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

2. OUTLINE 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 2 1. Unemployment and Houdholdformation in South Africa I. Literature Review II. Data/Method III. Interpretations of Unemployment and Houshold Formation IV. Conclusions 2. Minimum Wages in Kenya I. Minimum Wages II. Research Question III. Various Important Issues IV. Conclusions 3. Discussion

3. Unemployment and household formation in South Africa 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 3 Paper by: Stephan Klasen and Ingrid Woolard, Presentation by: Thi Minh Hanh Kieu

4. Background 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 4 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.

5. Main research questions 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 5 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?

6. Literature Review 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 6 Edmonds et al. (2005) and Bertrand et al. (2003): household formation in South Africa. → find that 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

7. Empirical Framework 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 7

8. Descriptive Statistics using a person-level and household-level analysis 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 8 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

9. Household formation patterns 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 9

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11. The link between unemployment and household formation 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 11

12. Results 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 12 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

13. Consequences of household formation on unemployment 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 13 1. 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

14. 13.09.2015 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

15. Conclusions 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 15 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

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

17. Why Minimum Wages? 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 17 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

18. Standard Textbook example 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 18

19. Arguments for Minimum Wages 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 19 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

20. Research Question 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 20 Authors are investigating on the effect of minimum wage legislation in terms of (i) enforcement and covering, (ii) general wage level and (iii) unemployment

21. Data & Method 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 21 Central Bureau of Statistics ( Economic Survey, 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:

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23. Important Issues (i) – Compliance and Enforcement 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 23 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 minimum wage regulations“ Compliance rate very low  esp. in agriculture and for women About 24 percent of the salaried workers in agriculture and 17 percent of salaried workers in non-agricultural activities in urban areas earned monthly wages below the statutory minimum Results show that the higher the minimum wage, the lower the rate of compliance

24. Important Issues (ii) – Wage Level and Distribution 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 24 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

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26. Important Issues - Employment 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 26 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

27. Conclusions 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 27 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

28. Questions and Discussion 13.09.2015 Development Workshop, Thi Minh Hanh Kieu & Emanuel Ules 28 1. Are public support and private safety net the reason for high level of unemployment in the rural in South Africa? 2. How are impacts of household formation on the employment and unemployment ? 3. Are Minimum Wages leading to unemployment or do they boost income of the poor?