Leadership

Assignment: UNDERSTANDING UNEMPLOYMENT IN SOUTH AFRICA Subject: Economics for Managers Course: MBA Modular 2004 (1) E Student: Tariq Jamodien Student Number: 14479982 Lecturer: Prof. Andre Roux Due Date: 10 July 2006 Certification: I certify the content of the assignment to be my own and original work and that all sources have been accurately reported and acknowledged, and that this document has not previously been submitted in its entirety or in part at any educational establishment. Signature: [pic] 1. Introduction Combating rising unemployment is undoubtedly one of the biggest challenges facing South Africa. The historical legacy of inequality has resulted in a workforce that is inappropriately skilled, with a clear bias along racial and gender lines regarding employment prospects. The labour market appears to be constrained by legislation and inflexible conditions. Economic factors such as the decline in manufacturing, mining and agriculture are also contributing factors to the malaise. Government has attempted to address unemployment through various methods such as Public Works Programmes, skills development and small business development. However, it is debatable whether any of these mechanisms have had any positive and sustainable effects on stemming the tide of unemployment. The focus of this paper will be to take a broad macro-economic view of unemployment and the context within which the country is grappling with this challenge. It is not the aim to come up with any novel solutions, but rather to foster an understanding of the issues as discussed within the media and other sources. 2. The Definition of Unemployment Barker (1999, p.165) defines an unemployed person as somebody who is without work, is currently available for work, and is seeking or wanting to work. The unemployment rate is defined as the number of unemployed persons taken as a percentage of the economically active population, which includes both the employed and unemployed. In South Africa, two different definitions of unemployment are often used: the expanded (broad) definition and the strict (narrow) definition. The expanded definition accepts as unemployed those who did not search for work in a four week period but who report being available for work and say they would accept if a suitable job were offered (South African Reserve Bank, 2006). In various readings, these people are often referred to as ‘discouraged job seekers’. In 1998 the narrow concept was declared the official definition of unemployment. According to the official definition, a person is regarded as unemployed if he or she did not work in the previous week, wants to work, is available to begin work within a week and has taken active steps to look for employment or self-employment in the previous four weeks (Business Trust, November 2004). The Labour Force Survey (September 2004) reflected the following: • According to the official definition, 25,2% or 4.1 million people were unemployed. • According to the expanded definition, 41% or 8 million people were unemployed. The number of ‘discouraged job seekers’ has also risen over the period September 2000 to March 2005. The figure increased from 2,2 million people to 3,8 million over this period, thereby reflecting an increase of 8% working age people to 13% in just over four years (Labour Force Survey, March 2005). 3. The Dimensions of Unemployment Based on official statistics, the Business Trust (November 2004) analysed how the unemployed were differentiated by age, education and skills, race and gender. In September 2002, South Africa had a working age population of 27.8 million; on the official definition, 15.8 million were economically active and 4.8 million unemployed. The official unemployment rate rose to 30.5 %. Based on these statistics, the following points are noteworthy: 1. Age, Education and Skills In September 2002: • 56% of the unemployed were aged between 15 and 30. • The unemployment rate for those aged under 30 was 49%, compared with 21% for those aged over 30. • The under-30’s made up only 26% of the employed and 35% of the labour force as a whole. • The unemployment rate among young people (under 30) with diplomas stood at 35%, whilst the unemployment rate for university graduates stood at 14%. The concentration of unemployment amongst the youth possibly reflects employers placing a premium on work experience, as opposed to secondary and even tertiary education. A concern would also be whether young people are following appropriate courses of tertiary study in line with the demands of the job market. 2. Race and Gender • African unemployment stood at 36.8% in 2002; Coloured unemployment stood at 21.3%; Asians at 21.3% and Whites at 6.2%. • 34.7% of women were unemployed in 2002, whilst 26.8% of men were unemployed. The above figures clearly reflect a distinct race and gender bias within the world of work. Clearly, white people are more likely to be in gainful employment, even though legislative interventions such as affirmative action and black economic empowerment have been promulgated. It could be surmised that the problem is a historical one, of white people being more appropriately skilled and educated and also having relevant work experience, thereby increasing their mobility in the job market. Similarly, traditional patriarchal work environments, particularly within corporate companies, create barriers of entry for women. The Minister of Labour, Mr Membathisi Mdladlana, has raised deep concern that both large and small employers were making limited improvement with regard to equitable representation of black people and women. Of 12 544 equity reports submitted by employers between 2002 and October 2005, it revealed that only 21% of senior managers were black, with a minute proportion being women (City Press, 31 July 2005). 