South Africa’s ‘hidden’ economy that doesn’t pay tax is facing a crisis
The latest employment data from Stats SA has triggered a hidden alarm bell in the country’s informal economy, which has seen a 12% contraction in workers over the past year.
According to Aluma Capital Chief Economist Frederick Mitchell, this is a brutal decline and signals an alarming trend for what is considered a “safety valve” in the wider economy.
This is also apparent in ‘crossover’ economies, such as private household employment, which has also contracted by 8% year-on-year, with a staggering loss in domestic worker jobs.
Mitchell noted that, in developing economies, the informal and domestic sectors function as vital economic shock absorbers.
“When formal corporate payrolls retrench, displaced workers traditionally establish informal enterprises, micro-retail operations, or casual service roles to survive,” he said.
“In South Africa today, that safety valve is failing.” The informal sector shed 98,000 jobs in the third quarter alone, a 2.7% decline.
Measured against the same period last year, the informal economy has haemorrhaged 485,000 jobs—what the economist characterised as “a brutal 12.2% annual contraction”.
Concurrently, private household employment dropped by 68,000 jobs in Q3 (−6.2% QoQ) and 87,000 jobs year-on-year (−7.9%).
The domestic worker segment alone lost 31,000 positions during the quarter (−48,000 YoY).
Mitchell said this points to acute strain on household balance sheets, where households are being crushed by high cumulative inflation, steep municipal utility tariffs, and elevated debt-servicing costs.
“Middle-class households have been forced to retrench domestic staff,” he said.
According to Nedbank, a modest gain in employment of 101,000, with strong hiring in the formal sector, offset losses in the household and informal sectors.
However, employment growth remained insufficient to absorb the expanding labour supply.
Consequently, the unemployment rate edged up from 33.6% to 33.7%, its highest level since Q2 2022.
Mitchell’s view of the data is that displaced informal and domestic workers are not transitioning into formal corporate offices, but instead falling directly into long-term joblessness.
“Stats SA reports that 80.3% of the unemployed have been seeking work for a year or more. The informal floor has buckled, leaving millions without an economic foothold,” he said.
South Africa’s informal economy is well hidden
The scale of South Africa’s informal economy is difficult to pin down due to its ‘off the books’ nature.
Previous estimates of the scale from groups such as Standard Bank had pegged it at around R1 trillion.
More recently, Stats SA revised and rebased its GDP data for the country and expanded the net of informal contributions to what it calls the “non-observed economy” (NOE).
Before the revisions, the NOE accounted for roughly 7.3% of GDP, capturing traditional informal activities such as spaza shops, informal taxis, street hawkers, shebeens, and informal recycling.
Following the change in data, the NOE expanded to 8.7% of GDP, incorporating broader categories, including informal and illegal activities such as illegal mining, e-hailing, and gambling.
As a result of the changes, the NOE increased from an estimated R487 billion to about R608 billion—though many still believe this is an underestimation.
Former Capitec CEO Gerrie Fourie has long been critical of the official data on the informal economy, particularly in terms of scale and jobs.
He said South Africa faces a significant challenge in understanding the local informal economy and how many individuals are employed in it.
This is because much of the economy is undocumented and untraced and simply does not appear in economic statistics on GDP and employment.
He famously expressed the view that, in reality, unemployment in South Africa is between 10% and 15% because of these gaps.
He has also expressed the view that South Africa’s social grants system is part of the reason, as many informal workers would actively try to hide their employment status to cash in on government grants.
“If you ask someone who gets a social grant if they are employed or unemployed, they will never say employed,” Fourie said.
“The moment that they say ‘I’m employed’, they lose all their social grants. There is no way they are going to answer: Employed.”
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