Employment – ZA Economist

How to solve SA’s unemployment woes

Many South Africans are condemned to a lifetime of inactivity for want of experience and the good habits acquired by having jobs. What are some of the practical steps that can be taken to solve SA’s unemployment problems?

In a well-functioning labour market, the number of employees who quit their jobs for something better will match those who are fired. The unemployed will then be a small proportion of the labour force. And it will not be a stagnant pool of work seekers. The number of new hires will roughly match the new work seekers, slightly more or less, depending on the state of the business cycle. Most importantly, the labour market will be reassigning workers to enterprises that are growing faster, from those that are growing slower or going out of business. It is a dynamic process that makes for a more efficient use of labour, and leads to faster growth in output and higher incomes from work over time.

To state the obvious, the above scenario does not describe the current state of the SA labour market. The unemployment rate since 2008 (the first year the current employment survey of households was released) and up to the just released for Q3 2020 survey, has averaged well above 20%. It was 23% in 2008 and 30.1% before the Covid-19 lockdowns. The army of the unemployed grew from 4.4 million in 2008 to 7.1 million in Q1 2020, compounding the problem at an average rate of 4% a year.

The numbers employed grew from 14.4 million to 16.4 million over the same period, at a 1.1% annual average rate, but therein lies the rub. The numbers of South Africans of working age who are neither working nor seeking work, nor are economically active, and therefore not counted as part of the labour force, numbered 15.4 million in Q1 2020. This is up from 12.74 million in 2008, having grown by 1.6% a year on average over the period.

The ability of the economy to absorb a growing potential labour force, defined as numbers employed divided by the working age population, now 39 million, declined from a low 45.8% in 2008 to 42.1% in early 2020. Even more concerning is the inability of the economy to absorb young people into employment. 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 economically inactive numbered 7.5 million. The absorption rate for the cohort fell from 17% in 2008 to 11% in early 2020. The economically inactive part of this group numbered 8.2 million in September. Of the cohort aged 15 to 34, the proportion who were not economically active was 40.4%.

A lifetime of inactivity
There is thus a large number of South Africans condemned to a lifetime of inactivity for want of experience and the good habits acquired on the job. What is going so very wrong in the SA labour market? We observe how vitally important it is for those with jobs to retain them. The struggle to hold onto well-paid jobs at state-owned enterprises (SOEs) such as SAA and the SABC is an understandably bitter one with so much at stake. And the sympathies of the politicians are with the threatened workers rather than with the attempts to sustain the economic viability of these SOEs in the face of an ever more padded payroll.

Being unemployed, especially for those retrenched form the public sector, is not part of a temporary journey to re-employment on similar terms. It is almost bound to be destructive of lifetime earnings. Even the competition authorities, who you might expect to focus on efficiency rather than job retention, make retaining jobs a condition for approving a merger or acquisition. Yet despite the large numbers of the unemployed and the economically inactive, the real earnings of those with jobs in the public sector have grown significantly and much faster than outside of it – by an average 2.2% a year after inflation compared with 1.52% for the privately employed. This perhaps explains why the SOEs have had such difficulty in balancing their books.

A system in SA has evolved that reinforces the better treatment of the insiders – those with jobs that are entrenched by law and practice – when compared with the outsiders who struggle. Many therefore give up the struggle to find “decent work”. A National Minimum Wage (NMW) is set at a level – R3500 per month – that regrettably few South Africans earn or are capable of earning. This is a major discouragement to hiring unskilled and inexperienced workers, particularly outside of the major cities. You would have to go well into the seventh decile of all income earners to find families with per capita incomes above this prescribed minimum wage.

It is possible to dismiss or retrench workers or managers in SA. But in addition to any regulated retrenchment package, it is not a low cost exercise to fire underperforming workers of all grades. Employers have to satisfy the Commission for Conciliation, Mediation and Arbitration (CCMA) to do so. Funding a human resources department, with skilled specialists well versed in employment and unemployment procedures, to whom dealing with the CCMA can be delegated, is one of the economies of scale available to big business. The small business owner-manager attempting to navigate the system is at a severe disadvantage that will surely discourage job offers.

The impact of Covid-19

It is not just the regulations and practices that inhibit the willingness of employers to take on more labour. Post-Covid-19 reactions reported by the latest survey of households give some important clues to the forces at work. During lockdowns, numbers employed fell from 16.3 million in Q1 to 14.15 million in Q2, and recovered slightly to 14.7 million in Q3. The numbers counted as unemployed fell sharply from 7.1 million in Q1 to 4.3 million in Q2 and then rose to 6.5 million in Q3, after the lockdown. The numbers of those who were not economically active rose dramatically in Q2 from 15.4 million in Q1 to 21 million in Q2, when it made little sense to actively seek work. The numbers of the economically inactive then fell dramatically by over 2 million in Q3, as more people sought work and were physically allowed to do so.

The numbers employed in Q3 rose, but were not as many as those additional work seekers and so the unemployment rate picked up. It was a development highlighted in the survey. It made sense for more people to look for work because it was more likely to be found, and also presumably because the declining economic circumstances of the family, perhaps the extended family on which many depend, made the search for work and additional income imperative.

South Africans understandably have a reservation wage, below which working does not make good sense. It has to pay to work. And the economically inactive in SA who are overwhelmingly low or no income earners are presumably able to survive without work by drawing on the resources of the wider family. They will not have accumulated much by way of savings to draw upon. The family resources, on which they rely, are likely to be augmented by cash grants from government and from 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, hence the fewer inactive members of the workforce.

The failure of SA’s mix of economic policies is revealed by what is still for many a reservation wage that remains higher than the wage employers are able and willing to pay them. Hence the discouraged employment seekers who are among the economically inactive. It seems clear that South Africans choose to some extent to supply or not to supply their labour, depending on their circumstances including their skills and earning capacity as well as the state of the economy. They have a sense of when it seems sensible to work or to seek work at the wages they are likely to earn.

Practical solutions

What can be done about this essentially structural issue for our economy? Businesses surviving Covid-19 have increasingly learned to manage with fewer workers and managers. Abandoning the NMW or the CCMA or reducing the legal powers of trade unions and collective bargaining would help increase the demand for labour, but this course of action is unlikely. Meaningfully improving the quality of education and training (on the job as lower-paid interns and apprentices) to raise the potential earnings of many more over their lifetimes of work, also seems wishful thinking. Reducing the value of the cash grants paid, so reducing the reservation wage to force more of the population to seek and obtain work, would be cruel and is as unlikely. Some form of welfare payments for work seems to be on offer in the form of the internship scheme announced recently by President Cyril Ramaphosa.

The Employment Incentive Scheme allows employers to deduct up to R500 off the minimum wage paid to workers under 29 and for all workers in the special economic zones. Employers simply deduct the subsidy from their PAYE transfers. It takes very little extra administration by either the firms or the SA Revenue Service. In 2015/16, 31,000 employers claimed the subsidy for 1.1 million workers and the scheme cost R4.3bn in 2017-18. The subsidy may well have to be raised to keep pace with higher minimum wages imposed on employers.

Raising taxes to subsidise the employment of young South Africans may be the only practical and politically possible way to provide more opportunities for them, especially if the market is not allowed more freedom to address the employment issue, by offering wages and other employment benefits that workers are willing to accept. Abandoning the NMW, the CCMA and nationwide collective bargaining agreements, all so protective of the insiders, would increase the willingness to hire and raise real wages for the least well paid in time. But it would be unrealisitic to expect the unemployment rate in SA to rapidly decline to developed market norms. It will take faster economic growth, which leads to higher rewards for the lowest paid and least skilled, to make work the better option for many more. And it will take many more workers to raise our growth potential.

