by Piet Coetzer

South African labour reform

Reform to lift employment SA’s most pressing challenge

CCMA is relatively burdensome for employers of low-skill workers

“With millions of unskilled people without work, it is no exaggeration to say that South Africa’s future depends on its ability to make the necessary changes in its labour relations dispensation. It is essential that South Africa acts decisively with respect to labour market reform. Vision and leadership from government are urgently required."

This is the concluding remark in a just-published paper by the Centre for Development and Enterprise (CDE), under the title Rethinking South Africa’s Labour Market: Lessons from Brazil, India and Malaysia.

The paper records the results of a round-table discussion in November last year at which an invited group of participants, including leaders from business, labour and government debated and discussed experiences of labour market reform in four important developing countries and the lessons South Africa could draw from them. It came in the wake of the violent labour unrest at Marikana.

Stating that even when narrowly defined at 26% (in 2012), unemployment in South Africa is exceptionally high and the country’s most pressing policy challenge, the paper concludes that “high unemployment is at least partially caused by South Africa’s labour market institutions and regulations”.

The labour regulatory regime has its roots in the historical protections afforded white workers, and their extension to all workers in the 1980s and 1990s. And, the views and preferences of unions (especially Cosatu) and big business have dominated the process of consultation and decision-making in government with respect to the formulation of labour market policies, the paper states.

As has often been the case recently, this paper also identifies youth unemployment as a particularly pressing problem in South Africa compared to global standards. Only around one young adult in eight is employed in South Africa, compared to two in five in other emerging economies.

There have been significant changes in the sectoral composition of the economy and employment over the past three decades. The most important change has been the rapid rise in employment in financial services since the late 1990s, and, more recently, in community, social and personal services. By contrast, there has been a fall in employment in manufacturing and construction.

These trends have driven and reflect a shift towards a more capital and skills-intensive economy, with fewer new low-skill jobs being created. The proportion of all jobs defined as skilled rose from 20 to 25% between 2001 and 2007. In the context of a poorly performing education system, this has exacerbated the challenge of finding work faced

by young people.

The declining proportion of employment provided by small firms, which tend to pay lower wages but are more likely to hire younger and less experienced workers, has also reduced labour market opportunities for this group. Levels of self-employment in South Africa are also extremely low by international standards,” the paper notes.

Importantly, there is evidence that South African wages are less responsive to productivity changes than in comparator countries, often rising at a greater rate than productivity, and encouraging firms to shed labour. In part, this is due to the extension of bargaining council agreements to non-parties.


Labour market regime

Unless current trends change, the South African economy is unlikely to generate significant numbers of new jobs in the near future, especially not the unskilled jobs which the majority of the unemployed have a reasonable prospect of securing.

While not the sole cause of these trends, South Africa’s labour market regime is a significant contributor to them,” the paper concludes.

It points out that international surveys such as the World Economic Forum’s Global Competiveness Report suggest that South Africa performs poorly with regard to cooperation between employers and employees, the flexibility of wage determination, the nature of the rules governing hiring and firing, and the link between pay and productivity. Countries which have achieved rapid job creation have typically performed much better in these areas.

Particular concerns about the current labour market regime relate to:

  • The role of the Commission for Conciliation, Mediation and Arbitratio, which tends to be used disproportionately by lower-skilled workers, and cases tend to be found in their favour, making this institution relatively burdensome for employers of low-skill workers;

  • Hiring and firing regulations where South Africa, in 2011, were ranked third last out of 142 countries in terms of its hiring and firing processes by the Global Competitiveness Report. Employers indicate that time, trouble and hassle of both these processes are obstacles to hiring new staff; and

  • Collective bargaining, wage setting and bargaining council extensions, with collective bargaining and unionisation associated with higher wages and lower employment levels in South Africa. One study suggested that those who are both members of a union and covered by a bargaining council earn 16% more than those who are neither. Bargaining councils are typically dominated by large firms and unions, but their agreements are often extended to all businesses in a sector. This practice is particularly damaging to small firms and entrepreneurs,

and one estimate of its impact suggests that it may account for one percentage point of unemployment.

The paper notes that the South African labour market policy has tended to focus on ensuring ”decent jobs”, at the cost of lower rates of job creation. “It favours ‘insiders’ – people who are already employed, members of established unions and big businesses – over ‘outsiders‘ – lower-skilled workers in smaller firms, and the unemployed. Current trends, driven by rising real wages, onerous labour regulation and the extension of bargaining council agreements, are not compatible with the large-scale creation of new jobs required to combat the unemployment crisis” the paper states.

While a debate is presently raging in South Africa about the role of labour brokers, the paper in its  general concluding remarks notes that “an excessive regulatory burden also contributes to growth in sub-contracted employment”.

Finally it concludes that not all labour reforms need to be implemented to have an impact but, “[t]he imperative to reform the South African labour market derives from our very high unemployment rates, our low levels of new firm creation and relatively low levels of investment (foreign and domestic). We are not like Brazil (which has absorbed millions into its urban economy), India (where economic growth is rapid), or Malaysia (where employment levels are very high). The differences in our circumstances mean that labour market reform is a more urgent priority here than it is in India, Brazil and Malaysia.”

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