Embracing a fit for purpose economy

Statistics South Africa has published the Quarterly Labour Force Survey (QFLS) for Q3 2021, showing how continued lockdown restrictions, load shedding, and the July riots impacted jobs in the country.

The results show that the number of employed persons decreased by 660,000 in the third quarter of 2021 to 14.3 million. By comparison, the number of unemployed persons decreased by 183,000 to 7.6 million from the second quarter of 2021.

These changes resulted in the official unemployment rate increasing by 0.5 of a percentage point from 34.4% in the second quarter of 2021 to 34.9% in the third quarter of 2021 – the highest since the start of the QLFS in 2008.

The unemployment rate according to the expanded definition of unemployment increased by 2.2 percentage points to 46.6% in the same period. The unemployment rate is up 10% over the past decade, having reached 25% in 2011.

These numbers stand in stark contrast with the government’s grand plans for an inclusive economy that will keep pace with the rapid technological changes happening in the labour market.

Embracing a low skill, low wage and job intensive economy

Arthur Lewis, the only man of African descent to win a Nobel Prize in Economics and who might be considered the founding father of development economics in the 1940s and 1950s, has argued that labour can move out of the peasant farming sector, without affecting production there, and into low-productivity capitalist sectors, including industrial sectors such as clothing manufacturing, if wages in those sectors are low in line with productivity.

As capitalist economies grow, Lewis argued, they will reach a turning-point at which labour becomes scarce. They will then shift into higher-productivity sectors and wages will rise.

Lewis's model was reflected in the economic history of East and South-east Asian countries. The economies of South Korea, Hong Kong and China developed through job creation in labour-intensive manufacturing sectors before these economies reached Lewis’s turning point and wages began to rise.

This is particularly pertinent to South Africa, as in the rest of the continent, to our north, there are a billion-plus people. They need cheap clothing, kettles, blankets, and other such goods.

The demand for less-skilled labour has collapsed

The inner city of Johannesburg itself has a large informal retail sector which attracts cross-border shoppers, but the manufacturing of the goods bought is done in countries like China and Bangladesh, rather than locally. Local industries would create a significant number of jobs.

But this is not how the South African economy has evolved over the past 27 years. Instead, South Africa’s industrial sectors have become more and more capital- and skill-intensive. The demand for less-skilled labour in these sectors has collapsed.

Economists refer to the effect of economic growth on employment as the employment elasticity of growth.

An employment elasticity of 1 means that, when the economy or sector grows by, say, 2 percent, employment grows at the same rate, i.e. by 2 percent. If the employment elasticity is more than 1, then economic growth results in a faster rate of job creation. If the employment elasticity is less than 1, then employment rises more slowly than output.

Data suggests that in the South African manufacturing industry employment elasticity has not only been less than 1, it has been negative. Data from the South African Reserve Bank, based on surveys of firms, suggest that manufacturing output expanded at 1.9 percent per year, taking inflation into account, between 1995 and 2017. Over the same period employment in manufacturing contracted by 1.3 percent per year. This data suggests that the employment elasticity of growth in manufacturing was -0.7.

In other words, this is the cost for South Africa of trying to skip steps in its economic development. It allows unions to pressure the government into prioritising higher wages over job creation in an economy that has a lot of surplus labour.

South African government policies result in a paradoxical situation: Even when industrial output grows, jobs are not created. Instead, firms invest in more capital- and skill-intensive technologies. Accelerating economic growth does not raise the demand for labour in industrial sectors.

In conclusion

Put simply, South Africa continues to have stubbornly high structural unemployment because of policies like the minimum wage, centralised collective bargaining which punishes and at times puts small businesses out of business, and onerous labour laws which disincentive hiring and make firing employees who are unproductive very difficult and expensive especially for small and medium enterprises.

Taken together these policies are anathema to job creation in an economy with surplus labour like South Africa's. Policy must prioritise job creation, especially in the potentially job intensive manufacturing sector over artificially high wages.

This article was first published on BBrief on 22 December 2021.

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