Here is the single most startling finding on the South African labour market: a 1% reduction in the real cost of labour in the manufacturing sector would lead to a 0,7% expansion in job opportunities.
Think about the implications: if we had taken the average inflation-adjusted wage in manufacturing industry in 1998, and decreased it from R4 358,48 to R4 314,90 a month — a loss per worker of R43,58 in monthly earnings — we would have created 9 462 jobs in the manufacturing industry, each person earning a slightly lower wage of R4 314,90.
Sitting in front of our noses is a simple, straightforward mechanism for creating jobs in South Africa.
With unemployment anywhere between 30% and 40%, it is jobs that count. They clothe and educate families. They are the stepping stones toward improved skills acquisition and transmission. Every day spent jobless represents a loss of productive potential society can never recoup.
Underlying this finding is the most straightforward principle known to economists: prices matter. The more something costs, the less of it will be demanded. The less something costs, the more affordable it becomes.
This applies to work as much as it applies to anything else. Producers will use workers when they are cheap enough — and switch to capital when they are not.
Why have we missed the obvious?
Because the South African left has pulled an astonishing marketing trick: depicting wage reduction as evil. Lowering wages is labelled pandering to the interests of capitalists who want to exploit poor workers for higher profit margins. Any wage reduction will clearly decimate welfare prospects for the poor.
This is obvious rubbish. Having existing workers earn R4 314,90 instead of R4 358,48 a month of course means they earn less. But having 9 462 additional workers also earning R4 314,90 instead of nothing is surely an improvement for the previously unemployed. And remember, the extra jobs are those in manufacturing alone — other sectors would also respond.
How do we explain the left’s admonitions? Perhaps the mistake lies with the science that underlies the projected impact of wage cuts. It sounds like the stuff nasty neo-liberal economists would peddle, right?
Well, wrong. The impact was estimated by the world’s leading Marxist economist, Samuel Bowles, who is a regular contributor to the world’s leading scientific journals in economics.
What is true is that there are limitations to the methodology used to estimate the impact of wage reductions on employment. Subsequent, more sophisticated econometric work has indicated that the employment gains in response to wage changes are likely to be even stronger — particularly for unskilled workers.
The explanation for this spectacular policy failure is that South Africa’s Department of Labour has been comprehensively captured by a specific interest grouping: organised labour. The only grouping that stands to gain from artificially high wages are those in formal-sector employment.
Obviously, those with jobs benefit from higher wages. The truly poor and dispossessed are jobless, with poor education — a legacy of the apartheid era — without job experience or the contacts to help them to find employment.
These potential labour market entrants cannot hope to be competitive at wage rates in South Africa that are high even by East Asian standards and given our endowments of skills.
South Africa has steadfastly introduced raft after raft of policy interventions designed to increase the non-wage and wage costs of labour: the imposition of minimum wages, the structure of wage bargaining, which takes little account of regional variation in wages, the Labour Relations Act and the Conditions of Employment Act, among others.
Worthy interventions all — if you have work. For the unemployed they wilfully take the prize of formal-sector employment further away. Equally steadfastly, there has been a refusal to countenance the possibility that lowering wages (even a tiny bit) may be an acceptable policy consideration.
To prove that it is the unskilled, the least advantaged elements of the workforce, that are most affected, consider the graph above. It shows the real wage in manufacturing, with particular emphasis on unskilled workers.
It is not difficult to see that the poor employment performance of the sector corresponds to the increases in real unskilled wages in the 1980s, with particularly spectacular effect in the second half of the 1990s.
Nor does manufacturing show the most dramatic result — in mining and construction the relationship is far stronger. Across the economy as a whole the lost policy opportunities have been immense.
Make no mistake: the people paying for rising real wages are the unskilled, those most disadvantaged by apartheid. The employment of unskilled workers fell in manu- facturing once the real wage started to rise, and the pattern is repeated economy-wide.
It is time that labour-market policy took seriously the fact that it serves not just the interests of big labour and big business, but of South African society at large.
Part of that society are the poor and the dispossessed who were the victims of the previous political dispensation.
Poorly educated and denied job opportunities by a range of discriminatory measures, their plight continues to be ignored by a policy that prices them systematically out of the market.
It is a policy founded on bad economics. And it is a policy that is immoral.
Johannes Fedderke is Gencor professor of economics at Wits University