South Africa’s biggest crisis is worse than it seems

South Africa’s improving unemployment figures mask the reality that there is significant underlying weakness in the country’s labour market. 

This weakness shows that the country’s unemployment crisis runs deeper than it seems, with years of significantly faster economic growth required to meaningfully increase employment. 

FNB senior economist Thanda Sithole explained that much of the improvement seen in South Africa’s unemployment figures is due to a statistical quirk. This masks the 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%,” Sithole said. 

“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.”

Sithole said this dynamic points to a troubling trend, which is compounded when one looks at the employment data in more depth.

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.

Most concerning is the continued rise in discouraged job seekers, with nearly a quarter of a million people not 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,” Sithole said. 

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 is struggling to generate scalable, higher-productivity jobs that goods-producing industries once provided.

South Africa is failing

The reality is that South Africa’s economy is simply not creating jobs at a rate that can absorb its growing population, resulting in the unemployment rate steadily rising. 

“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,” Sithole said. 

Sithole explained that the solution lies in faster economic growth and deeper structural reforms, with small businesses being particularly crucial. 

These businesses already account for more than 30% of employment and contribute significantly to the economy’s GDP. 

Yet, regulatory complexity, financing constraints, and infrastructure bottlenecks continue to hold them back.

Targeted reforms to unlock the potential of small and medium businesses (SME) could prove transformative, with significant employment opportunities likely to be created along the way. 

“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 would expand funding options and unleash entrepreneurial energy,” Sithole said. 

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 value-added tax (VAT) compulsory registration threshold and the turnover tax threshold from R1 million to R2.3 million, have lowered compliance costs and reduced 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 and 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, Sithole said.