No silver bullet for jobs crisis

Unemployment now stands officially at 30,5% — far higher than in any other middle-income country, and almost double the rate eight years ago. The result is deepening inequality, poverty and social conflict.

It is clearly tempting for economists trained in neo-classical models to argue that unemployment must reflect high wages. After all, isn’t it a truism that when prices go up, sales of any goods, including labour, will go down? By extension, the solution to unemployment should be easy: simply cut wages and the problem disappears. This is hardly startling.

But any economist who has suffered through the models of first-year economics should also know that cutting prices doesn’t always work. The question, whether you are selling widgets or labour, is whether you will get more income from cutting your price and selling more, or from selling less at a higher price.

In the event, most economists — oddly enough, including Professor Johannes Fedderke in his recent article in the Mail & Guardian (“Higher pay means fewer jobs”, May 16) — agree that, in South Africa, cutting wages will reduce the income for labour. Specifically, to use Fedderke’s figures, if you cut wages by 1%, you will only raise employment by 0,7%. That means that a decline in wages will actually reduce the total income going to labour by 0,3% — and poverty will deepen. In effect, you share a lower wage bill among more workers.

The problem with this simplistic approach is even more obvious if you see it as the solution to our unemployment crisis. To get full employment — that is, to increase employment by 30% — you would have to cut individual wages by 43%. Wages as a whole would drop 9%.

A reduction in workers’ incomes of this magnitude would, in turn, cut into domestic demand, especially in relatively labour-intensive sectors like food processing. That, in turn, would lead to job losses, even with lower wages. Leaving the models for the real world, even greater problems emerge. For one thing, since 1995, the average income from work in South Africa has apparently declined — but employment has not taken off.

Moreover, the share of remuneration in total income has sunk steadily since the mid-1980s, while the share of profits has risen. In other words, productivity has risen faster than total wage costs.

Labour now gets around 51% of the national income, down from 57% in 1990. Meanwhile, profits have risen from 25% to 33%. (The residual reflects consumption of fixed capital.)

Interestingly, proponents of cutting pay to create jobs never suggest specific measures. With good reason: it would not be simple to get workers to accept a pay cut. After all, according to the latest Labour Force Survey, half of all formal sector workers earn under R2 500 a month. Experience before 1994 suggests that taking away workers’ constitutional rights to organise and strike would only cause greater conflict in the workplace, without reducing workers’ bargaining power.

Luckily, none of the participants in the Growth and Development Summit have taken a simplistic approach to job creation. Instead, they agree that the basic problems are structural. There are two fundamental structural causes of unemployment. The first is apartheid, which left behind a profound dualism, with the majority of Africans effectively excluded from the formal economy. Historically, they were deprived of ownership of productive assets, denied access to skills and basic infrastructure, and excluded from key systems, including retail and financial networks.


The second is the formal sector in South Africa. It has traditionally been relatively capital-intensive, its roots in minerals production and refining. Restructuring in the 1990s aggravated this problem. On the one hand, government and the parastatals shed around 200 000 jobs as a result of budget cuts and the move to commercialisation and privatisation of government services. On the other, the opening of the economy and downsizing in gold mining and agriculture saw the loss of private-sector jobs on a large scale. The result has been a substantial decline in total formal employment since the mid-1990s.

The question, of course, is how to address these structural problems. Critical strategies include programmes to enhance the integration of poor households into the economy. Mechanisms to achieve that end include provision of basic government services and infrastructure; land reform; restructuring of the financial and retail sectors; support for small and micro- enterprise; and improvements in education and skills development.

While the government has initiated many important programmes in this regard, they need to be geared more consistently to employment creation. Also critical would be restructuring of the formal sector toward job-creating growth. In the long run that requires a shift toward relatively labour-intensive sectors.

Potential areas for job creation include production of basic goods for the poor, public and private services, and activities upstream and downstream from the mines and basic chemical plants.

This is not something that can be achieved by decree. For this reason, it seems critical for business, labour and the government to work together to develop sectoral strategies that can maximise each industry’s support for employment creation. In short, there are no simple solutions to the unemployment problem. If there were, they would surely have been implemented. Like other developing countries, South Africa faces the challenge of ensuring deep-rooted change in the economy. But there is no other way to bring about sustainable, job-creating growth.

Neva Makgetla is the Congress of South African Trade Unions’s coordinator: fiscal, monetary and public sector policy

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