Unemployment heightens socio-political and economic risks

As South Africa extricates itself from another messy and costly strike season – that will surely have a negative impact on the economy yet to show itself when third quarter economic data is released – the big debate around job creation and high unemployment continues. Unemployment can yet become a threat to stability.

The year to date has not lived up to the  label of “the year of job creation” promised by President Jacob Zuma in February.

Instead the red lights flashing on the dismal employment picture include:

• Rising concern over the high number of unemployable and unemployed youth, without  prospects for the future making them ideal candidates for partaking in riots and radical agendas;
• Service delivery protests that have been escalating across the country in the past two years, with high unemployment increasingly being cited as a cause alongside lack of delivery;
• Growing instability in the labour-political arena as competition for jobs and resources intensifies with government coming under increasing pressure over failed promises;
• The inflexible stance of unions regarding demands for “decent jobs”, versus a growing chorus of opinion that any job is better than no job, in tandem with other job-killing campaigns such as the one against labour brokers; and
• The ever-growing wealth gap, juxtaposing a small and wealthy executive elite, an ever more militant labour force making high wage demands, and the impoverished and unemployed masses in a tense and dangerous relationship.

Economists consistently warn that the country’s only salvation lies in growing the economy and creating more jobs, yet, they say, employers have responded to the increasing wage bill resulting from wage negotiations and strikes by shedding more jobs.

This comes at a time when unemployment stands at an official (narrow definition) rate of 25.7% - the worst in seven years -  with the expanded definition rate of unemployment having risen to 36.9% in the second quarter.

The impact on overall economic growth of the annual strike season may be significant. Data released by Statistics SA in June showed that the economy grew by 4.8% in the first quarter of the year, boosted especially by strong manufacturing growth. However, the preceding quarter, affected by strikes, had seen a contraction of 4.9%. This year promises no exception.

But labour union economists dispute this, saying declining factory output and the shedding of jobs is not necessarily the result of strikes and wage demands, blaming the high unemployment on the “neo-liberal macroeconomic policy” implemented by Trevor Manuel when he was Finance Minister and continued by his successor, Pravin Gordhan and South Africa having “entered the global economic market without state assistance” unlike the case in countries like China and the US.

In the period of economic growth under Manuel the economy moved away from its manufacturing base, creating jobs in the services industries instead, but due to a low multiplier effect in these industries growth stopped. With the manufacturing base destroyed, South Africa turned to imports, they claim.

Eskom’s rising electricity costs are also blamed for the reduction of the country’s manufacturing base.  And, cheaper labour and youth labour subsidies will not work as factory managers will optimally resource their factories, they say. “Additional employment is for capturing additional demand and not to contribute to job creation,” one union economist says and claiming lower wages will mean lower consumer demand, triggering a knock-on effect, leading to less production and even more job losses.

The Adcorp Employment Index for May, June and July recorded repeated monthly job losses. Government employment and informal employment, however, continued going up. The biggest falls in both permanent and temporary employment were in the unskilled and semi-skilled categories.

Adcorp predicted that the economy would shed a massive 470,000 jobs in the remaining months of 2011 and in 2012 – half as many again as were shed during the recent recession.

These newly unemployed workers plus 500,000 new entrants to the job market each year, most of whom cannot find work, are adding significant numbers to the existing 8.5 million job seekers in a market where there are just under 9-million permanently employed workers. South Africa’s employment ratio, that is the ratio between the number of people employed to the potential number, is 40.8%, one of the lowest among developing economies. The average ratio for developing economies is 56%.

The growth in public-sector employment  – 15% over the past four years - has also radically affected the labour relations picture. While employment has shrunk in the private sector, affecting especially mining and manufacturing, public-sector unions have grown rapidly alongside this expansion of employment, radically altering the representative profile of South Africa’s largest labour federation, Cosatu.

Growth in the public sector which already has a wage bill of 12% of GDP, or more than 40% of the total national budget is unsustainable. Yet government promised to expand employment in the public sector, among other things, as part of the quest to create five million new jobs over the next few years.

Meanwhile, the shift towards temporary jobs is a worldwide phenomenon, but in South Africa the shift is far bigger than most anywhere else. Economists blame this on the high risk of creating jobs and employing people in South Africa in the face of restrictive labour legislation and militant unions.

The latest Global Competitiveness Report produced by the World Economic Forum (WEF) showed South Africa slipping badly in labour-market-related categories. The latest UN Conference on Trade and Development World Investment Report also painted South Africa as an increasingly unattractive destination for investment due to the  political and the labour situation.

This explains the frenzied reaction recently when Minister Gordhan referred to a youth wage subsidy in order to stimulate employment of the youth and said that South Africa may have to reconsider its labour legislation if it hoped to achieve the government’s job-creation targets. (See our previous report).

While the WEF report and other developments seem to confirm the view of economists and business leaders that labour laws and militant unions are costing South Africa vital jobs, labour unionists strongly disagree. Cosatu spokesman Patrick Craven and UCT labour law Professor Paul Benjamin quite rightly point out in the Financial Mail article that too much credit is given to the WEF report which is based on the opinion of a very small number of executives – 39 to be exact.

Benjamin seems to attach far more weight to what he terms “the most authoritative comparative assessment” of labour laws undertaken annually by the Organisation for Economic Co-operation and Development (OECD) that since 2008 has consistently rated South Africa’s employment protection legislation to be “ more significantly flexible” than that of associate members Brazil, China, Estonia, India, Indonesia and Russia.

However, South Africa undeniably has one of the highest ratios in the world for work days lost due to strikes, having lost over 1,000 days per 1,000 workers in 2010. This makes it the most strike-prone country in the world, followed by Denmark with a ratio of only 159 days/1,000 workers.

Some of the more recent suggestions to address unemployment include a youth wage subsidy, relaxing labour laws, improving employment-creating tax incentives, promoting “business incubators”; enforcing preferential buying of locally manufactured goods, creating special economic zones with less restrictive labour laws, and forging a social compact between business, labour and government with all making required sacrifices and concessions

There are as many potential solutions to this complex problem as there are economists, analysts, business and union leaders. It seems however that South Africa is a long way off from achieving the social compact, or the required sacrifices and concessions many hope for.