The Medium Term Budget and Job Creation

It is encouraging that one of the central themes of the Medium Term Budget Policy Statement (MTBPS) is the pursuit of economic growth in order to reduce unemployment. Growth and unemployment are the two most pressing issues facing SA. To quote the MTBPS, “South Africa’s present economic growth trajectory cannot meet the country’s employment needs. Faster growth is required over an extended period of time to significantly increase labour absorption, reduce high unemployment and achieve a more equitable distribution of income”.

More specifically, “Modelling work by the National Treasury shows that if South Africa were to sustain 7 per cent growth for 10 years, national income would double and the economy would generate about 5.5 million jobs, leading to a dramatic reduction in poverty and inequality”. The pursuit of growth in order to achieve our social objectives is a dramatic departure from previous strategies that primarily focussed on redistribution and should be applauded.

And more importantly, the MTBPS recognises the role of the private sector as the primary driver of growth and employment: “While social grants provide an important safety net for about a quarter of the population, South Africa’s long-term prosperity depends on more people being drawn into work. The private sector accounts for 75 per cent of all economic activity and a slightly higher share of employment, and will remain the primary driver for job creation. The public sector plays a complementary role in this process”. Based on this, one can infer then that the government recognises the role of growth in alleviating unemployment and poverty in the economy and that the private sector is the primary driver of economic growth.

It is interesting to note that the MTBPS cites the OECD’s report on SA entitled “Going for Growth”. This report provides some details on how to reduce unemployment. Amongst other things it suggests:

Reform the wage bargaining system to increase labour absorption.

Strengthen policies to tackle youth unemployment through age-differentiation of minimum wages in sectors where these are set by the state; implementing a wage subsidy; and intensifying placement assistance for young workers.

Reduce barriers to entrepreneurship such as the burden of licences and permits, and the complexity of rules and procedures; introducing a systematic regulatory impact assessment for significant new regulations; and reviewing existing legislation to reduce administrative burdens for small businesses.

Of course, none of these proposals sit well with the trade unions, especially the second point. But, according to the latest statistics from Stats SA, the typical unemployed individual is a first time job seeker, has been unemployed for longer than a year, and has not completed secondary level education. The official unemployment rate is 25.3 per cent (which equates to 4.396 million unemployed individuals). If we include discouraged work seekers, those who would like to work but have given up searching for work because they believe that there is none available, a further 2 million people join the ranks of the unemployed. And a further 1 million individuals lack the means to actively search for employment. Combining all these numbers reveals that currently 7.290 million people are unemployed and that the actual rate of unemployment is 36.6 per cent. These statistics reveal that, over the last ten years, nothing much has changed in the labour market – the majority of the unemployed are still young, unskilled and have been unemployed for an extended period of time.

Given this information, the most important issue facing government today is improving conditions to make greater labour absorption possible. To achieve its stated objective of reducing unemployment and stimulating growth, government has to urgently address labour market policies and laws that exacerbate unemployment. We cannot focus on just the good intentions behind these policies. We must, perhaps even more importantly, rigorously investigate any unintended consequences.

An unintended consequence of South Africa’s labour laws, which are exclusively formulated to provide job security for those who are employed, is that they effectively prevent those who want to work from negotiating contracts freely with potential employers. Higher labour costs and minimum wages reduce the number of employment opportunities for those unemployed people with few skills who typically find employment in small and micro enterprises. It prevents them from gaining work experience because their productivity is not high enough to justify the wages employers would be compelled to pay them. This leaves them in a most invidious position. Without experience they cannot find work and without work they cannot get experience. In a labour surplus economy like South Africa, where there are 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.

Anyone who believes that South Africa’s labour unions will voluntarily give up job security for their members to allow young, unskilled individuals to compete to get jobs is being naive. However, an alternative policy proposed by my colleague, Eustace Davie, will not disturb the job security of the employed and give the unemployed the opportunity to find jobs. He suggests that anyone who has been unemployed for more than six months should be given a two-year exemption from the labour laws and allowed to enter any written agreement with whichever employer they wish. This will give them the freedom to decide for themselves what constitutes “decent work”, and, although this measure will not solve the unemployment problem overnight, it will give back hope, dignity and provide job opportunities to the millions who have lost all hope of obtaining employment.

Author: Jasson Urbach is an economist 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 Foundation.

FMF Feature Article / 09 November 2010