Firm and Worker Effects of Employment Equity Legislation: Evidence from South Africa

Abstract

Post apartheid South Africa implemented the world’s largest affirmative action policy of the labor market, operating through the private sector. This paper analyzes the effects of such policy on firms and workers using matched employer-employee data, exploiting a natural experiment where certain firms unexpectedly no longer were subject to the legislation. Within a regression discontinuity framework, we find that the removal of the employment equity legislation improves firm productivity by 11%, with heterogeneous results by broad industry. Firms in those industries that respond to the legislation change, alter the composition of their workforce. Over a four year horizon this results in a productivity increase in some industries, and a decrease in others. Tracking individuals over time, we find a positive effect on individuals exposed to the legislation change: workers exposed to the removal of the legislation because their employer is no longer subject to it, experience an increase in their wages over the four year period following the policy change.