Go, Delfin S.; Kearney, Marna; Korman, Vijdan; Robinson, Sherman; Thierfelder, Karen
Description:
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.