This report analyzes the causes and consequences of South Africa’s high rates of unemployment and the unique nature of labor market exclusion in the country. South Africa faces three interacting challenges: abnormally high poverty rates, the highest rate of inequality in the world, and the highest rate of unemployment in the world. When we put South Africa’s labor market issues in an international context, South Africa’s first labor market challenge is similar to that of other developing countries: expanding
formal, wage work. Where South Africa is unique is that it additionally faces the challenge of having a labor market where those excluded from wage work are more likely to be unemployed rather than working in informal, own-account jobs. There is also a large wage penalty for informal work (or premium for formal work) in South Africa that is consistent with the labor market outcomes we see. Section III of this report examines potential “push” and “pull” factors and finds little evidence for the various “pull” explanations. The diagnostic evidence of the informality puzzle emphasizes the need for more research and policy attention on issues of space, transport, density, and urban regulation. Growth through inclusion in South Africa must include addressing the problem of low formal work, but also should include higher levels of informal work.