Answer to Question #204618 in Microeconomics for Lungiswa

Question

According to the theory of the labour market the market mechanisms of supply and demand will naturally move towards equilibrium, where unemployment will be at its natural rate. However for more than 25 years South Africa’s unemployment rates have been among the highest in the world. Using your knowledge of the South African labour market as well as the theory of the firm examine why South Africa is faced with such high levels of unemployment. 

Answer 1

The unemployment problem remains the biggest elephant in the house for the government of South Africa with each year bringing forth a surge in the number of citizens entering the labour market. The challenge of unemployment can be traced back to many centuries back but it became a major concern after the end of apartheid. In 1994, the unemployment rate stood at 31.5% (expanded definition) and 35.1% in 2014; this menace can be attributed to several factors, some of which are firm and individual-related:

(i) The government sought reserve jobs, at the end of apartheid, for those who had suffered the racial prejudice, whether skilled or unskilled leading to a surge in public wage bill and quest for the white-collar job by every South African;

(ii) increase in the number of women entering the labour market and the young population led to a mismatch between labour supply and demand;

(iii) the 2008/09 global recession adversely affected the economy of South Africa leading to massive losses especially in the manufacturing industry owing to reduced aggregate demand in the local and international markets;

(iv) the unceasing high wage demands by the trade unions have made the government of SA freeze employment to mitigate high public wage bill leading to a decline in new employments, and

(v) low level of uptake of entrepreneurial activities by the South Africans is also connected to a high level of unemployed citizens who would have otherwise secured opportunities through self-employment, most SMEs are owned by foreign proprietors.

The graph below illustrates the unemployment trends in SA between 1994 and 2014: