• Chart of the Week
  • October 20, 2021

Informational barriers to hiring

A woman in Johannesburg, South Africa, irons customer clothing for a dry cleaning service.

Source: The Light Writer 33

South Africa is the continent's most industrialized economy and yet it has struggled with levels of joblessness over 20 percent for the last quarter century. This summer, the country’s unemployment rate hit a new record high of 34.4 percent—the highest in the world.

The explanations for this subpar performance range from a poor education system to an overly strict regulatory environment. 

But an underappreciated part of the story may stem from misperceptions on the part of small businesses, according to a paper in the American Economic Journal: Applied Economics.

Authors Marianne Bertrand and Bruno Crépon partnered with a labor law organization that provides concise information about labor regulation via newsletters and access to a specialized website with a case law library, a discussion forum, video tutorials, and a database of legal template documents. 

The researchers randomly gave 1,800 small to medium-sized South African businesses free access to this organization’s services for a 21-week period.

Figure 2 from the authors’ paper shows what happened to employment by the end of their experiment.

 

 

Figure 2 from Bertrand and Crépon (2021)

 

The x-axis represents the number of employees. The y-axis indicates the share of businesses with employees at or below a given point on the x-axis—what’s known as a cumulative distribution function.

The chart shows that the cumulative distribution for the companies that were given services (dashed line) is always to the right of the cumulative distribution for those that were not (solid line), and often outside the 95 percent confidence interval (purple shaded region).

For instance, the smallest 50 percent of firms in the control group had less than or equal to about 50 employees by the end of the experiment, while the smallest 50 percent of treated firms had slightly more than 50 employees. 

Overall, the average employment level at treatment firms was 12 percent higher than at control firms about six months after the program started. The results indicate that having more information about labor regulations decreases the perception that regulations are a constraint to hiring and increases the optimal level of employment at small businesses.

Teaching Labor Laws: Evidence from a Randomized Control Trial in South Africa appears in the October 2021 issue of the American Economic Journal: Applied Economics.