Policy Paper 16

South Africa has very high unemployment, yet few adults work informally in small firms. One potential contributor to this problem is that large firms and unions can extend arbitration agreements to non-unionized smaller firms, raising wages. While local labor market characteristics influence the location of these agreements, they are enforced in a spatially discontinuous way, allowing identification by spatial regression discontinuity. Centralized bargaining agreements are found to decrease employment in an industry by 8-13%, with losses concentrated among small firms. These effects are not explained by resettlement to uncovered areas, and are robust to a wide variety of forms for average spatial heterogeneity.