The employment effects of National Minimum Wages – the evidence will mount

Over the next few years we will learn much more about the sensitivity of employment in South Africa to large changes in the minimum wages employers are able to offer. What were 124 minimum wage determinations that varied from sector to sector and region to region has been replaced this year by a National Minimum Wage (NMW) of R3500 per month or the equivalent of R20 per hour.

The first evidence of the brave new world of a much improved NMW is now to hand with the Quarterly Labour Force Survey for the first quarter 2019 published by Stas SA. The survey provides no consolation at all for the proponents of the NMW. The number of potential workers increased by 149,000 in the latest quarter while the numbers employed declined by a further 237,000. The unemployment rate (narrowly defined to include only those actively seeking work) increased by 0.9% to 27.6% and when broadly defined to include discouraged workers, the unemployment rate has increased by a further 1% to 38%.

These regulated minimums were initially proposed by a panel of experts appointed to the task in 2016 by then Deputy -President Ramaphosa. The panel recommended the NMW to be set well above what many workers were earning. The poorest quintile of earners (some 16.3m souls) earned an average wage of a mere R1017 per month in 2016. Only 15.9% of these poorest South Africans were employed (mostly part time presumably) and their unemployment rate was 65.8%

Thus most poor South Africans are not employed – despite –rather because of low wages. Given social grants and the extended families it may make very little sense to seek or accept very low paid work- all regrettably that may be available to those without skills and strength. The newly prescribed NMW will not affect many of them – except perhaps to largely eliminate their opportunities to work part-time.

The next poorest 20% (12.9m of them) when employed had average wages of R1707 per month of whom 35.9% were employed and 37.9% unemployed. The somewhat better off third 20% (52% of a cohort of 9m who worked) earned on average only R2651 per month – with an unemployment rate of 21.7%
It is only when you enter the ranks of the remaining 40% of households defined as “non-poor” by the panel, is the average monthly wage of R4751 well ahead of the NMW of R3500. And the broad unemployment rate is a less mind blowing 14.1%. The top 20% of households (6.483m people) are reported to earn an average R13,458 per month and were fully employed with an unemployment rate of 4.8%.

It would seem that the benefits of a higher NMW would be mostly confined to those in quintile 3 (provided they keep their jobs – big if) And the damage in the form of fewer jobs and less part time work would be concentrated in the same group now earning well below the NMW, yet very much part of the labour market.

The panel admitted that they had very little knowledge of the impact on employment. They estimated job losses in a very wide range of 100,000 and 900,000 job losses. They promised to examine the evidence as it presented itself and adjust their recommendations accordingly. One might regard this cavalier approach as irresponsible social engineering.

For a better idea of just how sensitive employment can be to the cost of hiring workers, the panel might have studied the impact of the employment tax incentive – designed to lower the cost of employing young South Africans (under 28 years ) introduced in 2014. And now extended to all workers in the special economic zones. For the details about how very simply to claim the benefits, see SARS’ own resources here and here.
The 2019 Budget Review proudly pointed to how highly effective offering employers a subsidy of up to R1000 per worker has been for employment. In 2015-16, 31,000 employers (disproportionately employers with fewer than 50 workers) claimed the incentives for 1.1m workers with R4.3 billion of tax revenues sacrificed in 2017/18. That is a tax expenditure of a mere R275 per extra worker and over a million of them.

It is a case of the SA government taking away with the one hand- discouraging low wage employment- and then encouraging it with the other- providing significant wage subsidies to reduce the minimums actually paid by employers. Given the wishful thinking about the benefits of “decent jobs” political more than economic- while conveniently ignoring the costs to the many workers not employed- this sleight of hand – is regrettably as much as we should expect from economic policy.

Unemployment in SA – wishful thinking does not solve the problem

The recent labour force survey of some 30,000 households by Stats SA confirmed the baleful state of the labour market. That is the ever growing mismatch between supply and demand for workers in SA. In the third quarter the supply of potential workers increased, by 153,000 or 0.4% and much faster than the demand for them that increased by 92,000 to 16.4m. The numbers defined as unemployed, not working but actively looking for work, increased by 127,000 to 6.2m pushing the unemployment rate up to 27.5% of the potential work force.

But not all the news from the employment front was bad – depending on your perspective. While the formal sector continued to shed jobs, the informal sector was adding them at a rapid rate. In Q3 informal employment outside of agriculture rose by 188,000 and by 327,000 or 12.2% over the past year to over 3m workers employed informally, or over 18% of all employed.

The decline in formal and the increase in informal employment is not a coincidence. Formal employment has been subject to a rising tide of intervention by government and trade unions (with more to come soon in the form of a national minimum wage) These have provided those in jobs with consistently improved wages and other valuable employment benefits and security to a degree against dismissal and compensation for retrenchment. The informal sector’s employers and workers largely escape these constraints on the freedom to offer and supply employment opportunities. If formal employment – decent jobs as they are described – are unattainable – the choice may be only informal employment or not working or earning much less. A Hobson’s choice that many more South Africans are exercising.

It should be well appreciated that while formal employment, outside the public sector, has stagnated, the share of employment costs in total value added by private business has not fallen. The bill for employment benefits in real terms has gone up in real terms as have employment benefits for those in work, even as the numbers employed have gone down. ( see figures below)

Non-Financial Corporations – Share of Value Added. Operating Surplus and Compensation of Employees

Source. SA Reserve Bank and Investec Wealth and Investment.

Real Value Added by Non-Financial Corporations (1995=100) Using household consumption deflator

Source. SA Reserve Bank and Investec Wealth and Investment.

Non-financial corporations – Growth in Real Value Added and Real Compensation (using household consumption deflator)

Source. SA Reserve Bank and Investec Wealth and Investment.

If the wage bill in any sector of the economy goes up faster than the decline in union membership (as it has been doing) the pool of income upon which to draw union dues is deeper, not shallower. Strikes that increase employment benefits at the expense of employment are therefore not irrational from the perspective of union leaders -if wages increase at a faster rate than employment declines.

The jobs summit would have been better described as the “Decent Jobs Summit” for which the heralded Landmark Framework Agreement is but a wish list of all and everything that can be imagined to promote the demand for labour. A plan however that gives no consideration to the possibility that the rising cost of hiring labour and the more onerous conditions imposed on its hire, may have something to do with the disappointing volume of employment provided.

Everybody will agree that decent jobs for all able and willing to work is to be wished for. And to hope that economic growth can make it possible – as has largely true of employment conditions in the developed world. But the irresistible truth is that far too few South Africans have the skills, the qualifications or experience to allow them to be employed on decent terms- by inevitably cost conscious employers .

And the soon to be imposed National Minimum Wage (NMW) of R3500 per month or R20 per day will make it even more difficult to find employment outside of the informal sector. Because these minimums are well above what many in employment currently earn. And despite the fact that of the poorest in SA the apparent beneficiaries, a very small proportion are currently employed.

For all the many (including economists who should be trained to know better) to wish wages higher and poverty away it has been convenient to ignore the findings of the one comprehensive and highly relevant study. That is the very thorough study by Haroon Bhorat and colleagues of the impact of higher minimums etc. on employment in SA agriculture introduced after 2003. The impact on employment- down 20% -and much improved wage benefits for those still employed – were correctly described by the analysts as significant. There is every reason to conclude that the impact of the NMW on employment will be as significantly and destructive for those who lose their jobs. And helpful for those who retain their jobs on improved terms. They will be even more carefully selected for the skills and strengths they bring to their tasks. The informal sector will have to come to the rescue of the larger numbers of unemployed workers while they wait impatiently for economic miracles.

