Allowing the labour market to function

The rate of unemployment is 100 per cent if it is you that is unemployed

South Africa has experienced high and rising rates of unemployment since at least the mid-1970s and evidence suggests that we have one of the highest unemployment rates in the world. According to the latest statistical release by Stats SA, approximately 28 per cent of the potential South African workforce is unemployed but this rises to 42 per cent if you count the people who have given up looking for work. In simple terms this means that between 4.5 million and 8.4 million people are unemployed. In contrast, other middle-income developing countries such as Argentina and Brazil have strict unemployment rates of approximately 16.3 per cent and 12.2 per cent respectively. Contrast these rates with lower unemployment countries such as El Salvador (6.2%), Chile (7.8%), Costa Rica (6.4%) and Belgium (6.9%).

The negative consequences associated with unemployment not only affect the individual and his/her family and friends but also impact on society at large. Individuals that are unemployed are forced to ‘borrow’ money from family and friends but given chronic unemployment this money eventually becomes a ‘gift’ when it turns out that the unemployed person is in no position to repay the loan. This ‘borrowing’ is far from costless as personal relationships are put under increasing strain. The individual suffers the emotional stress related to being unemployed and the ‘lender’ suffers personal financial loss. Society is affected by a number of negative factors that are inextricably linked to the problem of unemployment, such as reduced economic welfare, increased crime and social instability. There is general consensus that unemployment must be reduced but a great deal of disagreement as to how this is to be achieved.

According to neoclassical economics the reason for unemployment is that wages are set above the market clearing level. In other words artificial barriers such as minimum wages and laws providing high levels of job security prevent the market mechanism from functioning correctly. In order for the chronic unemployment problem in South Africa to be alleviated it is therefore necessary to remove artificial constraints on the functioning of the labour market. However, those who are already employed argue that any weakening of job-security legislation and erosion of minimum wages will lead to increased poverty. On the other hand, critics of South Africa’s current labour legislation, including the World Bank, are of the view that there has to be labour law reform if the number of jobs are to be created that are necessary to transform South Africa into a low-unemployment country.

According to the Economic Freedom of the World index, South Africa ranks among the poorest in the world on labour market regulation. Essentially the index measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of privately owned property. South Africa ranks 44th on the economic freedom of the world index of the 123 countries measured. It shares this ranking with France, Lithuania, Malta, Peru and Uruguay and labour market regulation is one of the factors negatively affecting South Africa’s ranking.

If we make a simple comparison between the reported unemployment rates in the countries that share South Africa’s economic freedom ranking we find that South Africa fares worst by far on unemployment. Indeed, the unemployment percentages are: France 8.9, Lithuania 13.8, Malta 7.0, Peru 8.7 and Uruguay 17.2. On minimum wages South Africa has a rating of 4.6 out of a possible 10 and in the area of flexibility in hiring and firing a very low rating of 2.2, which will be no surprise to employers who have appeared before the CCMA charged with unjustifiable dismissal. These figures suggest that South Africa will have to move towards allowing market forces to determine wages and establish the conditions of dismissal.

An unintended consequence of South Africa’s labour laws, which are exclusively formulated to provide job security for those that are employed, is that they effectively prevent those that want to work from negotiating contracts freely with potential employers. Higher labour costs and minimum wages reduce the employment opportunities of unemployed people with few skills who typically find employment in small and micro enterprises. The unemployed are prevented from gaining work experience while their productivity is not high enough to justify the wages employers would be compelled to pay them, leaving them in a most invidious position. Without experience they can’t get jobs and without jobs they can’t get experience. In a labour surplus economy like South Africa where there are large numbers of semi-skilled and unskilled workers there is no other option – at the low end of the market economic forces must be allowed to function unhindered.

Author: Jasson Urbach is a researcher at the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/26 October 2004, Policy Bulletin / 03 November 2009
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