4. Understanding Causes of Unemployment Being a complex phenomenon, the causes of unemployment covers a wide spectrum of factors. Some of these are common to all market economies, others are specific to the South African economic and political order. 1. The Role of Unions Trade unions play a vital role in balancing the power of employers and in ensuring that workers’ interests and needs are furthered through a process of collective bargaining, where unions essentially focus on optimizing wages and other conditions of employment. The result could be that employers find the provision of such wage agreements too onerous to bear, leading them to reduce their reliance on human capital. Arora and Ricci (2004, p.26) mention that Angelucci (2003) surveyed the impact of unionization on unemployment for the period 1995 to 2001. Angelucci’s findings were that, all else being equal, a ten percent decrease in unionization, would reduce the unemployment rate by about 2%. The study, however found that the negative effect of unionization on employment has been declining over time and was insignificant in 2001. Arora and Ricci (2004) further assert that empirical evidence suggests that the degree of unionization is likely to contribute only marginally, if at all, to the high unemployment rate in South Africa. Other factors, such as skills deficiencies and labour market regulations, may be more important factors to contend with. 4.2 Labour Legislation A primary consequence of South Africa’s democracy has been the acknowledgement of worker rights entrenched in labour legislation such as the Labour Relations Act and the Basic Conditions of Employment Act. Government has been in the tenuous position of ensuring that a focus on social justice runs parallel with the country’s need to establish a framework for economic growth. However, these two objectives are often viewed as diametrical as the imposition of the various labour legislation has in turn had the effect of placing increasing burdens upon employers to ensure that they do not fall of the law and also acting as a disincentive to creating employment opportunities. The Basic Conditions of Employment Act has given all workers a basic floor of rights which regulate matters such as hours of work, overtime payments, leave and rest periods for workers. Furthermore, collective bargaining agreements within sectors are often struck between the unions and the big companies in those sectors. Often these agreements are extended to other smaller enterprises which are unable to afford the costs of such conditions of employment. The clothing sector has had a plethora of examples of smaller companies, who, unable to abide by the sectoral minimum conditions, renege thereon resulting in huge fines, and often ending in prosecution and often closure of the business. The statutory Employment Conditions Commission has promulgated nine sectoral determinations in sectors which are deemed as vulnerable, including domestic workers, and farm workers. According to research carried out by Efficient Research, increasing unit labour costs in South Africa had forced employers to reduce their workforces wherever possible. South Africa’s unit labour cost had risen by 250% since 1990, the highest increase of all countries for which reliable data was available (Business Day, 11 August 2005). A major aspect of the Labour Relations Act has been the perceived difficulty with which employers can dismiss workers. The Act prescribes that dismissals should be both substantively and procedurally fair. Often, employers have to go to great lengths and incur huge costs in ensuring that they do not flout the law. Also the labour dispute resolution system which had the aim of expediting the resolution of disputes has proved to be cumbersome, time-consuming and often costly. A statutory body, the Commission for Conciliation, Mediation and Arbitration (CCMA), has been bombarded with an inordinate number of dispute referrals. Anecdotal evidence points to about 17 000 cases heard in the Western Cape in 2005, besides disputes in the other provinces. The indirect costs associated with entertaining and defending such disputes has left employers fuming. Furthermore, compensatory awards made against erring employers, often amount to thousands of rands. Arora and Ricci (2004) reveal that surveys by Levy (2003) indicate that in 2002 dismissal costs totaled 3 million man-hours, which were equivalent to three times the cost associated with labour strikes. At the median wage of just under R4 900 a month, this would be equivalent to R15 billion annually, or 1,5% of GDP. Employers thus contend that their managerial prerogative to ‘hire and fire’ is being impeded, with the potential result being that employers will be seeking less labour intensive methods of production, thereby further curtailing job creation. 