By: Lonwabo Mtyeku | Pictures: Supplied – FNB
Seen Here: Thanda Sithole FNB & WesBank Senior Economist. Photo Credit: Supplied.
Johannesburg — South Africa’s unemployment rate has declined, offering a measure of optimism for the country’s struggling economy. However, economists warn that the latest figures conceal deeper structural problems within the labour market.
According to analysis by Thanda Sithole, Senior Economist at First National Bank and WesBank, the fourth quarter labour market data for 2025 shows that while the official unemployment rate dropped to 31.4%, the improvement is largely the result of declining labour force participation rather than strong job creation.
Participation decline masks reality
While formal sector employment recorded notable gains during the quarter, the positive momentum was offset by a significant drop in the number of people actively looking for work. More than 127,000 individuals exited the labour force, even as the working-age population grew by over 120,000 people.
This shift suggests that many South Africans have become discouraged in their job search and have stopped seeking employment altogether. Because these individuals are no longer classified as actively looking for work, they are excluded from the official unemployment statistics.
The phenomenon highlights what economists often describe as “hidden unemployment” — a growing pool of people who remain without work but are no longer reflected in headline figures.
Job gains offset by sector losses
Employment growth was recorded in seven out of ten sectors, with notable gains in community services, construction, finance and agriculture. However, these improvements were significantly diluted by heavy job losses in the retail and manufacturing sectors.
The decline in these industries reflects deeper structural changes in the economy. Over time, South Africa’s economic activity has gradually shifted away from goods-producing industries such as manufacturing toward service-oriented sectors.
While services like finance and community work continue to expand, they have struggled to create jobs at the scale historically generated by industries such as manufacturing and retail.
Rising discouragement among job seekers
Perhaps the most troubling development is the surge in discouraged job seekers. Nearly 250,000 people stopped actively searching for employment compared to a year ago, signalling growing frustration among job seekers facing limited opportunities.
These discouraged workers remain a critical part of the labour market reality. Although they are excluded from official unemployment calculations, they represent lost productivity, rising inequality and increasing social strain.
Long-term structural challenges
The country’s labour absorption rate — which measures the proportion of working-age people who are employed — stood at 40.6% in late 2025. This is significantly lower than the 46.2% peak recorded before the Global Financial Crisis, highlighting a long-term decline in employment capacity.
Economists say this trend reflects structural weaknesses rather than temporary economic cycles. South Africa’s economy has struggled for years to create enough jobs to keep pace with a rapidly growing population.
SMEs seen as key to job creation
Experts argue that small and medium-sized enterprises (SMEs) will play a crucial role in reversing the country’s employment challenges. SMEs already account for more than 30% of employment and contribute significantly to the country’s economic output.
However, many small businesses continue to face major obstacles, including regulatory complexity, limited access to finance and infrastructure challenges.
Policy reforms aimed at supporting SMEs — such as improving credit regulations, expanding venture capital funding and strengthening property title systems — could help unlock entrepreneurial activity and stimulate job creation.
Government interventions underway
Government programmes designed to address unemployment are also playing a role. The Presidential Employment Stimulus has created more than 2.5 million job and livelihood opportunities, many within the basic education sector.
In the most recent national budget, the government allocated R4.1 billion for the 2026/27 financial year to sustain the programme.
Additional measures aimed at supporting small businesses include increasing the VAT compulsory registration threshold and the turnover tax threshold from R1 million to R2.3 million, helping to reduce compliance costs and encourage formal business activity.
Fragile progress
Despite these efforts, economists caution that South Africa’s labour market recovery remains fragile. Without stronger economic growth and deeper structural reforms, improvements in unemployment figures may continue to mask the deeper issues affecting job creation.
Ultimately, experts say the real measure of progress will be whether the economy can increase labour participation and create sustainable employment opportunities for millions of South Africans seeking work.
Until that happens, falling unemployment rates may offer temporary reassurance — but they do not yet signal a true turnaround in the country’s labour market.