Will a national minimum wage help the poor? We beg to disagree with the expert panel

The National Minimum Wage for South Africa (NMW) – will it be helpful or harmful to the poor of SA? We beg to disagree with the expert panel.

A reality check

It is always salutary to be reminded just how dire are the economic circumstances of the average South African and how slowly their economic conditions have been improving. Over 51%, some 29,733,210 of our people, live on less than R1,036.07 per month. These and many other shocking statistics are reported by the Panel of Experts appointed to recommend the level of a National Minimum Wage (NMW) and on a process for its effective implementation (“Recommendations on policy and Implementation; National Minimum Wage Panel report to the Deputy President”).

The table calculated by the panel, included below, provides helpful detail about the lack of income and the associated unemployment.

The panel has no doubts about the helpfulness of an NMW in principle – only reservations about practice

The panel seems to have no doubts that a NMW would be a very helpful policy intervention in principle. To quote selectively from its substantial report of 128 pages”

“On its own it will not solve all of the challenges we face, but it is an implementable policy which is designed to have a measurable and concrete benefit on the poor. The minimum wage is therefore seen as one of the tools to close the wage gap, including between the genders, and thereby to overcome poverty.

“Furthermore, under the correct conditions and at the correct wage level, it is possible for minimum wage policies to contribute to improving economic growth. ……Given that the national minimum wage is essentially a policy to help the poor, it is generally accepted that exemptions and exclusions should be kept to an absolute minimum.”

Striking a balance – recognising employment dangers in scenario exercises

The panel was required by the social partners in Nedlac, who agreed to an NMW, to recommend an appropriate level for the NMW. Since it recognised a relationship between wages and employment the MNW had to strike a balance between the effects of increasing wages to a higher prescribed minimum level and its consequences for additional unemployment of which SA already has a great abundance. Some 26% of the labour force, those in work or looking for work, are currently unemployed, while many more potential workers have been discouraged from looking for work and have fallen out of the labour force. Adding them to the work force would imply a more broadly defined national unemployment rate well into the 30% plus range.

The panel recommended a NMW of R3500 per month or R20 per hour to be phased in by 2020 with 90% of the NMW to be applied in agriculture and 70% in Domestic Service provided to Private Homes. It also recommended annual reviews of the NMW and a gradual move to uniformity across all sectors of the economy. Using a so-called Computable General Equilibrium model of the SA labour market (as described and developed by Professor Harron Bhorat of UCT) that included assumptions (not predictions based on past performance) about the trade-offs between percentage increases in minimum wages and percentage reductions in employment (the relevant employment elasticities in economic speak) .

The aggregate employment losses were estimated as between 100,000 and 900,000 jobs lost in exchange for the recommended NMW. Clearly in the view of the Panel, the NMW had to be set high enough to make its contribution to poverty relief and yet low enough to be able to treat the extra unemployment as the acceptable price to the panel members of them doing such good for society. Another argument for breaking eggs to make omelettes from those unlikely to be harmed by the action and who might even benefit from helping to give effect to a new dispensation.

However the panel did qualify its judgment. It noted correctly:

“…..that there is no research or data that can accurately predict the outcome of any policy intervention. It is for this reason that strong emphasis has been placed on the need for good solid research to support the work of the NMW institution into the future. Any future changes to the level of R3,500/R20 per hour should be based on solid evidence of the impact of the national minimum wage.”

Would it be unkind to recognise that this would also be more grist for the economist’s mill?

The relationship between minimum wages and employment – what may be self-evident to the panel is not so to the society at large

It would have been helpful had the panel used the report to explain more fully why employment offers are negatively related to the wages or rather employment benefits provided by employers in exchange for hours worked. The relationship is much less self-evident than the panel may have presumed it to be – especially by members and leaders of trade unions who are inclined to attribute wage differences much more to political forces and bargaining power and even to race – than to the differences in skills and therefore of the contributions to output made by the well and poorly paid. And they are very inclined to believe that the wage gaps can be easily closed, with little consequence for economic growth by taking more from the well paid and giving to the poor. And so for ever higher NMW.

The relationship between skills, incomes and employment

The panel is well aware of an obviously important and highly consistent relationship to be observed of the SA labour market between measures of skills and wages earned. And as statistically significant is the relationship between incomes and employment. The lowest income South Africans have the highest rates of unemployment. The full income and employment details are shown in the table below (Table 5 Household Indicators of the Panel Report). Other reports from Stats SA have demonstrated the links between educational attainments and income and employment.

It may be seen in the Table, that of the 16,306,000 people in Quintile 1, 31.2% of the population with the lowest share of income, only 15,9% are employed, 25% strictly unemployed and the broad unemployment rate of this group is estimated as 65.8%. The average wage of those employed in quintile 1 is only R1017 per month. The second poorest quintile counts for a further 24.6% of the population, has a lower unemployment rate, a much higher participation rate in the economy and average wage incomes of R1707 per month. A large improvement but still a very low average wage.

The top income quintiles present very differently. Unemployment rates are much lower and participation rates and average incomes from work of the employed are much higher and well above the recommended NMW. Though it should be noted that the average wage income of those employed who fall into Quintile 3 of R2651 per month, is still well below the R3500 per month recommended NMW.

The implications of a NMW set so far above average wages- is there precedent that can help us predict the employment effects with any confidence?

This begs the question – is there any precedent for a NMW or a sectoral minimum wage determination –be set so far above average earnings – and if so what have been the consequences for employment? Or put in another way is there reason given the facts of the labour market to think that the employment elasticities in SA are a lot more negative than the range of assumptions considered by the models. Time will tell much more about the consequences of the recommended NMW as the Panel complacently assumes and adjustments can then made to the model and the recommendations. But who will care for the unemployed and their dependents in the meanwhile?

How can an NMW help the poor – who are now mostly not employed?

It is very difficult to understand why the Panel should believe that the NMW can be helpful to the poor of South Africa or reduce inequality. Because fundamentally the poorest South Africans those in first and second quintiles, are mostly not employed. And when employed they are able to only command wages far below those of the recommended NMW that still leave them objectively poor.

The recommended NMW will surely make it even more difficult for them to find work that might for some, especially young workers, prove a path out of poverty. Thus the NMW is very likely to increase further the unemployment of low skilled potential workers in SA and to widen the gap between the average incomes of the high earners and the low earners, mostly no earners of the population. The poor of SA deserve better opportunities to work and more so the opportunity for their children to acquire the education and skills that would help them qualify for and find well paid work. They do not need further interference in their search for work.

Employers will make the adjustments that will confuse the observers

Though to complicate the numerical outcomes to be observed in due course, structural adjustments to employment practice will be made by employers in response to higher minimum wages. The adjustments will include more reliance on mechanisation and automation- requiring more carefully selected and skilled employees, forces that substitute capital for labour, especially less skilled labour, that are already well at work in the economy.

Other adjustments employers will make will be to offer fewer hours of work and significantly less by way of other important employment benefits, food and accommodation and contributions to pension and medical aid for example, the cost to employers and value to employees the panel refuses to recognise in its money wage only determination. Evidence of such reactions so unhelpful to low income workers comes from previous minimum wage adjudications in the agricultural sector. Fewer workers were employed permanently – less accommodation was offered on the farm – and higher transport costs was incurred byr workers busing in from informal settlements. And there is also bound to be less compliance with the law given the availability of cheaper labour and additional employment offered to illegal immigrants.

