A high unemployment and labour market segmentation : a three-segment macroeconomic model

Background: South Africa suffers from an unusually high unemployment rate – officially averaging 25% since 1999Q3. In addition, depending on whether one uses the official or broad definitions of unemployment, since 2008 there are on average between 2 and 3.3 times as many unemployed people as there are people in the informal sector. Hence the question: why do the unemployed not enter the informal sector to create a livelihood? Aim: To fill this gap we propose a macroeconomic framework that incorporates both formal (primary) and informal (secondary) sectors, as well as involuntary unemployment resulting from entry barriers to the labour market. We believe such a model provides a more suitable basis for macroeconomic policy analysis. Setting: Standard macroeconomic theories at best provide a partial explanation for the South African unemployment problem, focusing mostly on the formal sector. Methods: The article uses a theoretical analysis. Results: The article presents a macroeconomic framework that incorporates both formal (primary) and informal (secondary) sectors, as well as involuntary unemployment resulting from entry barriers to the labour market. Conclusion: If the assumptions on which the model draws hold in the South African reality, then a solution to the unemployment problem involve policies addressing product and labour market structures and behaviour in the primary sector, as well as policies addressing the numerous barriers to entry, such as borrowing constraints, that potential entrants into the secondary sector face.