The failed skills experiment

For nearly two decades, skills development has been the cornerstone of the South African government’s job creation and poverty relief strategy. According to deputy president Kgalema Motlanthe, “The biggest challenge facing the South African economy is the shortage of skills. Many people are poor and jobless because they do not have skills.”

The idea is simple, at least in theory. Skills improve workers’ productivity, which in turn raises wages, incomes and living standards, not only for those who have work, but also for those who, without skills, could not hope to join the workforce. The government has initiated a vast array of skills development programmes to address poverty and unemployment.

The Joint Initiative on Priority Skills Acquisition (Jipsa) aims to develop skills that are most urgently needed, and as such it is one of the key components of the Accelerated and Shared Growth Initiative for South Africa (Asgisa). The Sector Education and Training Authorities (Setas) were established to ensure that skills needs for every sector of the economy are identified and that appropriate training is available. Yet the idea that South Africa is characterised by a pervasive “skills shortage” is more problematic than it at first appears.

Problem of definition
Firstly, if by a skills shortage we are referring to the lowest levels of skills related to the poor and unemployed, then we are referring to black youth under the age of 35 who comprise 74% of the total. The most obvious lack of skills for this group is the type obtained on-the-job through practical work experience. In this sense, a skills shortage is nothing more than a jobs shortage and very little analytical advantage is gained by using the one term as a euphemism for the other.

The crisis in primary and secondary education — fuelled by growing public sector unionisation — has not helped the situation, but it is unclear whether matriculation ever constituted adequate preparation for the practical realities of the world of work. To paraphrase the Minister of Finance Pravin Gordhan, work — not skills — is the solution to unemploy ment, however low-skilled and low-paying that work may be.

Competitive cost of skills
Secondly, if by a skills shortage we are referring to high-level skills in the engineering, medical, legal and financial services sectors, then we are presumably referring, not to the absolute unavailability of those skills, but to the high cost of hiring professionals who possess those skills. High wages for particular positions are a symptom, not of a skills shortage, but of the general economic principle of resource scarcity. For example, executive remuneration, which attracts more interest from trade unions (who use chief executive pay increases asa hypothetical basis for all workers’ wage demands) than from shareholders (who appoint chief executives and approve their pay), is a function of the scarcity of executive-level skills in a small open economy such as South Africa, where our very best managers are often cherry-picked to run some of the most successful (especially mining and financial services) corporations in the world. Pointing to the high level of global competition for the upper band of skills, the country lost nearly 285 000 high-skilled locals (or 20.8% of the total) since 1990.

Role of politics
Thirdly and most problematically, the idea of a skills shortage is politically expedient because it keeps other potential causes of poverty and unemployment — such as trade union militancy, the effect of collective bargaining on wage escalations, and the unintended effects of government regulations — conveniently off the table. South Africa’s immigration laws are a case in point.

In theory, an extensive application and vetting process applies to foreigners seeking work in South Africa. But the lack of enforcement for low-skilled immigrants and comparatively good secondary education in Botswana, Namibia and, especially, Zimbabwe have led to an influx of more than 3.5 million foreigners, creating an underground workforce that now comprises 26.9% of the total. Burgeoning low-skilled labour supply has caused a sharp decline in market-related wages at the low end of the skills spectrum (with no commensurate change in minimum wage laws) and fierce competition for jobs with attendant sporadic “xenophobic” violence.

On the other hand, far-reaching immigration controls on high-skilled foreigners have led to an artificially low unemployment rate for high-skilled locals of just 0.4%, among the lowest in the world. Reportedly Johannesburg’s foremost plastic surgeon earns R90-million a year. This would hardly apply if foreign medical specialists could enter the local job market because they cannot under present highly restrictive immigration laws. For the above reasons, the government’s boldest skills development initiative to date — the multibillion rand Seta system funded by a 1% payroll tax — has created just 25 000 skills a year, in part due to maladministration of some Setas, but primarily as a result of the failure of government interference in firms’ microlevel hiring and training decisions.

Catastrophic legislation
From a skills development point of view, the two most catastrophic sets of laws and regulations relate to wage levels and importation of skills. Wage levels in South Africa are regulated, not only directly through minimum wage laws, but also indirectly through statutory collective bargaining agreements with trade unions and bargaining councils. The net effect of these arrangements is to raise wages above the market-related level. Undue escalation of wages, in turn, has two deleterious consequences.

In a phenomenon which might be termed “job prohibition”, wage escalation prevents entry-level workers, typically youth, who have neither skills nor experience to offer employers, from offering their labour at a discount in competition with established, experienced and better skilled workers. For example, for a matriculant with adequate scholastic performance and no prior work experience, the probability of finding a job — any job within 12 months of leaving school
is just 9%.

