participants, changes in their productive capacity caused by unemployment and the resulting
consequences for wage bargaining and the matching process between workers and jobs. The
general idea is that a distinction be drawn between insiders and outsiders in the labour market, i.e.
a dual labour market exists. Each of these groups carry different weights in the wage bargaining
process. When unemployment by itself tends to reinforce the outsider status of those affected,
then the moderating impact of higher unemployment on wages will vanish over time. The same
result will emerge when the (employed) insiders have sufficient market power, probably fostered
by employment protection regulations, to safeguard their income claims and employment status
against outside labour market conditions. Finally, a growing number of unemployed outsiders
may create information distortions in the labour market, thereby making it more difficult to form
suitable matches between workers’ characteristics and the skill requirements of potentially
available jobs.
A number of hysteresis-mechanisms,4 which could lead to permanent shifts of equilibrium
unemployment over time, have been identified. The most suitable mechanism to explain the
South African situation operates through changes in human capital. According to this view,
prolonged periods of unemployment may lead to a deterioration of skills and important
attitudinal aspects of the work ethics and motivation of individual job seekers. In addition, when
out of work, there are no opportunities for learning-by doing and on-the-job training. The loss
of skills during unemployment may also lead to duration dependence in the probability of leaving
unemployment, i.e. the likelihood that unemployed workers move to employment is likely to fall
as the duration of unemployment increases. Furthermore, discouragement effects may over time
loosen the attachment to the work force resulting in reduced job search intensities.
Even when the quantitative importance of human capital depreciation is considered to be fairly
small, the mere fact of being out of work for a long time may convey a negative signal about
workers’ productivity to potential employers. Consequently, the long-term unemployed may
Pichelmann and Schuh (1997) present a theoretical model in explaining the occurrence and
effects (supply- and demand-side effects) of hysteresis on the equilibrium level of unemployment.