Why does the labour market only work well for the higher income earners? Is it because they are much less encumbered by regulations and collective bargaining?

A further observation of the inconvenient and uncomfortable truths of the SA labour market is that the supply and demand for labour are very well matched for the well paid and very poorly matched for the low paid. A very high unemployment rate – a large number of potential workers unemployed at current wages – is surely evidence of wage levels that are too high rather than too low to the important purpose of providing work for those who would wish to work- at prevailing wage rates.

These are not considerations that receive much attention from the panel. Other than a presumption of “structural imbalances” or why these structural forces that discourage employment do not apply to the most expensive of workers in SA who are so readily employed?

It is to be conceded that employment at low wages for those with limited skills cannot overcome the poverty of the working poor. But then what can – other than them acquiring the valuable skills that are in short supply and well worth hiring. Wishful thinking- waving magic wands in the form of un-affordable to potential employers of high minimum wages will not solve their problem.

But unemployment makes their condition more onerous and denies them the employment and low wage benefits that they would be willing to accept. A willingness demonstrated by their seeking work. And being unemployed prevents the potential worker from acquiring skills on the job and the opportunity to demonstrate their capabilities that add to their employment credentials. These opportunities are particularly important to young, unskilled entry level workers whose unemployment rates are regrettably but understandably well above average unemployment rates as is well recognised by the panel.

The panel might have sought an explanation of the high rates of unemployment of low income South Africans in the structural impediments to their employment in South Africa. Barriers to employment offered or accepted in the existing highly pervasive regulations of their employment contracts. It is not as if minimum wages have not been tried in SA. They are widely practiced and have surely had their effect on the employment of the lowest paid and least skilled.

The current regulatory barriers to employment in SA

There are in fact 124 separate such sectoral minimum wage determinations. They cover approximately 5m workers and 33% of those employed leaving only 35% of workers uncovered including presumably many of the better paid also without Union representation. The lowest such monthly determinations in 2015 ranged from R1813 for Domestic Workers to R2844 per month per Contract Cleaner in the lowest grades. The highest sectoral minimum determinations – for more skilled work- were R6155 for workers in private security and R6506 per month in Retail and Wholesale businesses.

The newly fashioned NMW is intended to remove all this administrative complexity – and presumably also the possibility of recognising very different labour market conditions – supply and demand – that may apply in the different sectors and regions of the economy. Conditions that participants in specific labour markets, unencumbered by regulations would be much better informed about than even diligent officials to the advantage of workers and their employers.

The case for best leaving the determination of an employment contract to willing buyers and sellers of labour does not get any hearing from the panel. While the collective bargaining process in SA that can easily be shown to protect the established interests of employees and their employers – the insiders – at the expense of the employment opportunities of the outsiders – receives nothing but uncritical approval from the panel- and with an appeal for the wider application of collective bargaining arrangements.

The influence of welfare on employment

Nor did the influence of SA’s extensive welfare system on poverty and employment receive much more than perfunctory and rather condescending attention from the Panel as follows.

5.43. “While wages are low relative to living levels, there are arguably some offsetting effects from the social wage spending by Government. About 35% of South Africa’s budget is spent on programmes targeted at the poor, including free basic education, health care, water and electricity, and income support grants for children and the elderly”.

They may, as did the Davis Committee on Tax Reforms, have referred to a report of the World Bank on the influence on incomes and their distribution of SA of its welfare system. To quote this study:

“But while incomes earned in South Africa may well be the most unequally distributed in the world – the distribution of expenditure is much less unequal. The World Bank shows, in a recent study, that South Africa does more to redistribute income in cash and kind to the poor than its developing economy peers with similar average incomes , Armenia, Brazil, Bolivia, Costa Rica, El Salvador, Ethiopia, Guatemala, Indonesia, Mexico, Peru, and Uruguay (South Africa Economic Update Fiscal Policy and Redistribution in an Unequal Society, World Bank, November 2014).”

As this World Bank study also reports:

“South Africa ranks as one of the most unequal countries of CEQ (Commitment to Equality Methodologies applied by official statisticians in income measurement) participant countries, if not among all middle-income countries, given its Gini coefficient of 0.69. The proportion of the population living in poverty at 33.4 percent measured by the international benchmark of $2.50 a day(purchasing power parity, PPP, adjusted) — is also higher than in many other middle income countries with similar levels of GNI per capita. For example, the poverty rate is 11 percent in Brazil and 4 percent in Costa Rica”

To quote further from the World Bank report:

“Briefly, this Update has two main findings. First, the burden of taxes falls on the richest in South Africa, and social spending results in sizable increases in the incomes of the poor. In other words, the tax and social spending system is overall progressive. Second, fiscal policy in South Africa achieves appreciable reductions in poverty and income inequality, and these reductions are in fact the largest achieved in the emerging market countries that have so far been included in the CEQ. Yet despite fiscal policy being both progressive and equalizing, the levels of poverty and inequality that remain are unacceptably high. South Africa is currently grappling with slowing economic growth, a high fiscal deficit, and a rising debt burden. In this context, addressing the twin challenges of poverty and inequality will require not only much-improved quality and efficiency of public services but also higher and more-inclusive economic growth to help create jobs and lift incomes.” (p22)

These income transfers and benefits in kind may moreover, influence the willingness to supply labour services at prevailing wages – especially when wages on offer are very low. By providing an alternative source of benefits welfare raises the reservation wage – the wage at which it makes good sense to work or to seek work, work that may well be physically demanding and less than enjoyable for its own sake. The panel might have paid much more attention to the supply side of the SA to help explain low rates of labour force participation. Also to help explain why immigrants from Africa are much more likely to be employed – at market related wages.

Economic growth and employment – ignoring the evidence

The panel remarks somewhat self-evidently that:

“An additional problem faced by the country is that there is evidence that the growth in the demand for labour in South Africa has not been sufficient to keep up with the much larger growth in labour supply.”

The panel quotes with seeming approval a study that apparently shows growth and job creation are not well correlated. To quote the Panel:

“Recent empirical work by Mkhize (2016) finds that the economy’s capital intensity undermines its ability to generate jobs in times of economic growth. He finds that, in the long run, growth and job creation are not correlated, although there is some sectoral variation. This points to the broader economic policy challenge facing South Africa, which is that there are structural barriers that exacerbate unemployment, the solutions to which require more than economic growth”.

A surprising conclusion it would be thought, given the fact that in the developed world incomes (GDP), population and the size of the labour force have grown together, as indeed it did in SA until the 1980s – as our own work has shown (see below), though such work on the relationship in SA between GDP and numbers employed is complicated by the absence of an official continuous long time series of numbers employed. Though the structural break in the relationship in the 1980s is easy to recognise and to be self-evidently explained by the increasing degree to which the SA labour market came to be regulated and the increasing bargaining power conceded to trade unions in the 1980s.

The recommended NMW represents more of the same lack of faith in market forces that encourage regulation, rather than regulatory interventions to generate growth and employment.

Another case I would suggest of economists as are the governments they usually serve, being part of the economic problem rather than the solution. 28 November 2016

Tough Love

National Minimum Wage Panel – do your duty and offer tough love and resist the arguments for economic miracles.

