Where the real morality lies
Johannes Fedderke proposes that a modest reduction in manufacturing wages will produce significant gains in job creation (May 16). In support of his argument, he cites a study showing that a 1% reduction in real manufacturing wages would lead to a 0,7% increase in employment. As the co-author (with Samuel Bowles) of this study, I feel the need to respond, not to the basic facts presented, but to Fedderke’s interpretation of the wage/employment trade-off.
The welfare implications of creating jobs through wage cuts are complex.
Given the estimates Bowles and I produced, a reduction in real wages from R4 358,48 to R4 315,90 a month will create an additional 9 462 jobs — all other things being equal. But it also implies that total income received by manufacturing workers would fall by R18-million after the new employment opportunities have been taken into account.
The reason behind the loss of income is obvious: if wages fall proportionately more than employment increases, total wage income must decline.
If prices remain constant, the R18-million is redistributed away from wage income and instead bolsters profit shares. This loss of income among workers can hurt economic growth. Much of it would have been spent domestically — a significant proportion in local communities — providing support to regional economies throughout South Africa. By contrast, raising the profit share will generate some additional investment, but the impact may be smaller and not targeted in the same way.
Furthermore, the welfare implications of a trade-off between more jobs and less income are not straightforward. If wages support a network of dependants, as is the case in much of South Africa, the net loss of income will reduce average living standards.
Only if there were a guarantee that the new jobs would go to individuals in households that currently receive no wage income would we be able to say, with some confidence, that job creation through wage cuts would reduce poverty or moderate inequality. Fedderke also implies that organised labour is behaving immorally by bargaining for higher real wages in the context of mass unemployment.
This line of reasoning is fraught with problems. Fedderke’s own innovative research suggests that political unrest associated with the mobilisation against apartheid contributed to a rapid decline in domestic investment.
This loss of investment must have reduced employment opportunities at a time when access to decent work for a majority of South Africans was sharply curtailed. Are we to conclude that the struggle for democracy and social transformation, in which organised labour played a prominent role, was immoral on similar grounds because it cost jobs and reduced growth?
South African unions have raised real wages and helped narrow the apartheid-era wage gap since the 1970s. Moreover, the recent job losses in South Africa have hit unions particularly hard, making it difficult to see why organised labour would deliberately adopt strategies that undermine its own long- run viability.
Labour costs do matter, and they will impact on unemployment rates and influence the number of jobs that South Africa will generate in the future. However, they do not constitute the most important factor behind the current unemployment crisis. Deflationary macroeconomic policies, the inability to reverse decades of low investment and rapid liberalisation has had a more profound effect.
The debate around job creation must include a reconsideration of the country’s current growth strategy in light of widespread joblessness and sustained poverty. Without it, simply adjusting labour costs will fail to deliver real welfare improvements. It is here where the question of morality truly lies.
James Heintz is a research professor at the Political Economy Research Institute of the University of Massachusetts