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Gains across seven sectors diluted by heavy losses in retail and manufacturing
By Thanda Sithole, FNB and WesBank Senior Economist
South Africa’s latest labour market figures show a decline in unemployment, but beneath the headline lies a more sobering reality: the improvement masks underlying weakness in the labour market.
At first glance, the fourth quarter of 2025 delivered encouraging news. Formal sector employment rose sharply, and the official unemployment rate dropped to 31.4%. Yet a closer look reveals that this improvement was driven less by job creation and more by falling participation. In fact, more than 127 000 people exited the labour force during the quarter, even as the working age population grew by 120 055.
This dynamic points to a troubling trend. Employment gains in the formal sector were almost entirely offset by steep losses in informal sector jobs, resulting in only marginal net job creation. Seven of ten sectors recorded employment growth, led by community services, construction, finance, and agriculture. Yet large job losses in retail and manufacturing erased much of this progress, underscoring the structural constraints within South Africa’s labour market.
Most concerning is the continued rise in discouraged jobseekers. Nearly a quarter of a million people stopped looking for work compared to a year ago. Discouragement is the hidden story of South Africa’s labour market. While these individuals fall outside the official unemployment rate, they remain part of the country’s economic reality. They effectively represent hidden slack, lost productivity, and mounting social strain.
The labour absorption rate stood at just 40.6% in late 2025, far below the 46.2% peak before the 2008/09 global financial crisis. This long-term decline reflects structural weakness, not temporary cycles. Over time, manufacturing and retail have steadily lost ground, while services such as finance and community work have expanded. The economy is shifting toward services but struggling to generate the scalable, higher productivity jobs that goods producing industries once provided.
The broader message is clear, South Africa is not creating jobs at a pace sufficient to absorb its growing population. Participation is weakening, discouragement is rising, and inequality remains entrenched. The challenge is not simply to lower the unemployment rate statistically, but to raise labour absorption meaningfully and sustainably.
Achieving this requires faster growth and deeper structural reforms. Small and medium sized enterprises (SMEs) must be central to this effort. They already account for more than 30% of employment and contribute significantly to the economy’s Gross Value Added. Yet regulatory complexity, financing constraints, and infrastructure bottlenecks continue to hold them back.
Targeted reforms to unlock SME potential could prove transformative. Measures such as clarifying SME-related credit regulation provisions, improving title deed systems to enable collateral, fostering open banking frameworks, and deepening venture capital markets (see IMF) would expand funding options and unleash entrepreneurial energy.
Government efforts to support youth employment, including through the Presidential Employment Stimulus, remain critical. The programme has created 2 519 162 jobs and livelihood opportunities, the majority of which are in basic education. The latest Budget allocates R4.1 billion in 2026/27 to sustain this intervention. Complementary small-business measures, notably the increase in the VAT compulsory registration threshold and the turnover tax threshold from R1 million to R2.3 million, lower compliance costs and reduce barriers to formalisation.
While these reforms are supportive in addressing unemployment and discouragement at the margin, broader and more decisive interventions will be required to materially improve operating conditions for small businesses and meaningfully strengthen labour absorption. Ultimately, South Africa requires an economy where increased participation is driven by expanding opportunities.
Until then, falling unemployment figures will offer only partial comfort. The headline may improve, but the underlying story remains one of fragility rather than recovery.
INFO SUPPLIED.