The government has (thankfully) decided to kick the National Minimum Wage (NMW) into touch. The hope must be that the panel come to advise that any NMW high enough to make a meaningful difference to the circumstances of the working poor, is a very bad idea. It’s a bad idea because it cannot offer much poverty relief (to those who keep their jobs) without destroying the opportunity for many more in SA, particularly the young and inexperienced and those outside the cities, to find work.

The problem is that even many of those who find work (mostly in the cities), at the lower end of the wage scales, remain poor. The working poor in SA have been defined as those who earn less than R4000 per month. Yet the problem is that most of those with jobs in SA earn much less than this, while a large number of potential workers are unemployed and earn no wage income at all.

According to a comprehensive recent study of the labour market in SA by Arden Finn for the University of the Witwatersrand, 48% of all wage incomes, representing 5m workers, fell below R4000 per month in 2015 and 40% earned  less than R3000 per month, about 2.7m workers out of a total employed of about 13m. The proportion of those employed who fall below R4000 are much higher in the rural areas, higher in agriculture (nearly 90%) and domestic services (95%). In mining, 22% of the work force earned less than R4000 per month in 2015, while in the comparatively well paid and skilled manufacturing sector, about 48% of the work force were estimated to earn less than R4000 per month.

How many would lose their jobs? And how many would hold on to them to receive the promised benefits of higher minimum wages? These are the numbers that would have to be estimated by the panel. They would have to allow for all the other independent forces at work, other than wages, that could favourably or unfavourably influence numbers employed. For those on the panel who believe that SA can repeal the laws of supply and demand for labour and that wages have little to do with what workers are expected to add to business revenues, and so higher minimums can happen without very unhelpful employment effects – there is a question they will have to answer.

If a higher NMW can make such a helpful difference to poverty without serious consequences for the unemployed and their poverty, why not set the NMW ever higher?  If an NMW of R4000 a month is not enough to escape poverty, why not double or treble these minimums? They must surely agree that the number of job losses would increase as the distance between current wages and the intended minimums widened. Agree, that is, that the only way to avoid extra unemployment would be to set the minimums very close to actual minimum wages in the very different locales where they are earned, a symbolic rather than a practical gesture.

The panel could turn to the well-known relationship between employment, employment benefits and output (measured as value added or contribution to GDP) in the formal sector of the SA for evidence that improved employment benefits, for those who keep their jobs, leads to less employment for the rest. GDP has grown consistently while employment has stagnated and the numbers unemployed have risen as the potential work force has grown. Yet the real wage bills have grown more or less in line with real GDP. In other words, the percentage decline in the numbers employed has been less than the percentage increase in employment benefits paid out. Nice work if you can get it and too many South African have not got it. And wages and profits have maintained their share of value added. Firms have adapted well to more expensive labour; the unemployed have not been able to do so. Their interests should be paramount in policy action.

An NMW set well above market related rewards will reinforce such trends. It will not be fair to the non-working poor nor promote economic growth, the only known way to truly relieve poverty and raise wages over time. It is the duty of economists to practice tough love – to recognise the inevitable trade-offs should a NMW be introduced. We can but hope the panel will do its duty and resist politically tempting actions that have predictably disastrous effects. After all, if we knew how to eliminate poverty with a wave of a wand (the NMW is such a wand) we would have done so a long while ago.

‘Season of outrageous demands for wage increases upon us’

As published in Business Day 10 July 2015: http://www.bdlive.co.za/opinion/2015/07/10/season-of-outrageous-demands-for-wage-increases-upon-us

THE season of outrageous demands for wage increases is upon us. And, more important, it is the season of wage agreements that appear to take little account of the hundreds of thousands of workers outside the mine and factory gates who would willingly accept employment for existing benefits.

Even more unsettling will be the loss of jobs, as managers replace unskilled workers with machines and more skilled and experienced workers productive enough to justify their higher costs of hire. The losers will be the newly unemployed with little opportunity for alternative employment on anything like the same conditions.

How, then, can one make sense of this seemingly irrational behaviour by the unions? How can they not be aware, it will be asked, as their members will continue to be retrenched in large numbers? Why do the unions do what they do? They are surely as well aware as any that higher real wages can lead to job losses in the sectors of the economy where they exercise the power to strike.

The answer must be that they are well aware of the economic circumstances and the trade-off between wage gains and job losses, which they make for their own good reasons. I would suggest that, in fact, unions are not in the business of maximising employment or employment opportunities. Rather, unions are in the business of maximising the total wages paid to their members. The objective they quite rationally and self-interestedly attempt to achieve is the highest possible wage bill, not the number of wage earners or members of the union. It is the total wage bill agreed to by employers that forms the basis for collecting dues from members. Therefore, (percentage) increases in employment benefits can more than compensate for fewer workers employed. And better paid members may be more willing and able to pay their dues.

It is theoretically and practically possible for the wage bill paid by firms to rise in both nominal and real terms even as employment drops. This is precisely what has happened in the mining and other sectors of SA’s economy. While employment has declined in recent years, total compensation paid to employees of all kinds has continued to increase, and so presumably have the dues paid to their unions (collected conveniently by the employers themselves).

To put these outcomes in terms familiar to the financial sector, the asset base of the unions and staff associations from which they collect their fee income — the wage bill — has continued to rise as the unemployment rate continues to remain damagingly high to the economy, but not necessarily to the unions. There is nothing ignorant or irrational in all this, just predictable self-interest at work. Such an explanation fits the facts of the economy and its labour market well.

The statistics help make the point. SA’s economy may well have become less labour intensive — fewer worker hours employed per unit of gross domestic product (GDP) — but the share of total remuneration in GDP or total value added has changed very little. The wage bill (not numbers employed) has risen more or less in line with output. The share of owners and funders and rentiers in SA output peaked at about 47% of GDP in 2008 (before the global financial crisis) and has been in decline since (now 44%) as the share of employees has been rising. Employment benefits now constitute 46% of GDP. That is despite or maybe because of slow growth that reduces the rewards for savings and the demands for labour — but not necessarily the rewards of the majority who hold on to their jobs.

A similar picture emerges for the mining sector. The share of mining output accrued by employees has been rising in recent years, from 35% of total output (in current prices) to about 42% in 2013. In other words, the unions appear to be successful if their objective is (as I infer) to increase the wage bill paid by the industry rather than the numbers employed at the expense of the other claimants — shareholders and creditors — on the value added by the mining sector

Thus, while mining employment was at 2008 levels in 2013, average employment benefits per worker employed have risen consistently, at an average annual rate of more than 11% in money-of-the-day terms, and equivalent to an average increase of 4.5% in real terms, using the GDP deflator to convert nominal into real growth of employment benefits or rather costs to owners. The average employee in the mining sector came with an average cost to employers of more than R220,000 per employee in 2013. Not bad work if you can keep it.

The data on compensation of employees supplied by Statistics SA goes back only to 2005. It is, however, possible to view mining output and employment over a much longer period. The mining work force declined dramatically in the 1990s, from nearly 800,000 employees to about 400,000 by 2002, whereafter the number rose to more than 500,000 in 2008. Volumes of mining output, having declined in the 1990s as metal prices came under pressure, increased significantly in the mid-naughties, only to fall away again after 2008. The producers of iron ore and coal produced significantly more during the commodity price super-cycle that accompanied the Chinese thirst for raw materials. The big losses of output were suffered by the gold mines, as they ran out of profitable grade to extract.

