by Piet Coetzer

Economic growth

Growth alone will not solve unemployment problems

Professor Frederick Fourie
Professor Frederick Fourie.jpg

Although South Africa, like most of the rest of the world, has for some years been experiencing ‘jobless’ economic growth, the pursuit of higher economic growth is the single most agreed-upon policy strategy. This consensus, however, could be blinding us to the fact that economic growth may be only half the solution. 

In a recent article, professor of economics at the University of the Free State, Frederick Fourie, writes that “attempts to fine-tune and turbo-boost the formal economy ‘engine of growth’ to absorb more labour are fundamentally constrained. Economic policy-makers must look at other options for generating employment and self-employment for unemployed people.”

It is not a challenge unique to South Africa. In an article in The New York Times, Peter S. Bloomberg writes that economists “fear that the nascent recovery (from the present recession) will leave more people behind than in past recessions, failing to create jobs in sufficient numbers to absorb the record-setting ranks of the long-term unemployed.”

In fact, as we report elsewhere, this trend of ‘jobless growth’ has been in the making for at least 40 years. In each business cyclical expansion over that period, the long-term unemployment rate remained either at or above the level of the previous one. For 40 years, short-term unemployment has been declining, and the number of long-term unemployed has increased as a percentage of all unemployment figures globally.

In South Africa, this is further evident in the swelling numbers of people who have given up hope of finding employment, and who often are not even included when unemployment figures are calculated.

Prof. Fourie writes that for the last 20 years, South Africans have seen policy documents stressing the need for a high gross domestic product (GDP) growth rate. These policy documents have included the Reconstruction and Development Programme (1994), the Growth, Employment and Redistribution economic policy (1996), the Accelerated and Shared Growth Initiative for South Africa (2006), the New Growth Path (of 2010) and recently the National Development Plan. Various government documents such as the National Treasury’s annual Budget Reviews and govern­ment Medium-Term Strategic Frameworks have done the same.

He notes that there is a persistent, significant gap between the required or desired growth rate and the actual growth rate. And unemployment remains stuck at around 25% (narrow definition) and 35% (broad definition).

“South Africa does not seem to have an alternative strategy to ‘going for growth’ and adopting a conventional menu of broadly agreed-upon strategies: removing the bottlenecks to output growth and employment in the formal sector (including the reform of education), promoting exports and investment (including investment in infrastructure), promoting small business and so forth. (The relaxation of labour market policies is the one strongly contested policy proposal – one favoured by the business sector, but not by labour and government.)

“We continue to hope and wait for the required higher growth. Is this a realistic position – or are we collectively ‘waiting for Godot’ (while continuing to churn out ambitious policy plans, conferences and workshops?

"Do we know how to increase growth? Not really,” Prof. Fourie writes.

He concludes that GDP growth in South Africa is “not very” employment-intensive. “The reason an extraordinary high growth rate is required (and has to be sustained for many years) to make a meaningful impact on unemployment and poverty, is the relatively low rate of labour absorption in a modern formal economy i.e. that economic growth does not produce many employment opportunities, that it is not employment-intensive.”

He further concludes that growth within the formal sector alone is unlikely to absorb sufficient numbers of people to reduce unemploy­ment rates significantly (unless real growth rates increase drastically).

“The formal sector cannot absorb all the people who entered the labour force since the 1990s, many of them (notably women) from being economically inactive, others from the subsistence segment and the informal economy; large flows of job seekers from other African countries contributed to the growing labour force. This situation is bound to continue.”

In line with our article on the stresses experienced by the present global economic model, Prof. Fourie notes that the  continually declining employment or labour intensity in the South African economy is “actually ... normal”.

He further points out that the ability of the private sector to assist in improving growth is limited. “Since labour is a cost to business, employment growth in the private sector is, at most, a side effect of growing sales and output.”

He points out that large incentives still rather go toward increasing capital expenditure, and he is not optimistic that government plans to invest massively in infrastructure will increase employment intensity directly, since the construction of infrastructure tends to be very capital-intensive.

The options he holds out to improve the situation include:

·       Developing a vibrant informal micro-enterprise sector; and

·       The unemployed finding meaningful and gainful employment and self-employment in the informal economy.  

“It is true that the informal economy in South Africa is much smaller than in other developing countries. This could mean that it has reached a plateau and cannot make much of a contribution to employment growth,” Prof. Fourie writes.

"However, it could also mean that the informal economy has significant untapped potential – if only it is developed and boosted in appropriate ways. This could mean that the informal economy may become more ‘self-absorbing’ as far as unemployed people are concerned, rather than being a place where people wait to be absorbed into the formal economy – where they are waiting for Godot, once again.”

Whatever employment growth has occurred in the informal economy, has occurred without economic policy support, he writes, and concludes that a two-pronged, formal-plus-informal policy approach should be adopted.

If the formal economy continues to grow at around 3% a year and creates employment at historical rates, employment is likely to grow at approximately 1.5% a year. This is only half of what is required to reduce unemployment significantly, which means unemployment will remain at around 25% (narrow definition).

“A carefully designed and balanced two-pronged economic strategy, which targets both the informal and formal economies (and, notably, the linkages between them), is likely to have much more success at reducing unemployment.

“Economic policy-makers should not allow formal sector issues (and interests) to claim the entire economic policy thinking space and to absorb all policy resources,” Prof. Fourie writes.


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