Compliance costs destroy potential jobs

Who will protect us from our protectors? That is what SA’s unemployed people should be asking. The labour laws that protect the fortunate employed have the unintended consequence of preventing the unemployed from getting jobs. The jobless are thus being ‘protected’ from getting ‘unprotected’ jobs.

Young, unskilled, inexperienced and otherwise disadvantaged people are especially vulnerable. They are in the anomalous position that the labour laws make it very difficult for them to get jobs but provide them with a high level of job security once they are employed. The consequence is that not many of the five to eight million currently unemployed have any hope of finding jobs under prevailing conditions. They have been priced out of the job market. The total cost of their wages plus labour law compliance costs is greater than the value of their labour to prospective employers.

In Jobs for the Jobless: Special Exemption Certificates for the Unemployed I suggest that the unemployed should be exempted from the labour laws for a period of at least two years in order to allow them to get jobs. A serious but invalid criticism of the proposal is that it would expose the jobless to exploitation by unscrupulous employers. What it would in fact do is to allow employers to pay wages to those exempt employees instead of wasting money on labour law compliance costs.

If an employer hires an unskilled worker at R600 per month and labour law compliance costs are (say) R1,000 per worker, the value of the employee’s production must exceed R1,600 for the employer to show a profit. As it is difficult to establish the real cost of compliance, employers respond to the ‘hassle factor’ by cutting down on employment, especially the employment of unskilled labour. Putting up with labour law hassles may be worthwhile in hiring highly skilled and productive workers but probably not worthwhile for unskilled workers with low levels of productivity. However, reduce the compliance cost to zero and the employer in the example could pay a wage of anything up to R1,599 per month and still make a profit. Exempting the jobless from the labour laws therefore has the potential of allowing employers to pay an exempt worker a higher wage than would otherwise be possible.

Given the compliance costs, it is not surprising that it is inexperienced people that have the hardest time finding jobs, including those with theoretical knowledge or qualifications and no practical working experience. What they need most is the right to forego job security, at least for a time, so that they can gain the experience that will increase the demand for their services.

Compliance costs are particularly severe on small firms. EU studies have shown that costs per worker can be as much as 60 per cent more for small firms than for large firms. The reason is that large firms spread their costs over a larger number of workers. The average cost then constitutes a much greater percentage of the wages of employees of small firms and is particularly high in the case of low-wage workers. If the compliance cost per worker in a large company is R1,000, the cost to a small firm is likely to be as much as R1,600, making the hiring of low-wage workers uneconomic for many small firms. As small firms generally provide unskilled job seekers with their best job opportunities, this cold, hard fact creates a desperate situation for the unemployed.

In most countries small firms employ the largest percentage of the total workforce. Two-thirds of all jobs in the European Economic Area and Switzerland are in SME’s. On the basis of SA’s complicated definition of SME’s, our small firms employ just over 50 per cent of the total workforce but if we used the same definition as the EU (0 to 249 employees) the figure would be much higher. Small firms therefore have a key role to play in unemployment reduction in SA, especially in the employment of young, old, unskilled or otherwise disadvantaged people. However, this will not happen while compliance costs render the employment of low-wage people unprofitable.

Demand for labour can be increased by the simple expedient of reducing compliance costs and the most politically-neutral mechanism for doing so appears to be to exempt the unemployed from the labour laws. The special exemption certificate that I have proposed will not jeopardise the job security of people with jobs and should be welcomed by labour unions. An increased labour pool will in due course provide them with more members. In order to deter employers from trying to fire and re-hire their workers once they have acquired exemption, this facility can be reserved for people who have been unemployed for a minimum period of six months.

There is no doubt that eliminating labour law compliance costs for the long-term unemployed could substantially increase the demand for unskilled labour. Resultant job opportunities could , in turn, transform the lives of South Africa’s poorest families and simultaneously boost economic growth.

Author: Eustace Davie is a director of the Free Market Foundation and the author of Jobs for the Jobless: Special Exemption Certificates for the Unemployed. 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 Foundation.

Copies of Jobs for the Jobless: Special Exemption Certificates for the Unemployed are available from the FMF at R30 plus postage. Phone Judith at (011) 884-0270

FMF Feature Article /14 September 2004, Policy Bulletin / 12 May 2009
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