But a focus on mining volumes rather than mining revenues (volumes times price) misses the driving forces in the industry. SA’s mining industry had the advantage of rising prices, especially after 2000, and became significantly more profitable — enough to hire more labour as well as offer significantly higher rewards to its employees between 2000 and 2008, after the savage job losses incurred in the 1990s.

A better sense of the environment for SA’s mines, for their owners, managers and workers, can be gained if we reduce mining revenues to their real equivalents by deflating current revenues by prices in general, represented by the GDP deflator, rather than by the index of the prices of the metals and minerals themselves, which rose much faster than prices in general to the advantage of the mines. Real mining revenues measured this way show a strong growth pattern until 2008 and explain the employment and wage trends much better than mining volumes that have remained almost constant over many years.

Notwithstanding a better appreciation of SA’s mining environment, it can still be asked about employment of workers in SA that is so desperately needed. A better understanding of the self-interested behaviour of the unions (in the quantum of dues collected) and the shareholders in mines attempting to improve returns on their capital, which have led to fewer better paid and skilled workers, should lead us to expect more of the same in the years to come. This would be a trade-off of better jobs in the industry for fewer employment opportunities and more capital (robots) per unit of output.

What then can be usefully done to encourage employment in SA, especially of unskilled workers, of whom there is an abundance? The first step would be not to look to the established unions or firms as sources of employment gains. The right way to look for employment gains is to find ways to inject competition in the labour market. Competition for customers and workers and competition for work will help convert the pursuit of self-interest to better serve the broad interests of society; that is in more employment.

More competition for the established interests in mining and every other sector of SA (unions and firms) from labour-intensive firms needs to be encouraged in every way possible. This means, in practice, rules and regulations that allow willing hirers and suppliers of labour to more easily agree to terms (they may well be low-wage terms) without artificial barriers. These barriers to more competition in the labour market come particularly in the form of closed shop agreements that apply to all firms and workers, wherever located or regulated. Less regulation and more competition is the solution to the employment problem. Higher employment benefits for the fortunate few with artificially enhanced bargaining powers will not reduce the unemployment rate any more than it has to date.

Labour relations, the elephant in the room of the 2013 Budget

Pretence about wages and employment harms the SA economy and the poor

There is a politically convenient illusion at the heart of SA’s dysfunctional labour market, which is well demonstrated in the balancing act forced upon the Minister of Finance in his 2013 Budget proposals.

The dysfunction is the large and ever growing gap between the potential supply of labour and the demand for labour by formal sector employers. The formal economy has become ever less labour intensive, while the real wages of those in formal employment have grown significantly. The gap between real GDP and formal employment has grown consistently over the years. And competition between labour unions to represent the increasingly well paid formal sector workers has intensified, leading to unprotected strikes and the disruption of production. The figure included in the 2013 Budget Review makes the essential point: it show how the growth in GDP, or value added, has consistently exceeded the growth in the numbers employed. These are dangerous trends, crocodile jaws that might well eat up the economy unless this gap can be closed.

Employers in SA have been forced to pay higher wages by unions capable of disrupting production. Higher minimum wages and limited normal hours of work have added to the costs of hiring labour. The rights of employers and their rights of dismissal for unsatisfactory work have become highly attenuated and have added to the risks and costs of providing employment.

What is not appreciated by many in government and in the unions is that employers, sometimes to the obvious frustration of the unions and the politicians, retain the right to decide how many workers to employ. And private sector employers, with their own or their shareholders savings (capital) at risk, have responded by employing fewer workers whom they pay higher real wages but reinforce with more and superior quality machinery.

The reality for the average formal sector business is that capital has become relatively cheaper and equipment more productive while employing labour has become more expensive and maybe even less productive, when the contribution of capital to output is factored into their production functions – hence a smaller proportion of workers with formal sector jobs. And with fewer workers formally employed this means many more employed outside the formal sector, unemployed or discouraged from seeking employment.

The gains made by the formally employed have come at the expense of those who have found it so difficult to break into the ranks of the better off formally employed. Their frustrations are highly understandable but they appear to have had much less political support than the unionised workers, protected against lower wage competition. These labour market outsiders are not the only parties disadvantaged by these trends in the labour market. Artificially expensive labour is to the disadvantage of formal business as well, since they might have grown faster had they been encouraged to employ more labour. Labour intensive entrepreneurs able to compete with the established, capital intensive firms are thin on the ground.

It is not an accident that employment by government agencies has grown significantly while employment conditions have improved considerably, both in real terms and also in comparison with benefits provided in the private sector. Taxpayers have proved remarkably generous in their treatment of government employees. We cannot be definitive due to inconsistencies in the Statistics SA data, but private sector employment declined by around 1 million between 1994 and 2012 whereas government employment grew by around 1.5 million over the same period. At any rate, the public sector now employs 2.83 million people or nearly 1 in 4 formal sector workers.

This no doubt has encouraged the belief that neither wages nor the productivity of labour has anything to do with employment opportunities in the public sector, ie it is not economics but politics that determines who earns what.

The illusion is also that all employers can and should provide decent jobs with good pay. The unfortunate reality is that many South Africans and most of those without formal employment do not possess the skills to command so called decent (well paid) jobs. Therefore even when those without valuable skills manage to find work they will not easily escape poverty. Unfortunately low wage employment is the only realistic alternative to unemployment. Presumably, for many actively seeking work, low paid work would be preferred to no work at all. Given the quality of the SA labour force, and given the inadequacy of the education and training provided many South Africans during and after apartheid, the choices in the labour market are unfortunately limited to low paid work or no work.

It is this illusion that has led recently to a 50% increase in the minimum wage for agricultural workers, to a countrywide R105 per day. This is despite very different supply and demand conditions around the country. It is also despite the fact that employment in agriculture, hunting, forestry and fishing (according to the Quarterly Labour Force Survey) fell precipitously from 1.362 million in September 2000 to a reported 624 000 in September 2011. The presumption must surely be that minimum wages and other regulations applied to agriculture have had a major influence on this outcome and that the higher minimum wages will lead to further losses in employment. This is so even though the higher minimum wage of R105 per day, will not enable these farm workers and their families to escape poverty.

There is a great divide between those South Africans in what may well be described as “decent jobs” and those many more who stand outside the gates and are understandably anxious to enter the more comfortable world of formal employment. The outsiders may be unemployed – actively looking for work and able to accept a job offer at short notice – or they may be working, usually for lesser benefits in the informal sector, or they may well have withdrawn from the labour market. A definitive account of the unemployed or discouraged workers as well as those working part time or full time informally is not available. We have to rely on surveys and the responses of the sample of households surveyed for evidence of employment status (which may not be reliable).

The 2011 census estimated the unemployment rate, narrowly defined as the percentage of active work seekers in the labour force as 29.8%, with the labour force being defined as the sum of the employed and unemployed. The absorption rate of the economy, that is the numbers employed as a percentage of the working age population, makes even grimmer reading: it averaged only 39.7% while the labour force participation rate (the labour force, employed and unemployed) as a percentage of the working age population was only 56.5%.

These rates varied widely by racial group and gender with black South Africans and black women the least likely to be employed or to participate in the labour force. The absorption rate for black men was estimated at 40.8% while that for black women was much lower at 28.8%. The percentage of white men of working age absorbed into employment was 75.7% while that of white women was 62.5%. The reality is that the real incomes of those in work have been rising significantly, while the numbers employed in the formal private sector have moved significantly in the other direction since the Labour Relations Act was introduced in 1995, even while the adult population and the potential supply of workers to the formal sector has grown significantly. Supply and demand for labour has not been allowed to work as it might have done with less interference.

