High Unemployment Yet Few Small Firms: The Role of Centralized Bargaining in South Africa

South Africa has very high unemployment, yet few adults work informally in small firms. This paper tests whether centralized bargaining, by which unionized large firms extend arbitration agreements to non-unionized smaller firms, contributes to this problem. While local labor market characteristics influence the location of these agreements, their coverage is spatially discontinuous, 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 controls for unobserved heterogeneity. ∗University of California, Berkeley. I thank Guojun He and Charles Seguin for excellent research assistance and John Bellows for alerting me to some of the data used in this study. I also thank Michael Anderson, Lori Beaman, Tim Conley, Ann Harrison, Elisabeth Sadoulet, Paul Schultz, Chris Udry and seminar audiences at Berkeley, USC, UCSD, the World Bank, the University of Stellenbosch, the University of Cape Town, The University of the Witwatersrand, the University of Pretoria, Yale, and Northwestern for many helpful comments, and also Economic Research Southern Africa for organizing a workshop and facilitating seminars in South Africa. All remaining mistakes are naturally my own.