In a phenomenon which might be termed “job squatting”, wage escalation impedes mobility of established workers who, due to their unduly escalated pay, cannot pursue job options in other organisations or industries at the same high wage, since they have priced themselves out of the market. For example, the average unionised worker in South Africa is 43 years of age and will typically hold just one job in their entire career.

Importation of foreign skills in South Africa is controlled, not only directly through immigration laws, but also indirectly through bureaucratic immigration procedures which are costly (in some cases up to R20- million for each applicant) and time-consuming (in some cases taking as long as seven years for an application to be processed with no certainty of eventual success). The net effect of these laws and policies is to impose a tax-like hindrance on foreign job-seekers.

In contrast to the 1950s and 1960s, when foreign engineers, artisans and entrepreneurs were welcomed following the discovery of gold in the Free State, in the 1990s and 2000s high-skilled
foreigners are explicitly discouraged from seeking work in South Africa. In other words, existing laws and regulations actively conspire against the two most important ends of the skills spectrum, namely unskilled, unemployed youth and high-skilled

Unintended consequences
This cosy arrangement is hardly unintended, since it suits everyone else in-between. Local professionals earn substantially higher wages and are almost never short of job opportunities, due in large part to the absence of competition from foreign skilled job-seekers. Unionised workers exclude youth and other entry-level job-seekers from competing down wage rates and benefits packages, with the result that youth cannot obtain the first job that is so essential to their skills development and career mobility.

In the public service, managers and supervisors, such as they are, have generally succeeded in averting performance measurement initiatives, which create an “I just need to show up” mentality and drive a perpetual wedge between wages and productivity. Although on-the-job performance (not the cost of living or chief executive pay) is the correct basis for wage increases, it has not featured in any material public or private sector wage negotiation since 1997. No relaxation of these and other labour market laws is on the cards.

In fact, a comprehensive labour law review currently underway under the auspices of the department of labour is likely to add further laws in time, no doubt in each case with sprawling unintended consequences. The proposed Temporary Employment Services Bill will, according to the minister of labour, “effectively” ban temporary employment agencies (“labour brokers”), who are the primary vehicle by which youth and reentrants to the labour market (such as stay-at-home mothers or discouraged job-seekers) find employment. The new Employment Services Bill, which will establish “free” government-operated recruitment centres, will require employers to register all vacancies with the government within 14 days, impeding the functioning of the labour market.

The outlook for skills development is consequently poor and deteriorating, and the employment outlook is equally grim. A hopeful development in this context is the minister of finance’s proposed youth wage subsidy, which will subsidise, not employers’ training costs in the current roundabout fashion through skills development, but employers’ direct wage costs for unskilled entry-level workers. It is interesting, however, that trade unions vigorously oppose wage subsidies and, indeed, any form of undercutting wages — and this proposal, too, is unlikely to see the light of day.

Economically feasible solution
The most economically effective approach — though not necessarily politically feasible — is to dismantle all labour laws and regulations, allowing the labour market to function freely and without government interference, while supplementing all workers’ day-to-day living needs with a basic income grant. The key idea behind a basic income grant is that the labour market would be allowed to perform its functions properly, but that the attendant social welfare consequences for the most vulnerable workers would be addressed by a cash payment from the government.

Nobel prize-winners Milton Friedman, Friedrich Hayek, Robert Solow, Jan Tinbergen and James Tobin all favour a basic income grant over other regulations such as the minimum wage and social security. But in South Africa, we have taken the “lowest common denominator” approach, namely highly restrictive labour laws and regulations and expanding social welfare. Social security, rather than job creation, has become the essential means of poverty relief, with uncertain long-term consequences for the government’s fiscal position. Skills development has never been properly debated in South Africa. After nearly two decades of experimentation, the system has failed to deliver either the hoped-for increase in employment or the requisite quantum of skills.

In fact, despite massive government intervention and expenditure in this area, all key indicators of employment and skills development have gone backwards. The most valuable lesson emerging from the skills development experiment is that marketable skills are acquired on-the-job, in a practical workplace setting, not in classrooms or lecture theatres. So we are back at square one, where jobs remain the nation’s number-one political and economic priority, and in the mean time, the broad unemployment rate has more-than doubled from 17% in 1994 to 36% in 2010.

Loane Sharp is a labour market analyst at Adcorp. This article first appeared in the recent Adcorp Employment Quarterly and is reprinted with permission.

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