Surviving Unemployment Without State Support: Unemployment and Household Formation in South Africa

TLDR

South Africa’s open unemployment rate is about 30%, especially high in rural areas, despite the absence of unemployment insurance and limited labour‑market regulation. The study investigates how unemployment can persist in South Africa without access to unemployment compensation. Using household survey data from 1993–2006, the authors analyze how unemployed individuals form or dissolve households and rely on state transfers such as non‑contributory old‑age pensions as a private safety net. Unemployment delays young people’s household formation by years, can cause household dissolution and return of members to relatives, pulls households into poverty when unemployed members lack state transfers, and reduces employment prospects by diverting unemployed away from job opportunities.

Abstract

While in many African countries open unemployment is largely confined to urban areas and thus overall rates are quite low, in South Africa open unemployment rates hover around 30%, with rural unemployment rates being even higher than that. This is despite the near complete absence of an unemployment insurance system and little labour market regulation that applies to rural labour markets. This paper examines how unemployment can persist without access to unemployment compensation. Analysing household surveys from 1993, 1995, 1998, 2004 and 2006, we find that the household formation response of the unemployed is the critical way in which the unemployed assure access to resources. In particular, unemployment delays the setting up of an individual household by young persons, in some cases by decades. It also sometimes leads to the dissolution of existing households and a return of constituent members to parents and other relatives and friends. Access to state transfers (in particular, non-contributory old age pensions) plays an important role in this private safety net. Some unemployed do not benefit from this safety net, and the presence of unemployed members pulls many households supporting them into poverty. We also show that the household formation response draws some of the unemployed away from employment opportunities, and thus lowers their employment prospects.