The harsh truth is that for many South Africans unable to gain entry to formal employment, it will continue to be a choice between low pay determined by the realities of the supply and demand for labour or no pay at all. Migration from the regions of slow growth to seek work in the faster growing cities may be the only alternative to not working. Their opportunity set could however be widened significantly were the rules that govern employment opportunities to be relaxed.

It is high time, in other words, to restrain the power of the trade union movement that has been so enhanced in recent years by regulation and legislation . We can do so in several practical ways, all of which are consistent with Article 23.1 of the Universal Declaration of Human Rights, the so-called “right to work” as Loane Sharp of Adcorp has detailed (Business Day, 25 May 2012: http://www.bdlive.co.za/articles/2012/05/25/loane-sharp-sa-s-trade-unions-the-biggest-obstacle-to-job-creation#).

He suggests:

• Repealing the “closed shop” laws that compel job-seekers to join a trade union as a precondition for obtaining a job;
• Repealing the “agency shop” laws that compel workers to pay trade union membership fees whether they belong to a trade union or not;
• Requiring that trade unions ballot their members ahead of a strike, and further require that a two-thirds majority votes in favour of a strike;
• Prohibiting open ballots and requiring secret ballots, since open ballots lead to intimidation of union members who vote against a strike;
• Prohibiting employers’ collection of trade union dues on trade unions’ behalf;
• Prohibiting the automatic extension of bargaining council agreements to entire industries or sectors, so that these agreements are voluntary;
• On a nationwide basis, placing an upper limit on wage settlements, so that wage increases may not exceed labour’s marginal nominal productivity growth; and
• Making trade unions liable for the loss of company earnings that occurs during unprotected work stoppages.

The hope must be that over time increased spending on education and training will provide the entrant to the labour force with the skills that command good pay. The further hope is that the economy, helped by a much more flexible labour market, can grow fast enough to cause a shortage of unskilled labour relative to the availability of skilled labour, capital and natural resources. The competition for unskilled workers will then help in time to provide decent jobs for all. It can be much faster than trickle down – more like a torrent of real wage growth should the economy grow faster. It is certainly capable of doing this with the encouragement from a much more functional labour market. Brian Kantor

Employment: The annual strike (that is the loss of jobs) season is well under way

The annual strike season is well under way. The usual well above inflation increases are being demanded accompanied by the usual marches, highly rhythmical toi-toing and some violent intimidation of workers, less inclined to put their jobs at risk. And after losses of production and presumably also of wages, management and unions settle on still significant increases above recent inflation rates.

The season might well be called the season of further loss of permanent jobs in the formal sector of the economy. Wages and benefits improve for those who keep their jobs, while management are strongly encouraged to proceed with operating strategies that rely less and less on unskilled labour and more on capital equipment employed.

The outcomes are plain to see in the ever widening gap between output growth and formal employment growth. This has become ever more conspicuous after 1995, due to more onerous regulation of the SA labour market (for management).

The labour saving logic practised by management is sensible enough – including their willingness to concede well above inflation increases. The logic driving union action is less obvious to those outside the ranks of union leaders and presumably their generally supportive rank and file who seem to appreciate a good fight with their bosses. One might be inclined to think, given the long established employment trends, that the leaders would rather wish to encourage employment (perhaps of their sons and daughters) and so union membership and the dues they collect with less militancy and less aggressive demands for more. Clearly there is something else at work that makes union militancy, rather than co-operation, the action that keeps the union leadership in their jobs. And so the history repeats itself: higher real employment benefits, fewer formal sector jobs and productivity gains to compensate for more expensive labour.

Shareholders by contrast have no reason to be immediately concerned about these trends, unless they fear, as they may well, the instability threatened by the growing divide between those in good jobs and those increasingly excluded from gaining access to them. But this is an issue that the management of any one firm cannot address. The reality is that management teams have adopted labour saving or especially unskilled labour saving policies that have proved to be consistently profitable and can be expected to continue to be profitable.

Over recent years the share of operating surpluses in the gross value added by the SA corporate sector has if anything tended to rise while that of employees (including managers) in the form of wages in cash and kind has tended to fall. In other words operating profits have been improving despite higher wages for those who hold on to their jobs.

The share of the operating surplus in the value added by non-financial corporations in SA and their gross cash savings is shown below. As may be seen it is a much improved picture, especially in the form of cash flow generated by these firms that has no doubt added to balance sheet strength and added value for shareholders.

The issue confronting the firms, the unions and SA generally, is how these cash flows and profits should best be employed – in reducing debt, paying dividends, making acquisitions or (much more helpfully) for economic growth adding to capital equipment or workers employed.

The answer for SA is obvious enough to all – more jobs. The uncomfortable truth is that management has no good reason to alter its ways. They are reacting to the fact of economic life in SA that the real cost of capital, in the form of a lower risk premium paid by SA firms, has come down materially, given a most helpful political transformation. Over the same period their real cost of hiring labour has increased materially.

It would seem obvious to all but those who find it convenient to deny the relationship between employment levels and employment benefits. That is to say. in the interest of more formal jobs, it is the unions that need to become less militant and more co-operative with management. The unions need to promote employment by encouraging the adoption of policies that would make for a more flexible labour market and a much more mobile labour force that could adapt appropriately to the state of the economy. Maybe only an economic policy Codesa will lead to this.

To view the graphs and tables referred to in the article, see Daily Ideas in the Daily View:
Daily View 21 July

Industrial and employment policy: A new dawn or a false dawn?

The long awaited subsidy for Job Creation has become a reality. The Jobs Fund will make available R9bn over the next three
years as a subsidy for jobs to be created and encouraged with R2bn available this financial year. The fund will be administered by
the Development Bank (DBSA). It will be “…targeted at established companies with a good track record and plans to expand
existing programmes or pilot innovative approaches to employment creation, with a special focus on opportunities for young
people..” (Q&A, Media Briefing, Houses of Parliament, 7 June 2011).

The four areas of focus are Enterprise Development, Infrastructure Investment, Support for Work Seekers and Institutional
Capacity Building, including internship and mentorship programmes. The focus seems broad enough to cover almost any aspect
of business activity.

The approved programmes will be “..cost and risk shared by participants..to ensure real ownership..” In other words, private sector
participants will have to provide matching funds on a 1 to 1 ratio. A reduced own contribution is intended for “non-private sector
applicants” These would include municipalities and public enterprises. It may presumably include NGOs and their like. Applications
must be made by 31 July for funding this year.

The scheme will clearly be employment creating among the ranks of the consultants. It should prove particularly welcome to firms
with well established training programmes. “Support for Work Seekers; assistance with job search, mobilisation and enhancement
of training activities, support for career guidance and placement services” (Media briefing) will surely prove a boon to the well
established and much maligned labour brokers. The statement above reads like an accurate description of their business model.
The SA government is trading off a significant proportion of its corporate tax base for new industrial projects and subsidies for
employment. In addition to the R9bn Jobs Fund the newly defined s12i Tax incentives are backed by a 2011-12 Budget allocation
of R20bn. These are by no means trivial amounts in absolute terms, or relative to all the tax collected from SA companies. It would
be of interest to know the proportion of company taxes paid by manufacturers. Would it be as much as R20bn allocated in the
2011-2012 Budget?

