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Wage subsidy and labor market flexibility in south Africa, Volume 1
 
Author:Go, Delfin S.; Kearney, Marna; Korman, Vijdan; Robinson, Sherman; Thierfelder, Karen; Country:Southern Africa;
Date Stored:2009/03/23Document Date:2009/03/01
Document Type:Policy Research Working PaperSubTopics:Access to Finance; Economic Theory & Research; ; Labor Markets; Labor Policies
Language:EnglishMajor Sector:Public Administration, Law, and Justice
Rel. Proj ID:3S-Za Econ Modeling On Wage Subsidy And External Shocks -- -- P104299;Region:Africa
Report Number:WPS4871Sub Sectors:General public administration sector
Collection Title:Policy Research working paper ; no. WPS 4871Volume No:1

Summary: In this paper, the authors use a highly disaggregate general equilibrium model to analyze the feasibility of a wage subsidy to unskilled workers in South Africa, isolating and estimating its potential employment effects and fiscal cost. They capture the structural characteristics of the labor market with several labor categories and substitution possibilities, linking the economy-wide results on relative prices, wages, and employment to a micro-simulation model with occupational choice probabilities in order to investigate the poverty and distributional consequences of the policy. The impact of a wage subsidy on employment, poverty, and inequality in South Africa depends greatly on the elasticities of substitution of factors of production, being very minimal if unskilled and skilled labor are complements in production. The desired results are attainable only if there is sufficient flexibility in the labor market. Although the impact in a low case scenario can be improved by supporting policies that relax the skill constraint and increase the production capacity of the economy especially towards labor-intensive sectors, the gains from a wage subsidy are still modest if the labor market remains very rigid.

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