Can we fix unemployment in South Africa?

by Loane Sharpe: An economist and labour analyst at Adcorp, an international award-winning researcher who is widely published in academic and business journals, and an eminent authority on the SA labour market.
South Africa has not always had high unemployment.

Although it is true that, prior to 1994, Black South Africans were not properly represented in official statistical surveys, the best available estimates suggest that South Africa’s unemployment rate increased from about 7% in the mid-1970s to 13% in the mid-1990s and 25% in the late 2000s. To the South African government this is an inconvenient fact, since it implies that current high levels of unemployment are largely a post-apartheid phenomenon and not, as many officials and academics would prefer it, a legacy of apartheid. Acceptance of this fact – and its implication that unemployment has current rather than historical causes – is the necessary first step in fixing the problem. So long as we cite historical causes, we live in a fantasy world where unemployment can only be addressed when the legacy of apartheid itself is finally addressed. Indeed, persistent belief in the faulty “structural unemployment” myth led the ANC government for many years to relegate education, labour and other policies to the sidelines when, in fact, they could have made an enormous difference.

While we are debunking myths it is worth noting that, though South Africa’s unemployment rate is one of the highest in the world (in 2010 there were 8.5 million unemployed and under-employed people), this does not mean that millions of South Africans are destitute and starving. Our research shows that informal sector employment (i.e. employment that doesn’t necessarily involve a formal employment contract or membership of a pension fund or medical aid) is substantially underestimated in South Africa. If we fully account for informal employment, South Africa’s unemployment rate is closer to 8% than 25%. This suggests that many millions of enterprising South Africans make a living on a daily basis and, while that living may not be luxurious or even “decent”, many South Africans have been labelled as “unemployed” incorrectly. This, too, is an inconvenient fact: many millions of enterprising South Africans make a living on a daily basis and neither pay taxes nor adhere to labour laws.

So can we fix unemployment?

As we have argued above, this would largely entail (a) unravelling the post-1994 changes that have caused the unemployment rate to nearly double over that period; and (b) bringing millions of informally employed people into the formal sector. This essentially requires revising two areas of the Labour Relations Act of 1995 (“LRA”), namely collective bargaining procedures and protections against dismissal.

According to the World Economic Forum (WEF) – an international grouping of the world’s largest multinational corporations, obviously representing businesses’ perspective on things – South Africa’s labour laws and regulations rank 133rd (i.e. the 7th-lowest) among 139 countries in the world, particularly in three areas: hiring and firing practices (135th), cooperation in employer-employee relations (132nd), and flexibility of the wage-determination process (131st). All three areas are governed by the LRA.

Historically, the LRA was one of the first pieces of legislation introduced by the ANC government in the post-1994 period. It followed from a pervasive belief (held more by the ANC’s election partner, Cosatu, than by the ANC at the time) that workers had been exploited and oppressed under apartheid. In the government’s words, “industrial relations in the apartheid era were characterised by high levels of racial discrimination, conflict, union repression, cheap-labour policies and authoritarian management.”1 Apartheid, in this view, was a capitalist system designed to suppress wages and working conditions for Black South Africans. As the Free Market Foundation argues, apartheid was neither capitalist nor market-oriented2. Nonetheless, labour market reform – more so than the Constitution itself (which was introduced only later, in 1996) – was an overriding objective of the new coalition government. However, the industrial peace to which the LRA aspired failed to materialise. In 2010 there were more working days lost due to strikes and work stoppages than at the peak of “rolling mass-action” under apartheid. As the WEF notes in its 2010 Global Competitiveness Report, South Africa has the 8th-highest level of industrial conflict in the world – despite having, in the South African government’s view, some of the world’s “most progressive” labour legislation.

The LRA has moved South Africa backwards rather than forwards. Firstly, dismissal protections – which make it exceedingly difficult to fire workers who fail to perform or even to show up for work – have made falling labour productivity an endemic rather than occasional or isolated problem. As the WEF notes, South Africa’s hiring and firing practices rank the 5th-worst in the world. Secondly, the collective bargaining process – which gives significant power to trade unions and bargaining councils – has allowed two-digit wage escalations to co-exist with falling labour productivity. As the WEF notes, South Africa’s wage determination process is the 9th-most inflexible in the world. The inability to get workers to perform, and the inability to pay them for their performance, are the single biggest drivers of low employment, which in turn is the primary cause of high unemployment. As a result, big and small employers alike are considering how to mechanise, automate and generally do away with labour: the labour intensity of production for South Africa as a whole has fallen by 16% since 1994.

In our lifetime, collective bargaining and dismissal procedures will be revised. Cosatu’s 1.8 million members cannot indefinitely call the shots relative to 8.5 million unemployed and under-employed people. The political calculus for the ruling party does not otherwise make sense. However, given the restrictive labour legislation currently being considered by Nedlac, Cosatu and the government (or, at least, the Department of Labour) appear to be hell-bent on moving in the opposite direction. It is likely to take time, but an about-turn is in the making.

  1. http://www.southafrica.info/business/economy/policies/labourbodies.htm  
  2. Apartheid, in this view, was at best a mixed economic system with heavy government influence and, at worst, a government-directed totalitarian state.

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