Cutting labour costs not the answer

Cosatu is facing an unprecedented onslaught. Is the federation, as Democratic Alliance leader Helen Zille claims, “the main roadblock in the road to job creation and redress”? And would “lowering the cost of employment” be the “biggest single step towards solving the unemployment problem”? The DA asserts that a youth wage subsidy would create 423000 jobs. But does any of this withstand scrutiny?

Nearly four in 10 South Africans in the labour force, more than four million people, are unemployed. Of these, 44% have never worked, 68% have been looking for work for a year or longer, and 71% are young.

This crisis existed before the Labour Relations Act of 1995 and Cosatu’s participation in the ruling alliance. Large-scale unemployment began in the 1970s and, by 1994 ,was, broadly defined, already at 30%. At that time, when the first nationally representative statistics were published, South Africa’s unemployment rate was arguably the highest in the world.

The government’s new growth path document states that two-thirds of “working people” in South Africa earn less than R1 000 a month. This salary supports, on average, more than four other members in a poor household.

A 2010 Organisation of Economic Co-operation and Development study on South Africa reveals that, since 1997, the top 20% “were the only ones to experience any growth in real wages. All other deciles suffered a decrease in real wages.” During that period, real wages of the bottom 10% almost halved. “Ultimately,” concludes the study, “the highest decile enjoyed the highest increase in real wages while the lowest decile suffered the highest decrease, further entrenching wage inequality.”

A mild check
According to Abhijit Banerjee, professor of economics at the Massachusetts Institute of Technology, all that Cosatu has achieved is to keep “the wages of the unionised unskilled from falling as fast as they otherwise would have”. As a result, according to University of Cape Town economics professor Haroon Bhorat, Cosatu acted as a mild check on growing inequality in the private sector.

The International Monetary Fund now recognises that “it would be a big mistake to separate analyses of growth and income distribution”. Inequality generates instability, which dampens investor confidence, increases debt levels and, in turn, the prospect of financial crises and encourages corruption.

The clamour of workers for higher nominal wages – to maintain their real wage – is connected to the extreme concentration of our local economy. Members of the working class spend a considerable part of their income on bread, chicken and other commodities whose prices have been driven up by cartels.

Moreover, the Competition Commission has found that the cost of doing business is inflated by monopolies such as Telkom and oligopolies such as those in the banking sector, and not simply by high labour costs. All this dampens competition and in turn innovation, the key driver of increased productivity and growth.

There is scope for considerable reform of our inefficient labour-related institutions and for a reduction of the administrative complexity (particularly for small businesses) of managing employees. But this is not the crux of the matter. If labour costs and market flexibility were all that mattered, then Ethiopia, with a minimum wage of R160 a month, would have industrialised decades ago. As anyone who has enjoyed injera (flatbread) in Ethiopia knows, this is not the case.

Plainly disingenuous
In fact, the ongoing de facto deregulation of the South African labour market proceeds apace. Bhorat has found that 45% of workers covered by bargaining-council agreements earn wages below the legislated minimum, with the average amount of the shortfall being 36% of the minimum wage. The obsession with a suffocating labour market is plainly disingenuous.

Labour market efficiency is only one of 12 pillars used by the World Economic Forum in its competitiveness index, which places more emphasis on factors that enhance labour productivity such as health, education, infrastructure and the macroeconomic environment.

Labour’s weak productivity is central to the challenges faced by the South African economy.

The apartheid system created a cheap labour system, developed with migrant labour, that was the basis of exploitation in mining. It aimed to keep the black population uneducated and out of the cities, thus pitting itself against that inexorable market force: urbanisation. Labour that was “cheap”, proscribed and distant became unproductive and relatively expensive in the context of a more sophisticated urban economy.

Capitalism’s tendency to replace labour with machines is progressive when rising education and training and improved technology, enable the take-up of skilled employment. This has not happened in South Africa. As the late Oxford historian Charles Feinstein noted in An Economic History of South Africa, capital intensity in manufacturing nearly doubled between 1974 and 1994, but output per worker made negligible gains. Technology progressed but people did not.

Widening remuneration gap
South African workers find themselves on the wrong side of an increasing global demand for skilled labour and the widening remuneration gap. Utterly pivotal, therefore, is improving the quality and equity of education – an ongoing failure of the government. Without this, businesses will struggle to enter higher value-added export markets.
Substantial increases in investment are central to reducing unemployment, but the non-household private sector is currently sitting on R700-billion worth of deposits, the majority earning low interest in one-day demand accounts. In our obscenely unequal economy, the surplus piles up on one side, unable, or unwilling, to be reinvested.

As Stanlib chief economist Kevin Lings says: “South Africa’s high unemployment requires a far more complete and bolder solution” than a single-minded focus on wages.

In the face of structural unemployment, what role could a youth wage subsidy play?

The proposed subsidy would provide R5-billion in tax credits to businesses over an initial three-year period. It would cover half the wages of an employee aged 18 to 29 and earning below the income-tax threshold. Each employment subsidy would last two years. A review of international experience compiled by the Southern Africa Labour and Development Research Unit concedes that large firms with market power are likely “to capture some of the subsidy” as profit.

Youth wage subsidy
The DA asserts that 430 000 new jobs would be created by the youth wage subsidy. The source of this figure is the treasury, which asserts that only 178 000 new jobs – still a significant amount – would be created, because the rest would have been hired anyway.

The strongest argument for a youth wage subsidy is that formal employment, even if temporary, has been found to have a lasting benefit for young job-seekers. That experience of life in the world of work is a critical advantage.
Cosatu’s opposition is rooted in an expectation that the subsidy so far proposed will cause bosses to discharge non-subsidised (that is, older) workers and that, when it expires in two years, businesses will retrench the previously subsidised youth or induce everyone to take a wage cut. In short, Cosatu sees the subsidy as the thin end of the wedge in a general attack on wage levels.

Such an attack on employed workers is precisely what follows from the DA’s diagnosis of the fundamental problem as “the high cost of hiring labour”. But this approach does not treat the core problem, and its inherent dangers are increasingly understood at the level of the global economy.

In pursuit of profit
Every business needs to drive wages down in pursuit of profit but at the same time needs other businesses to sustain consumption by paying higher wages. This applies globally. Businesses attack demand at home with wage cuts, but want a flourishing export market reliant on high foreign wages. For this reason, Western exporters now look to rising Chinese wages with optimism.

Cutting this Gordian knot requires globally agreed-upon and enforced minimum wages and conditions, which would prevent the DA’s “race to the bottom” and allow a competitive race to the top.

Cosatu needs to place much greater emphasis on strengthening the international process in this direction. It should be possible to use the resources proposed for the wage subsidy, and more, to achieve similar ends, without threatening existing jobs and in a way that expands the economy as a whole.

The attempt to return South Africa to reliance on cheap labour is wrong-headed and ignores the vital lessons of the past. Strong employment growth will require wide-ranging investment and a healthy, educated and productive labour force.
The youth wage subsidy does nothing to address these fundamental and urgent tasks.

Doron Isaacs is the co-ordinator of Equal Education and Ilan Strauss is a researcher in the School of Economic and Business Sciences at the University of the Witwatersrand

Subscribe to the M&G

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

Related stories


press releases

Loading latest Press Releases…

The best local and international journalism

handpicked and in your inbox every weekday