive to search and find employment

• The delayed household formation of the unemployed can also partly explain the unusually high rural unemployment rates in South Africa, due to

- The legacy of apartheid residential policies- Generous social pensions programme for the elderly

Consequences of household formation on unemployment


1. Impact on the welfare of the unemployed and the welfare of households hosting them

• This private safety net is essential and beneficial for most of the unemployed however, do not cover some

• Adding unemployed members pulls many households supporting them into poverty

2. The potential impact on search behaviour• The unemployed to households with pension or remittance

income, which might reduce search activities and employment prospects if the household is in rural


• However, when examining the determinants of reservation wages of the unemployed →little evidence of a direct disincentive effect of pension and remittance income on search activities and employment prospects

Conclusions


• Unemployment can persist at very high levels even in the absence of unemployment support

• A private safety net is clearly beneficial for the majority of the unemployed but not cover everyone ˃˃ some unemployed and their dependants in deep poverty.

• Reliance on a private safety net can generate disincentive effects that can prolong unemployment

Mabel AndalónCornell UniversityCarmen Pagés

Inter-American Development Bankand IZA

Minimum Wages in Kenya

Why Minimum Wages?


minimum wage is the lowest hourly, daily or monthly wage that employers may legally pay to employees

PRO increases the standard of living of workers and reduces

povertyStimulates consumption

CONTRA increases unemployment, particularly among workers with

very low productivityMay stimulate inflation, because businesses try to compensate

higher wages by raising the prices of goods

Standard Textbook example


Arguments for Minimum Wages


The efficiency-wage argument states that higher wages can increase workers’ productivity, which in turn allows employers to pay higher wagesHigher productivity through: improving nutrition (in developing

countries)and investment human capitalBut maybe also tougher selection: people with higher

producitivty get hiredmain reason for instituting minimum wages is to protect

workers by the excessive market power of employersSweat Shops

Research Question


Authors are investigating on the effect of minimum wage legislation in terms of (i) enforcement and covering, (ii) general wage level and (iii) unemployment

Data & Method


Central Bureau of Statistics (Economic Survey, various years) Houshold data 1998/99 - Integrated Labour Force Survey

11,040 householdsMinimum Wages in Kenya:

All in all 17 different levels; according to region, age and profession

Regression for wagesFor employment:

Important Issues (i) – Compliance and Enforcement


Min. wages are set at quite high levels relative to the median wage, non-compliance is high and the fraction of workers that receive wages at the minimum is relatively small

Enforcement: “even the government itself does not adhere to the minimum wage regulations“Compliance rate very low esp. in agriculture and for womenAbout 24 percent of the salaried workers in agriculture and 17

percent of salaried workers in non-agricultural activities in urban areas earned monthly wages below the statutory minimum

Results show that the higher the minimum wage, the lower the rate of compliance

Important Issues (ii) – Wage Level and Distribution


to check for the influence of minimum wages: look at wage distribution and see if a large number of workers are bunched around minimum wage levels no influence: normal distribution

minimum wages push up wages of less educated workers as well as of women but most results are at best weakly significant

Important Issues - Employment


Minimum wage seems to influence negatively employment in formal sector but positively self-employment and employment in informal sectorGood thing? NO

10 % increase in minimum wage/median wage ratio 5.6 percentage points decline in the share of formal employment and a 5.9 percentage points increase in the share of self-employment.

BUT results are very ambiguousEspcially due to bad data quality

Conclusions


minimum wages might be pushing up the level of urban wages for formal workers in urban area

Minimum Wages are not a good tool to fight poverty, but protect workers from excessive power of employers

Too many different minimum wage regulations sometimes outdated

Low compliance and enforcement effect of minimum wage can go in any direction

Questions and Discussion


1. Are public support and private safety net the reason for high level of unemployment in the rural in South Africa?

2. How are impacts of household formation on the employment and unemployment ?

3. Are Minimum Wages leading to unemployment or do they boost income of the poor?

unemployment and household formation in south africa minimum wages in kenya

Documents

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kenyadevelopment workshop

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household housing

household composition

formation of households

oldage pensioner