The labour market
The general conclusion that emerges based on a review of studies by the International Labour Organisation, the Organisation for Economic Cooperation and Development (OECD), and the International Monetary Fund is that South Africa’s labour laws are not the principal cause of high unemployment. According to most international surveys, these laws are not overly rigid relative to either developed or developing countries.
Despite the positive overall assessment of the labour laws, two areas do make it difficult for new entrants to enter the labour market. The evidence suggests that high entry-level wages (high relative to the productivity of a new entrant) bias firms against taking on new entrants. Furthermore, collective bargaining appears to benefit larger employers, undermining the competitiveness of smaller firms.
In OECD countries, a new entrant earns on average about 37 percent of the average wage. Firms pay a premium for experienced workers and experienced workers generally have much higher rates of productivity. In South Africa, the average starting salary is 60 percent of the average. Therefore, starting salaries in many firms are higher than the relative productivity of a new worker. This discourages firms taking on new young workers.
Figure 5.4: Ratio of minimum wage to average wage of full time workers, selected countries
In this way, the country’s demographic trend contributes to high unemployment. South Africa, like other sub-Saharan African countries, has a relatively young population. According to the United Nations, the median age was 21 in 1950, 24 in 2005, and is expected to rise to 27 by 2025.
At the same time, because of the shortage of skills, professionals (especially outside of the public sector), receive high salaries. While the system of skills supply has transformed somewhat, the throughput rates (the proportion of those who enrol and graduate) have been low and racially skewed.
The consequences of apartheid’s spatial legacy and settlement patterns complicate these matters. The country’s low-income population tends to be dispersed in relatively dense settlements that are far from areas of high economic activity. The high costs of transport and long commuting times prevent many low-income households from taking full advantage of large urban labour markets. This results in a loss of productivity and, in effect, a regressive tax on earnings for the poor.
The country’s spatial arrangements are therefore partly responsible for low disposable incomes among employed workers. A large section of the labour force, by any standard, spends a big proportion of wages on transport. This also affects search costs for those looking for employment. Beyond the cities, an estimated 23 percent of the population is trapped in former “homelands”, where there are few if any economic opportunities, and which have very limited connections to economic centres.
These economic factors, and social factors such as the performance of the education system, combine to give South Africa an inordinately high unemployment rate. Of particular concern is that the labour market is almost designed to limit new entrants.
Some countries, such as China, have sought to deal with this stalemate (of broadening access to jobs and protection of labour standards) by reforming at the margins through instruments such as industrial development zones. South Africa’s attempts in this regard have not been successful.
The social cost of long-term unemployment is staggering. In South Africa, if young people fail to get a job by the age of 24, they are almost never likely to get full-time formal employment. As a consequence, about 60 percent of an entire generation could live their lives without ever holding a formal job.
This time bomb is the greatest risk to social stability in South Africa.
