Reform the labour market or subsidise employment more heavily

In a well-functioning labour market the number of employees who quit their jobs roughly matches those who are fired. The unemployed will be a small proportion of the labour force. The number of new hires will match the new work seekers, depending on the state of the business cycle. And the labour market will be reassigning workers to enterprises that are growing faster from those that are growing slower or forced out of business and being replaced by the competition. All very good and necessary for economic growth and for the growth in jobs and rewards for work.

This does not describe the labour market in SA. The unemployment rate since 2008 has averaged well above 20%. It was 23% of the labour force in 2008 and 30.1% before the pre-Covid-19 lockdowns. The numbers of economically inactive South Africans of working age who are neither working nor seeking work, and hence not part of the labour force, numbered 15.4-million in the first quarter of the year, out of a working population of 39-million. Those absorbed into the labour market (employed-working age population) have declined from an already low 45.8% in 2008 to 42.1% in early 2020. Most disturbing is that of the 10.3 million between the ages of 15 and 24 years, 31.9%, or only 3.2 million, were working or seeking work. The not economically active numbered 7.5m. The absorption rate for this young cohort fell from 17% in 2008 to 11% in early 2020, condemning many to a lifetime of inactivity or worse.

For most, being unemployed in SA is not part of a temporary journey to re-employment on similar or better terms. It is bound to be highly destructive of lifetime earnings. Job retention, not growth in employment, is therefore the objective of policy. The system protects insiders — those with jobs that are entrenched by law and regulation — from the outsiders who struggle to find employment. Many give up the struggle, their economic potential wasted.

The latest survey of households by Stats SA (Quarterly Labour Force Survey) gives important clues to the forces at work. During lockdown the numbers counted as unemployed fell from 7.1-million in the first quarter of 2020 (Q1) to 4.3-million in Q2, then rose to 6.5-million in Q3 as first fewer and then many more actively sought work when the economy opened up. The numbers of economically inactive rose dramatically in Q2, from 15.4-million to 21-million, and then fell by more than 2-million in the third quarter. It made sense to look for work that was more likely to be found.

SA has a reservation wage below which working does not make sense. And the economically inactive are presumably able to survive without work by drawing on the resources of the wider family, augmented by cash grants from the government, subsistence agriculture or occasional informal employment. Covid-19 may well have damaged the ability of the extended family to provide support for those not working or intending not to work. The failure of our economic policies generally is revealed by a reservation wage that for far too many remains higher than the wage employers are able and willing to pay them.

The Employment Incentive Scheme allows employers to deduct up to R500 from the minimum wage paid to workers under 29 years old. Employers simply deduct the subsidy from their PAYE tax transfers. In 2015/2016, 31,000 employers claimed the subsidy for 1.1-million workers, costing R4.3bn in 2017-2018. Raising taxes to subsidise employment more heavily may be the only practical way to provide more employment opportunities for young South Africans.

If, that is, the market is not allowed to deal with the employment issue. Abandoning the national minimum wage, the Commission for Conciliation, Mediation and Arbitration (CCMA) and nationwide collective bargaining agreements — all so protective of the insiders — would greatly increase willingness to hire and in time raise real wages for the least well-paid, making work the better option for many more.

Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.

This article was first published on BDLive on 26 November 2020
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