Sindile Vabaza, an aspiring economist and an avid writer, is a contributing author for the Free Market Foundation.
The views expressed in the article are the author's and not necessarily shared by the members of the Foundation.
This article may be republished without prior consent but with acknowledgement to the author.
The FMF is an independent, non-profit, public benefit organisation, created in 1975 by pro-free market business and civil society national bodies to work for
a non-racial, free and prosperous South Africa.
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of good law. As a think tank it seeks and puts forward solutions to some of the country's most pressing problems: unemployment, poverty, growth, education, health care, electricity supply, and more. The FMF was instrumental in the post-apartheid negotiations and directly influenced the Constitutional Commission to include the property
rights clause: a critical cornerstone of economic freedom.
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This article was first published on City Press on 5 December 2022
Labour unions: Why they are not good for South Africa
Many of South Africa’s most seemingly intractable problems, from the civil service wage bill to sub-standard teaching, to unemployment, can firmly be laid at the door of trade unions. Unions are heavily protected by the Labour Relations Act of 1995. The law gives unions the right to call strikes, during which workers are protected from being dismissed. It enables unions to effectively oppose measures employers might take against non-performing workers, such as teachers who don’t turn up for work or lack basic competencies. It enables unions to prevent necessary retrenchments, such as cutting Eskom’s staff numbers or the civil service wage bill.
Labour market value and labour market mobility
An often-overlooked aspect of low wages in South Africa is that workers do not have much labour market mobility or job choice and so employers naturally have the upper hand when negotiating pay. Workers don’t have many options, and this can be traced to the ineffectiveness of government policy in creating an environment that encourages investment, especially foreign direct investment, and so creating an economy of opportunity and plentiful jobs. The government’s often onerous and sometimes senseless regulations on small businesses also stunt business formation and job creation.
In other words, workers would have more leeway to bargain for higher wages in an economy where they can easily find another job if employers cannot match their expectations. It is this scenario of employers and employees negotiating the best possible price for labour that produces the most efficient and effective market outcomes.
Unions and trade-offs
This is precisely why calls for union intervention in this regard would only serve to exacerbate the structural problems in our economy which lead to labour market inefficiency (higher unemployment). Unions in South Africa are very good at securing higher pay for their own members, but the trade-offs of bargaining councils and artificially imposed labour restrictions and pay are that this locks young low-skilled workers out of the job market. Young low-skilled workers are the majority of the labour market in South Africa.
Those who want trade union intervention ultimately must pick their poison in either the form of higher unemployment or higher prices on consumers, which in the current climate of sky-high inflation, rising petrol prices and wage stagnation for the middle class especially will most likely be a deeply unpopular trade-off.
Why foreign direct investment matters
The IMF defines Foreign Direct Investment (FDI) as cross-border investment associated with a resident in one economy having a significant degree of influence on the management of an enterprise in another economy.
This is important to note because the overall benefits of FDI for developing countries’ economies are well documented. Given appropriate host-country policies and a basic level of development, a majority of studies show that FDI triggers technology spillovers, assists human capital formation, contributes to international trade integration, helps create a more competitive business environment, and enhances enterprise development. All of these contribute to higher economic growth, which is the most potent tool for alleviating poverty in developing countries.
South Africa’s FDI inflows are tanking, despite the numerous promises of renewal and structural reform from within the Presidency and from the President himself. Foreign direct investment in South Africa fell by 39% to $3.1-billion in 2020, according to the latest data from the United Nations Conference on Trade and Development. Data from the Reserve Bank in June 2021 showed FDI inflows slipped to R6.1-billion in the first quarter of 2021 from R16-billion in the fourth quarter of 2020. For the whole of 2020, FDI inflows were at R51.1-billion, down from R74-billion in 2019.
In the last almost decade and a half, South Africa has consistently struggled to attract foreign investment due to increasing political and policy uncertainty and wide-ranging corruption and infighting within the ruling party, which has soured investor confidence.
There is no solution to low incomes in this country that does not involve fixing long-running structural issues in order to entice foreign investment, and upskilling and educating the labour force.
Union involvement comes with very hefty economic and social consequences which include higher (youth) unemployment and idle young men who become very susceptible to lives of petty and violent crime. There needs to be a commitment to policy certainty, to common sense reforms which lead to investment and to the medium- to long-term work of up-skilling and educating our country’s workforce.