Watts happening to work? The labour market effects of South Africa’s electricity crisis

In South Africa, the power grid undergoes rotational, scheduled outages—or rolling blackouts—most commonly referred to as load shedding. Load shedding is primarily a consequence of frequent breakdowns at the national utility. These are due to a combination of poor long-term planning, a lack of financial resources, rampant state capture and corruption, and aging coal-fired power stations. Four of every five (80%) of South Africa’s coal-fired plants are past their mid-life cycle.

Power outages have become significantly more frequent and severe in recent years. In 2008, when about 85% of generation capacity was available, just 171 megawatts (MW) of demand went unmet, or were ‘shed’, in the average day. Compare this to over 4,000 MW of unmet demand per day in 2023—the worst year on record—when only 50% of generation capacity was available. Put differently, in 2023 load shedding was in place for a total of 289 complete days. Several studies find that these outages reduce economic growth, but ours is the first to examine their labour market effects, as far as we know.

The economic toll of power outages

Power outages have long been identified as a major constraint to economic growth in lower-income countries. Many studies document their negative effects on various outcomes such as economic growth, firm productivity, and sales. It is unsurprising then that the estimated demand for reliable electricity, as measured by the willingness to pay to avoid outages, in such contexts, is relatively large. Given these effects, and the relationship between economic output and employment, outages are expected to also significantly affect labour market outcomes.

These effects are of particular interest given the labour market’s central role in determining socioeconomic wellbeing globally. This is especially the case in high-unemployment contexts, like South Africa, where decent employment generation is key to achieving meaningful poverty alleviation. We consider this very question and analyse the labour market effects of electricity outages in South Africa in a recently released SA-TIED Working Paper.

Labour shedding amid load shedding

We model the labour market impacts of load shedding in South Africa using over 15 years’ worth of nationally representative labour force survey data, covering nearly 3 million individuals, merged with macroeconomic data and high-frequency electricity data from 2008 to 2023.

We find that load shedding is significantly and negatively associated with employment, working hours, and monthly earnings. On average, periods of load shedding are associated with a 2.6% lower chance of being employed, 1.3% fewer working hours per week, and 1.7% lower real monthly earnings. These are large, non-negligible effects. We do not find evidence of a relationship with hourly wages, which suggests that the monthly earning reductions are driven by fewer working hours.

Importantly, all these associations are not evident for low levels of load shedding but instead tend to become markedly worse with higher levels. We do not find any evidence of negative associations for stages 1 and 2, but from stage 3 upwards, we show that the average negative association become significant and stronger. For context, stage 1 refers to up to 1,000 MW of unmet demand, and stage 6 to up to 6,000 MW of unmet demand, with intermediate stages falling proportionally within this range.  For employment, for instance, stage 3 is associated with 1.9% lower employment, compared to 3.6% for stages 4 and 5, and almost 6% for stage 6—more than double the average association.

These effects do not, however, affect all firms equally. Manufacturing firms appear particularly vulnerable. On average, load shedding is associated with nearly 17% lower manufacturing employment, which is about 6.5 times larger than the average for all firms. In terms of working hours, load shedding induces larger reductions in small firms than large ones. Our results suggest that small firms tend to favour reducing working hours rather than introducing layoffs, a finding which is not unique to South Africa.

Overall, then, our analysis reveals three key sets of results. First, load shedding in South Africa has negative labour market effects on both employment—the extensive margin—as well as working hours and monthly earnings—the intensive margin. On average, the effects on employment are larger than the effects on working hours or earnings, which highlights the threat that load shedding poses to job preservation and creation efforts. Second, these effects are not distributed equally across firms, with those in energy-intensive manufacturing appearing particularly vulnerable. Third, effects are non-linear with respect to load shedding intensity. In other words, the labour market appears to be largely insensitive to relatively low levels of load shedding, but high levels are particularly costly. Importantly, the lack of effects at low levels does not imply that low levels should be tolerated, given the negative effects in non-labour market outcomes such as economic output.

Escalating economic risks: the critical need for strategic energy policy adjustments

These results highlight the significant negative effects of load shedding on the real economy. From a policymaking perspective, while support to firms and households ought to continue to be considered, the primary goal must be to rapidly reduce both the frequency and intensity of these outages and, ultimately, eliminate them. Recent events are encouraging. Efforts by the national utility have resulted in fewer breakdowns and improved generation capacity, while deregulation and tax incentives appear to have increased demand from households and firms for alternative energy sources like solar. Consequently, electricity supply has been uninterrupted for more than one month as of this writing.
However, South Africa’s energy system remains unstable and supply is expected to be constrained in the medium-term. Longer-term policy decisions revolve around further diversifying the energy mix beyond coal, accelerating the transition towards renewable energy sources, incentivizing private investment, and, overall, building a more resilient and sustainable energy system.