Open the labour market

09 November 2018
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The results of South Africa’s official unemployment statistics published by Statistics SA in the Quarterly Labour Force Survey (QLFS) reveal some alarming labour market trends. South Africa is on the cusp of an ignominious feat, almost 10 million people are unemployed, and the number is rising rapidly with another 337,000 people having joined the ranks of the unemployed since last year.

At the heart of the matter is the flawed, ideologically driven policy of “decent work”. Who decides what is “decent work”? If you are unemployed, as far as you are concerned, the rate of unemployment is 100%. Surely, then, you should have the right to decide for yourself what does and does not constitute “decent work”?

Professor Nicoli Nattrass of the University of Cape Town states, “Decent work for the few was achieved through rising capital intensity and job destruction. This is tragic for the millions of unskilled, unemployed South Africans whose only hope of regular employment is a more labour-intensive growth path. Yet policy makers today regard this as undesirable, uncivilised even, hoping instead that industrial policy can somehow catapult us on to a high-wage, high-productivity growth path that will be sufficiently rapid as to be labour-demanding despite its capital-intensive nature.”

South Africa has experienced high and rising rates of unemployment for over a decade and we probably now have one of the highest sustained unemployment rates in the world. It should be clear that the single biggest problem facing the country is the unemployment crisis.

During the apartheid era, people in South Africa were told by government, “If you are black, you may not work at this job or that job”. Now, policymakers are preparing to tell the people of South Africa, “If you cannot produce for an employer value per hour that is at least equal to the national minimum wage, you may not work at that job or for any employer anywhere in the formal sector”.

Often ignored is that worker productivity is the main determinant of what employers are willing to pay. A legislated increase in the price of labour does not increase worker productivity. According to fundamental economic logic, if a minimum wage of R3,500 per month is deemed necessary to improve conditions for workers, then one of R35,000 per month would improve conditions so much more. Obviously, though, a prescribed minimum of R35,000 would immediately render many more people unemployable.

The University of Cape Town’s Jeremy Seekings states, “Every study in SA finds that real wage increases reduce the demand for labour. The question is not whether wage increases destroy jobs, but how many jobs are destroyed, and how to weigh up the costs of job destruction with the benefits of higher wages.”

Employers respond rationally and predictably to a rise in labour costs – they either mechanise and employ fewer people, reduce the hours of existing employees, or do a combination of both. Some employers may choose to forgo profits, but this will stall investment in their businesses, which will halt any expansion, and, eventually, cause workers’ wages to stagnate. To cover increased wage payments, employers will have no choice but to increase the price of their products. Rich people can easily accommodate increased prices, but poor people, who are far more sensitive to price increases, will suffer. Especially those who do not earn any wage at all.

We can also expect to see more people forced into the informal and underground sectors of the economy, which will have the perverse effect of reducing the amount of protection for the poorest and most marginalised members of society. In the formal sector 125,000 jobs were lost over the last year whereas an additional 327,000 people were employed in the informal sector.

If government reduced the bureaucratic red tape and relaxed the statutory requirements that prevent people from getting jobs in the formal sector it would not be necessary for so many people to turn to the informal sector for employment. A labour surplus economy like South Africa, where there are large numbers of semi-skilled and unskilled workers, should not erect barriers to entry into the labour market.

This article was first published in The Star on 6 November 2018


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