As South Africa liberalized and opened its economy to trade, production in agriculture and mining declined and production shifted towards capital-intensive manufacturing and highskilled services, exacerbating the weak demand for less-skilled labor. See Edwards (2001) and Fedderke, Shin, and Vase (1999) among others for a more detailed discussion. A key factor in the economic transformation and structural change of the South African economy is the relative decline of the tradable sectors, particularly the manufacturing sector but also agriculture and mining, where employment is traditionally generated. The absolute number of jobs in the three sectors declined between 1994 and 2004. Employment fell by 12 percent in the agricultural sector, by 29 percent in the mining sector, and by about 12 percent in the manufacturing sector. The non-tradable sectors such as finance and business services grew the most, but they primarily are primarily skilled labor-intensive. See, for example, Hausmann (2008) as well as Rodrik (2006).

Another significant factor is the rise in real wages, which directly dampens labor demand. This rise is not a recent phenomenon and has persisted for several decades. The average growth of real wages was about 1.3 percent per year in the 1980s and 1.5 percent per year in the 1990s. Lewis (2001) estimates that real wages for unskilled and semi-skilled workers in particular have risen by 150% from 1970 to 1999. At the same time, unemployment among unskilled and semiskilled workers rose significantly from less than 10 percent in 1970 to over 50 percent in 1999. The evolution of real wages is, however, subject to measurement and interpretation issues. Banerjee _et al._ (2007), for example, measure employed hours worked in “efficiency units” and find instead that “real wages per unit of human capital” have increased only slightly from 1995 to 2005. On the other hand, labor policy and minimum wage legislation since 1994, which were designed to correct the inequities and disparity of the Apartheid era, have significantly increased the indirect non-wage labor cost.

The protection of labor has the indirect consequence of increasing labor market rigidities through reduced labor mobility, increased frictions to exits from employment, as well as the additional cost of compliance to labor regulations and of the negotiation processes with labor unions – see, for example, Nattrass (2000) and Moolman (2003). In addition to the implied wage premia arising from unions and labor market institutions, it is plausible that the high concentration ratios in the output markets noted by Fedderke, Kularatne, and Mariotti (2006), Aghion, Bruan, and Federkke (2006), and Hausmann (2008) limited competition and investment, thus reinforcing the slow growth of employment in the formal sector. In a survey of 325 large South African manufacturing firms, Chandra, Moorty, Rajaratman, and Schaefer (2001) document the behavioral consequences of the various labor market legislations – firms tend to hire fewer workers, substitute capital for labor when expanding, employ temporary workers as opposed to hiring permanent workers, and rely more on sub-contracting services.

There are also structural issues underlying the South African economy and labor markets. A key manifestation of the structural problem is the complementarity or lack of substitution between skilled and unskilled workers, with the skills constraint dampening the employment growth of less-skilled workers – see Hausmann (2008) and Levinsohn (2008). Significant factors include the dualistic structure of the South African economy and the economic shifts towards more high-skilled and capital-intensive economic activities. Implicit in the shift towards capital-intensive sectors and their demand for skilled labor is the relative complementarity

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