The government, the African National Congress (ANC), big business, and labour say they want inclusive growth as part of a post Covid-19 recovery plan. Before the mention of the word growth, they all place the adjective “inclusive” to denote an expanding economy that generates jobs and makes inroads against poverty and inequality.
With the economic devastation of the lockdown, finding ways to make it easier to create jobs through labour-intensive businesses should be the policy priority.
High unemployment is a significant, if not the dominant, factor behind poverty. Improvements in education and more efficient transportation to areas where there are jobs would also help in reducing poverty, but the creation of low-skilled jobs would offer the biggest boost.
South Africa has an appalling record on unemployment and the situation is deteriorating. In South Africa the term unemployed covers those who have looked for work in the past month.
Over the past year unemployment has reached successive all-time highs, and in the first quarter of this year was at 30 percent. It is highly likely that the numbers of unemployed and of discouraged job seekers would have substantially risen over the lockdown. The youngest, those aged between 15 and 34, have been most affected by layoffs and will have the biggest problem in finding jobs. In March, the unemployment rate of this cohort was 59 percent, which means they amount to more than 63 percent of those looking for jobs. Most of the job losses in the contraction that began last year were among those with few skills.
Reforming the country’s inflexible labour markets to give job creation a better chance is a policy for which many private sector economists, the IMF, and the credit rating agencies have been clamouring for years. In virtually every speech he delivers, the Governor of the Reserve Bank, Lesetja Kganyago, calls for labour market reform.
Soon after coming to power the ANC brought in labour laws that resulted in labour policies that made it difficult to set minimum wages suited to a firm’s circumstances, and made it more difficult to fire, and hence hire, workers.
The Big Three that dominate the National Economic Development and Labour Council – government, big business, and the unions – have been largely silent on the issue of the labour laws. Big business has said in its proposal for a post-Covid-19 economic plan that it wants restrictions on bargaining councils’ ability to impose minimum wages, but it has not provided specifics.
Any change to the labour laws will be politically difficult. For the government there would be a big price to pay with their union allies. Labour unions are afforded protection by the labour laws, and big business can carry the cost to an extent through high margins and capital intensity.
Some years ago I got into a conversation with a Cabinet minister on the labour laws and mentioned that the weight of opinion of private sector economists was that they were problematic for job creation. His retort was: “We will not allow SA to become a low-wage economy.” I did not have the presence of mind to come up with a reply, but in hindsight it might well have been: “Do you want SA to become a high-unemployment economy?”
The labour laws protect those with jobs and leave those who don’t have jobs unable to sell their labour at below a price that has been set in a bargaining council. That gives little recognition to local factors or indeed the position of smaller companies. This is a form of protectionism and leaves many unemployed.
Nicoli Nattrass and Jeremy Seekings, professors at the University of Cape Town, argue in this paper for the Centre for Development and Enterprise that South Africa’s labour and industrial policies are biased against labour-intensive growth. They argue that the country’s minimum wage retards the expansion of labour-intensive industries and favours capital intensity. Higher wages mean companies have an incentive to invest in capital rather than labour.
According to Nattrass and Seekings, the country’s “present labour regime has contributed to mass unemployment.”
The wage-setting mechanism in South Africa is overwhelmingly centralised and rigid. In many sectors, wages are set through collective bargaining between unions and the largest employers. Under law these agreements can then be extended to small and medium-sized businesses.
This heavily favours big and market-dominant firms who have substantial economies of scale and have sufficient margins to afford higher wages. It is a fundamentally unjust and anti-competitive system that allows larger firms and unions an almost free ride over competition. Smaller firms that are not parties to bargaining council wage agreements often do not have the cash flow to pay at the same levels of big firms.
Nattrass and Seekings suggest the Labour Relations Act be amended to require the Labour Minister to consider potentially adverse employment consequences before extending collective agreements to entire sectors.
Pay in sectors outside of collective bargaining agreements falls under the National Minimum Wage Rate, which the government set at R20.76 an hour from March this year. There are a number of exceptions to this, with farmworkers entitled to a minimum wage of R18.68 an hour and domestic workers, R15.57 an hour. The lower end of the pay scale is for those working on the government’s jobs creation scheme, the Expanded Public Works Programme, who are paid R11.42 an hour.
If the government is permitted to pay the lower minimum wage to those working on the public works programme, surely the private sector should also be allowed to pay this rate?
Employing those with few skills in productive private jobs at the same rate as paid by the government would be an undoubted public good, yet the law does not allow this. To encourage the employment of the low-skilled, Nattrass and Seekings suggest that the private sector be allowed to pay at the same rate as the government’s expanded public works programme, R11.42.
South Africa’s labour laws are more inflexible than those of the predominantly ‘rich country club’ of the Organisation for Economic Cooperation and Development. Hiring and firing are particularly difficult here. The costs of dismissal and retrenchment can be a large part of the total labour costs facing businesses, and act as a deterrent to taking on new workers.
Changing the labour laws is politically difficult, as it is not in the interests of the unions to give way on this and it is also highly doubtful that they would trade this for a commitment by other members of the Big Three on another issue. Big business agreed to the labour laws and has not pushed for change with any urgency.
With their own calls for inclusive growth, the Big Three are now on the line to come up with something that actually creates jobs.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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