In the 2010-11 Budget estimated revenue from companies was R150bn or 24% of all estimated tax revenues of R643bn. The SA
government’s dependence on income from companies is unusually large. In many other tax regimes the corporate tax rate may be
comparable to the rates levied on company profits in South Africa. But when taxes actually paid are reduced by investment and
many other allowances provided by government to stimulate investment and job creation, the effective (economic) tax rate
becomes much lower than the nominal company tax rate.

SA is following this route. More subsidy and allowances provided for companies, in one way and another, tax concessions and job
subsidies included, that lead to less tax paid and a lower effective tax on business profits. No doubt these lower taxes paid will be
very welcome to businesses that are able to engage skilfully with the system.

If however the path of government spending is to remain unaffected, as would appear likely, the taxes saved or the subsidies
provided to the companies that benefit, would have to be made up by taxes collected from other taxpayers. This must mean
increased taxes on consumption expenditure or on individual incomes; or companies outside the sectors favoured by industrial
policy will be forced to pay up for the benefits provided to industry.

The SA government clearly thinks, as do governments almost everywhere, that it can do better than simply providing an
encouraging tax and regulation environment for business in general. It clearly believes it can pick the winners in the industrial
space rather than leaving the investment and employment decisions to participants in the market place on a field levelled by
equally generous tax treatment, irrespective of the designated activity and location in which it takes place.

It would promote economic growth in SA if more generous investment or depreciation allowances were offered to business in
general rather than those judged particularly worthy by the bureaucrats involved. This would encourage companies to save and
invest more of their after tax earnings or cash flow. Investment allowances reduce the taxable income of companies, leading to
less tax paid and more cash retained and invested. This would lead in turn to more output and employment. But this is an
argument for lower business taxes in general rather than for particular benefits or subsidies.

One has to question the ability of the government through the Department of Trade and Industry (DTI) or any other of its agencies,
the Development Bank or the IDC, to pick the winners, without fear or favour, among the many proposals that are bound to be
made to it. As indicated there will be a great deal of taxpayer’s money at stake.

The government has proved itself much more capable of raising tax revenues than spending them effectively. The subsidies or tax
concessions will surely add to industrial output and employment. But we will never know how much better the economy might have
done and the employment created had much less discretion been exercised over tax concessions or subsidies. As the saying goes if you want more of something subsidise it, if you want less tax it. SA is doing both – extracting more tax from some
employers, employees and consumers, while subsidising other businesses and their employment decisions more generously.

The government through the DTI (and organs like the competition authorities) seems to show a marked and regrettable lack of
respect for the creative powers of private businesses. The simple recipe for economic growth is one that relies on businesses
directed by their owners and senior managers, to pursue their self interest, constrained essentially by the competition provided by
other businesses for their customers, workers and providers of capital. Economic history has surely proved that the recipe works.
But governing best by governing least does not serve the interest of ambitious policy makers. There is a constant flow of new
regulations and intrusions that SA business has to manage which adds to their costs and reduces their competitiveness with
imported goods. There moreover appears no popular ground swell of support for activist economic policies. The impetus seems to
come directly from officials and their consultants.

The poor protest about the lack of delivery of basic services by government not about the lack of delivery of basic goods and
services by businesses. SA Business, unlike the SA government, delivers very effectively. It would deliver more jobs if the labour
market were less heavily regulated to encourage them to do so.

Industrial policy and the Job Fund have become an expensive and counterproductive alternative to sensible, employment growth
encouraging, de-regulation of the labour market. The intervention by the competition authorities in the employment and
procurement decisions to be made by Massmart and Wal-Mart provide an obvious case in point and a further example of
government officials thinking they know better how business should be run in the interest of more employment. The goods and
services market has been made less competitive to make up for the lack of competition in the labour market. The employment
problem is one of the government’s own making, acting as it has done to entrench the rights of established workers, at the
expense of potential entrants to the ranks of the formally employed.

The government and its officials will no doubt point to the jobs gained through subsidy and perhaps also compulsion to employ
more labour demanded of the government departments themselves and publicly owned enterprises. The jobs lost because of
higher taxes and job destroying regulation will be much less obvious and ignored to the great disadvantage of the poor in SA who
need jobs – not handouts to lift them out of poverty.

The solution to the failures of the SA economy, or rather its formal businesses to provide jobs would seem obvious to all but those
with an interest in the status quo – the trade unions and the officials who write and implement interventions in the labour and other
markets of the economy. This is to rely less on government and its regulatory, taxing and subsidy powers and more on private
business to deliver more of the essential goods and services demanded in a modern economy.

To view the graphs and tables referred to in the article, see Daily Ideas in the Daily View: Daily View 8 June: Industrial and employment policy: A new dawn or a false dawn?

Good news about home loans and employment

In a previous note on the state of the SA economy we pointed to the weakness in bank lending and the slowing growth in the money supply, particularly in the supply of Reserve Bank cash to the banks and the public. This indicated to us that while the SA business cycle was firmly in an upswing phase, the pace of recovery was not accelerating.

We showed that the housing market leads the credit market – higher house prices both encourage home owners to spend and borrow more and encourage entrants to the housing market. Higher house prices also mean larger mortgage bonds issued by the banks.

We suggested that what was needed to add momentum to the housing and credit markets market was growth in employment. Get a good job and the credit to buy a house and a car will likely follow.

In this regard the news from both the job and home loan markets in March, released this week by the leading employment agency Adcorp and the bond originator Ooba, was very encouraging. Ooba reported via I-Net Bridge that the number of bond applications in March had reached a three year high, that the average number of bond application in March was the highest level recorded since May 2008 and 36% higher than the average monthly application intake recorded in 2010. Not only applications but approved home loans were also strongly up and represented the highest value of approved home loans since October 2008. Yet these much improved volumes of potential bond business were still only 36% of the application volumes recorded at the peak of the market in May 2007.

Adcorp monitors the labour market very comprehensively and reported in its March Employment Report that in February employment in the formal sector was up 7.3% on a year before while informal employment grew by 2.0% “, the first time since January 2006 that the formal sector drew workers out of informal employment..” Its Index of Employment, having moved sideways, is now pointing higher.

The business of Adcorp is to find jobs for workers, something it has proved very successful at but whose success has inspired a Cosatu led thrust to close its business down.

The news from the labour and housing market must be regarded as encouraging, but not yet encouraging enough to lead the Reserve Bank to become less cautious about the state of the economy. As the IMF suggested, and as we have done, any early move to higher interest rates would be highly premature. Hopefully also the SA government will leave what is working well in the labour market (the demand for and supply of temporary employment) well alone.

To view the graphs and tables referred to in the article, see Daily Ideas in todays Daily View: Daily View 13 April: Good news about home loans and employment

Employment: A call for economic realism, not wishful thinking

The employment problem in SA has become a major focus of government action. Employment in the formal sector, that is with employers who provide medical and pension benefits and collect PAYE , has lagged well behind GDP growth since the mid 1990s.

Furthermore real remuneration per worker since then has increased significantly over the same period. The two figures below, provided by Adcorp, tell the full story of much better jobs for far fewer workers. The SA economy, or at least the formal part of it, has become much less labour intensive, and much more capital and skilled labour intensive. Decent jobs, but only for the fortunate few, is the SA reality.

The less fortunate or less well endowed with skills get by finding work outside the recorded regulated sector and depend increasingly on welfare grants. Immigrants, of whose large numbers we are uninformed about, without cash grants support from the SA government (i.e. the taxpayer) seem to find work easily enough, though no doubt at highly competitive wages.

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Continue reading Employment: A call for economic realism, not wishful thinking