Income inequality and unemployment in South Africa

Last year marked the tenth anniversary of democracy and the end of apartheid in South Africa. The South African government has a lot to be proud of and must be congratulated on a number of beneficial reforms that has seen the overall level of economic freedom and growth increase steadily over the past decade. However, the government cannot claim to have adequately addressed two of SA’s biggest problems, which are inextricably linked: income inequality and unemployment.

According to the latest Labour Force Survey (LFS), which is conducted by Statistics South Africa, the country continues to suffer from mass unemployment and many people are still living in poverty. Between 4 million and 8 million South Africans are unemployed. This means that approximately 26 to 41 per cent of our potential labour force is unemployed; depending on whether the strict or broad measure of unemployment is adopted. Approximately 4.7 million South Africans are living in extreme poverty, defined as living on less than one dollar a day. This figure is up from the 3.7 million that were living in extreme poverty in 1995. The LFS also showed that the most affected section of the population is black, with about 45 per cent of households in the lowest two income quintiles having no income earners.

It should come as no surprise then that South Africa still has one of the most unequal distributions of income in the world, second only to Brazil. South Africa’s income distribution, as measured by the Gini coefficient, has risen steadily over the years from 0.596 in 1995 to 0.635 in 2002. However, these figures hide a significant factor: the Gini is higher among African households than among non-African households. What we are witnessing is that as inter-racial inequality declines, intra-racial inequality is steadily rising.

Some African households have improved their financial positions considerably – a process that started at the beginning of the 1990s and accelerated after SA became a democracy in 1994. As apartheid unravelled, many more Africans were able to move up the occupational ladder. As the number in higher-paying occupations rose, so the gap between high- and low-paid Africans has steadily increased.

Whiteford and Van Seventer found that, in 1997, the income of the top African decile grew 7 per cent whilst the income of the poorest 40 per cent declined by 27 per cent. They also found that African households comprised 22 per cent of the richest decile. This means that in the last ten years there has been a significant shift in the composition of the wealthiest group in SA, which now includes a small number of extremely wealthy black individuals. The poorest layer of the population is still predominantly black, although an increasing number of white households are also rapidly sinking into poverty.

So what can the government do in order to promote the greatest good for the greatest number? The best way to increase the standard of living of the entire population is through economic growth. High economic growth will occur if the government concentrates on its core functions, substantially reduces barriers to doing business and restrictions on trade, and liberalises the labour laws. Increased economic growth will have positive spin-offs for all South Africans. Most economists recognise that to reduce inequality, unemployment must be reduced, and the best way to do so is to remove artificial constraints that prevent the efficient functioning of the labour market.

Artificial barriers, such as minimum wages and laws providing high levels of job security, prevent the labour market from functioning correctly. 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 current labour law environment perpetuates a vicious cycle: without experience individuals can’t get jobs and without jobs they can’t get experience. In a labour surplus economy like SA’s, with 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 in order to substantially reduce the unemployment crisis we are currently facing.

Author: Jasson Urbach is an economic 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/ 1 November 2005 - Policy Bulletin / 11 August 2009

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