SA’s unemployment battle continues

During his inaugural State of the Nation address, President Jacob Zuma promised an additional 500,000 ‘job opportunities’ by the end of this year. Although we have not quite reached the year-end, it has been clear for a while now that the ambitious target will not be met. Instead, what has transpired is that about 484,000 jobs have been lost over the period June to September 2009, most of them (283,000) recorded in the formal sector. Compared to September 2008, this is an annual decrease of 5.6 per cent (770,000) in employment. The number of unemployed increased by 70,000 and that of persons not economically active (i.e. those aged between 15–64 who are neither employed nor unemployed) increased by 1,071,000 – which includes an additional 561,000 discouraged work seekers.

In order to address the unemployment problem the Millennium Labour Council co-chairs Zwelinzima Vavi and Bobby Godsell are urging business and labour unions to consider wage cuts, wage freezes and short time as alternative options to retrenching workers. Coming from the general secretary of Cosatu this is a significant statement. Labour unions generally ignore the fact that wages need to be tied to economic realities. For example, they lobby for minimum wages arguing that workers are entitled to a ‘living wage’ yet ignore the fact that legislated minimum wages block potential competition.

However, worker productivity is the main determinant of what employers are willing to pay, and a legislated increase in the price of labour does not increase worker productivity. According to fundamental economic logic, if setting a minimum wage of R1,650 per month can improve conditions for workers, then a minimum wage of R16,500 per month should improve conditions even more. But, clearly a minimum of R16,500 would make even more people unemployable. The people who don’t get jobs as a result of such legislation are the unseen victims. Those who lose jobs are only too visible.

According to the latest quarterly labour force survey (QLFS), approximately 4.192 million working-aged adults were officially unemployed in the third quarter of 2009. This equates to an official unemployment rate of 24.5 per cent. However, a further 1.632 million did not actively search for work in the month prior to the survey but indicated they would work if jobs were available. If these discouraged work seekers are included, the total number of unemployed increases to 5.824 million and the unemployment rate shoots to the more realistic rate of 31 per cent.

About 60 per cent of the unemployed have been out of work for more than a year; over 70 per cent are younger than 34 with the highest proportion (41.5%) falling into the 25-34 year category. Cosatu is by far the largest trade union body in SA, representing roughly half of all unionised workers and through its affiliation with 22 trade unions has a combined membership of over 2 million – 1.8 million paid-up. With labour unions forming such an integral part of our society it is easy to lose sight of their primary role – to raise the wages and improve the working conditions of their members relative to equally productive workers in an identical, competitive, non-unionised sector.

For instance, if there is a high demand for a particular job performed by a few people, these people will have a relatively large amount of market power and will be in a position to determine their own pay and working conditions. In this instance there will be little need for them to be unionised. However, once many people become engaged in this activity, their bargaining power will be diluted and their market strength lost. In this scenario there is scope for a union to enter the market, sign up members, bargain collectively on their behalf, and protect them by blocking the entry of anyone trying to compete for their jobs.

Trade unions block potential competition – usually from low-skilled individuals willing to accept lower wages rather than face the bleak option of unemployment and the consequence of starvation for themselves and their dependants. For workers within the unionised sector, wages are secure. Another unwelcome side-effect is that this trade union action increases inequality because some individuals are earning money while others are effectively prevented from even entering the market let alone earning a wage.

Considering the role of labour unions (partly to bargain collectively and partly to block the entry of potential competition) it is clear that they have an interest in ensuring that their members are protected, whatever the implications may be. In this light, to achieve governments stated objective of reducing unemployment and stimulating growth, labour market policies that affect unemployment and hence SA’s prospects for growth and reducing poverty have to be weighed most carefully.

Author: Jasson Urbach is an economist with 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 Foundation.

FMF Feature Article / 15 December 2009

Help FMF promote the rule of law, personal liberty, and economic freedom become an individual member / donor HERE ... become a corporate member / donor HERE