Given South Africa’s small formal labour market and high unemployment, it is important to know whether the regulation of an informal employment sector could have a real impact on the earnings and the conditions of employment within such a segment, especially when there is weak monitoring and enforcement.

With reference to the introduction of minimum wages and mandatory employment contracts for domestic workers, which became effective in 2002-2003, we look at the effects of these regulations in this sector (see Dinkelman & Ranchhod 2012). We find that, despite only partial compliance amongst employers and a very weak monitoring and penalty regime, the average hourly wage for domestic workers increased substantially across the board. We also see a rise in monthly earnings, explained by the fact that employers did not respond to the increased wage by reducing the working hours or dismissing employees. Over and above this, the proportion of domestic workers with a formal employment contract, unemployment insurance contributions and pension contributions rose substantially.

These findings suggest that labour market legislation of this kind could aid the formalisation of working conditions and improve the earnings of workers in a large informal labour market. Many employers reacted positively even in the absence of monitoring and penalties (at least in the short run).

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Written by Taryn Dinkelman, Assistant Professor, Dartmouth College; Vimal Ranchhod, Chief Research Officer, SALDRU, University of Cape Town; and Clare Hofmeyr, Researcher, SALDRU, University of Cape Town.

This article was first published on the Econ3x3 website – Accessible policy-relevant research and expert commentaries on unemployment and employment, income distribution and inclusive growth in South Africa.