Unemployment and household formation in South Africa Minimum Wages in Kenya

1. Unemployment and household formation in South AfricaMinimum Wages in Kenya Thi Minh Hanh Kieu Emanuel Ules

2. OUTLINE • Unemployment and Houdholdformation in South Africa • Literature Review • Data/Method • Interpretations of Unemployment and Houshold Formation • Conclusions • Minimum Wages in Kenya • Minimum Wages • Research Question • Various Important Issues • Conclusions • Discussion Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

3. Paper by: Stephan Klasen and Ingrid Woolard, Presentation by: ThiMinh Hanh Kieu Unemployment and household formation in South Africa Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

4. 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. Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

5. 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? Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

6. Literature Review • Edmonds et al. (2005) and Bertrand et al. (2003): household formation in South Africa. • → findthat 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 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

7. Empirical Framework Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

8. Descriptive Statisticsusing 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 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

9. Household formation patterns Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

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11. The link between unemployment and household formation Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

12. 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 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

13. Consequences of household formation on unemployment • 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 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

14. 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 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

15. 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 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

16. Minimum Wages in Kenya Mabel Andalón Cornell University Carmen Pagés Inter-American Development Bank and IZA

17. 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 poverty • Stimulates consumption • CONTRA • increases unemployment, particularly among workers with very low productivity • May stimulate inflation, because businesses try to compensate higher wages by raising the prices of goods Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

18. Standard Textbook example Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

19. Arguments for Minimum Wages • The efficiency-wage argument states that higher wages can increase workers’ productivity, which in turn allows employers to pay higher wages • Higher productivity through: improving nutrition (in developing countries)and investment human capital • But maybe also tougher selection: people with higher producitivty get hired • main reason for instituting minimum wages is to protect workers by the excessive market power of employers • Sweat Shops Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

20. 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 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

21. Data & Method • Central Bureau of Statistics (EconomicSurvey, various years) Houshold data 1998/99 - Integrated Labour Force Survey • 11,040 households • Minimum Wages in Kenya: • All in all 17 different levels; according to region, age and profession • Regression for wages • For employment: Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

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23. 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 minimumwage regulations“ • Compliance rate very low  esp. in agriculture and for women • About 24 percent of the salaried workers inagriculture and 17 percent of salaried workers in non-agricultural activities in urban areasearned monthly wages below the statutory minimum • Results show that the higher the minimum wage, the lower the rate of compliance Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

24. 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 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

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26. Important Issues - Employment • Minimum wage seems to influence negatively employment in formal sector but positively self-employment and employment in informal sector • Good 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 ambiguous • Espcially due to bad data quality Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

27. 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 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules

28. Questions and Discussion • Are public support and private safety net the reason for high level of unemployment in the rural in South Africa? • How are impacts of household formation on the employment and unemployment ? • Are Minimum Wages leading to unemployment or do they boost income of the poor? Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules