Poverty wages are no solution to SA's unemployment crisis

The economy must be reshaped so that we no longer have such obscene levels of high individual wealth in a country that is defined by its poor

14 October 2018 - 00:00 By IMRAAN VALODIA and KIM JURGENSEN

Everyone agrees that unemployment is the major economic problem in SA, and that government policy needs to address this scourge.
There remains debate about why unemployment is high, and what policies are required to address the challenge. Ann Bernstein lays the blame on government policy. She argues that it favours high wages and protects employed workers. This, she says, favours the insiders who have jobs at the expense of the 9.6-million who don't. Her advice: reduce the costs of employment by reducing labour protection and cutting wage costs, especially for new and small businesses. Bernstein and her ilk have been trotting out this for years. She is wrong on many levels.
Let us look at some facts. First, the economy has produced jobs. We use the Labour Force Survey to estimate the levels of employment and unemployment. In 2001, when the survey was undertaken, there were 11-million workers employed in SA - 7-million in the formal sector, 2-million in the informal sector, 1-million each in agriculture and domestic work. The latest survey estimates total employment at 16-million - 11-million in formal employment, 2.7-million in the informal sector, 1.3-million in domestic work, and 830,000 in agriculture.
So the economy has created jobs. The formal sector is now 1.5 times what it was in 2001. On these terms, SA performs better than most comparable economies in generating new employment opportunities. It is not enough to meet the challenges but it is important to note that employment has grown significantly.
Second, much of the growth has been in low-paid jobs, and we have a significant problem of low-paid work that is not protected by regulations. Almost half of those who have a job earn less than R3,500 a month - 6.4-million. That is hardly enough to make ends meet for one person, let alone for a family.
The facts do not support Bernstein's arguments. If she calls R3,500 a month "relatively high" she must tell us how low she thinks wages must fall until the employment landscape changes.
Why is unemployment so high, and why does it increase? And how might we address the challenge?
Like many developing countries, labour supply has increased since the 1980s. This has been driven in part by an increase in the numbers of female workers. In SA this has been relatively stronger because apartheid created a further barrier for black workers, especially women, from entering the labour market.
As these controls were relaxed, labour supply increased. For much of the past 50 years, though employment has grown, labour supply has increased at a faster rate.
In most economies this growth has been absorbed by the informal economy. In India it makes up almost 90% of employment. Informal employment makes up 51% of nonagricultural employment in South America, 82% in South Asia, 66% in Sub-Saharan Africa. In SA it has remained about 15%.
Why has the informal economy remained small? One explanation is government policy - our urban planners want our cities to look like New York and Oslo, rather than Mumbai or Accra, and make it difficult for informal workers to work in our cities. The main reason is because the formal sector is so large and powerful; it is difficult for small-scale firms and informal workers to enter and operate in markets dominated by big firms.
Two examples are bread and cold drinks. In most countries, towns and villages have little family-owned bakeries that supply communities. In SA, even in the remote parts, bread is supplied by large factories in the urban areas. There is no small-scale bread production to speak of in SA.
The cold drinks industry is a simple manufacturing process - add a bit of sugar and flavour to water and bottle it. Large, dominant firms make it difficult for small firms by ensuring that all retailers - large and small - have their proprietary fridges and insist that only their products can be kept in these.
The Competition Commission recently imposed a "cooler condition" on this sector, requiring that a percentage of fridge space be reserved for small producers. The result has been a growth in small producers, larger market share for small players, and increased employment in the sector.
Large sections of the economy are dominated by big firms, making it difficult for small firms and informal operators. It has nothing to do with wages, as Bernstein suggests, and everything to do with market power.
Addressing unemployment is complex and there are no simple answers. Here are a few ideas. Implement a national minimum wage that will stimulate domestic demand because the lowest-paid workers consume domestic goods. Address market power and vested interests to create opportunities for small players. Address the high costs of inputs into the manufacturing process to boost exports.
Third, Bernstein is correct that wages are too high but she focuses on the lowest-paid workers. The problem is at the higher end of the wage distribution, where skilled workers and managers earn high incomes relative to others. One solution is to make it easier for skilled foreign workers to enter SA. But we need a wider discussion about the high levels of inequality in incomes.
Fourth, we need more effective and efficient investments in the social economy - education, housing, transport, and so on.
Bernstein's arguments should be rejected. It is easy to posit a false dichotomy between exploitative work opportunities that pay near-starvation wages and unemployment. Poverty wages have not yielded the jobs she believes they should, and are unlikely to do so. Our unemployment problems are complex and not unrelated to our history. Trotting out ideological arguments that have no appreciation of our history does nothing to solve our unemployment problems.
The elephant in the room is the high levels of inequality. Part of building this country must be reshaping the economy so that we no longer have such obscene levels of high individual wealth in a country that is so widely defined by its poverty.
• Professor Valodia and Kim Jurgensen are from the faculty of commerce, law and management at Wits University

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