There is significant consensus that unemployment and more generally, exclusion from the labour market,is the central socio-economic problem in South Africa. Joblessness is strongly implicated in such socio-economic problems as crime, poverty, alcoholism, HIV-AIDS, and even poor educational outcomes and low skill levels (see for example Bhorat etal.2001; Fryer and Vencatachellum, 2004; Nattrass, 2003).The literature flowing from household survey data has however tended to confine itself to measuring unemployment and its consequences. In doing this, it tends to treat unemployment as something that happens to individuals and communities. However, factors such as unemployment and poverty will have obvious feedback effects on the current capabilities of individuals, on the intergenerational transmission of capital (and especially human capital) and on social and market structure. Below critical threshold levels, such factors can generate market and coordination failures. The distortions generated by unemployment can become endogenized in the sense that they become part of the cause of unemployment. To date, there is no clear understanding in the South African literature as to whether such endogenous factors are important and how they interact with other factors such as so-called imposed distortions (caused, for example by labour legislation and union wage premia) and other macroeconomic causes of unemployment.Section 2 sets out the theoretical case in slightly more detail.