4.3 Lack of appropriately skilled workforce One of the major challenges facing South Africa is addressing the lack of appropriately skilled workforce geared for the modern economy which is characterized by technological advancement and knowledge cultivation. In essence, there is an oversupply of unskilled labour and an undersupply of skilled labour. The problem is often ascribed to an apartheid education system which ensured that black people were constrained in their acquisition of education and skills. The practice of job reservation also meant that menial, hard labour was the lot of the black worker with very little opportunity for advancement into occupations which were knowledge-based. The bulwarks of our economy, namely, mining, agriculture and manufacturing has declined, with a shift towards service industries such as call centres, hospitality and tourism. Along with the decline, has come a tide of retrenchments of workers who have very little mobile skills to ensure their continued participation in the new economy. Capital-intensive work methods have also gained in popularity, with a focus on increased productivity often defined as the ability to produce high output with less input (usually referring to workers). The pressure from international competition has also forced South African producers to adopt low-cost production targets, with a focus on smarter work methods. A further constraint is the apparent lack of entrepreneurial skills enabling people to start small businesses and successfully grow them. Various institutional and legislative impediments also create barriers to entry. 5. Current Employment Situation Quarterly employment statistics for March 2006, released by Statistics South Africa, reveal the following: • The manufacturing industry reported an annual increase of 24 000 employees at March 2006, with 5000 jobs being added in the last quarter. With increased consumer spending, this increase is attributed to increases in employment in the manufacture of foodstuffs, beverages, machines and motor vehicles. • The electricity, gas and water supply industry reported an annual increase of 2000 employees at March 2006, with a quarterly increase from December 2005 of 1000 employees. • The construction industry reported an annual increase of 83 000 employees with a quarterly increase of 9 000 employees. With a boom in the property market, spurred on by low interest rates, this increase in employment is expected. • The mining industry added 3 000 jobs in the first quarter, after losing 5 000 jobs in the previous three months. • Employment in the trade, motor vehicles and hotel industry fell by 23 000 in the first quarter, after gaining 49 000 in the previous three months. Employment in the industry typically declines in the first quarter as the number of seasonal workers hired for the December shopping season drops. • The transport industry reported an annual decrease of 1 000 employees. • The financial, insurance, real estate and business services industry reported an annual increase of 102 000 employees but a decrease of 8 000 employees since December 2005. In general, South Africa added 9 000 jobs in the first quarter, the lowest in a year, as the rand’s gains undermined exports and the number of seasonal workers declined. The number of new jobs created in the first quarter fell from 83 000 in the previous three months and was the lowest since the first quarter of 2005. 6. Government’s response to Unemployment With unemployment being one of government’s major concerns, various labour market policies have been pursued in order to alleviate and address this scourge. Government’s aim is to halve poverty and unemployment by 2014. 6.1 Public Works Programmes Public Works Programmes (PWP’s) are labour-intensive programmes aimed at providing unskilled and semi-skilled workers with short-term employment opportunities (Larsson and Nybom, 2006). By the end of 2004/05 fiscal year the PWP had created 174 800 net jobs with most jobs being created in infrastructure and environmental / cultural projects (Finance Week, 20 July 2005). Workers with PWP’s are paid lower than market rate and because of the short- term nature of projects, the idea that these workers would graduate to more concrete levels of employment has often not been realized. It is usually found that these workers are relegated back to the ranks of the unemployed, with the skills gleaned from the PWP’s not being sufficient to enter the formal sector. Also, the brevity of the employment period, coupled with the low wage, has been found to have very little impact on poverty alleviation as participants on PWP’s focus on the immediate need to ‘put food on the table’ (Larrson and Nybom, 2006). The efficacy of PWP’s to make a significant dent in South Africa’s unemployment is questionable. It appears to suffice as a means of containing rising unemployment, but definitely does not constitute a sustainable long-run model. 6.2 Reviewing the Labour Market To a great degree, South Africa’s economy can be described as having dual features as opposed to being integrated. There could be described as a ‘first’ economy consisting of people working in the formal sector who have access to benefits such as pension funds, medical aids, and earn salaries significantly above a ‘living wage’. A ‘second economy’ would consist of people who operate in the informal sector, who are vulnerable to exploitation and who earn low wages with very little access to other social benefits. An ANC discussion document proposed the introduction of a two-tier labour market which would reduce the burden of labour regulations on small businesses and encourage employment (Finance Week, 20 July 2005). Some of the suggestions are that companies hiring young, first-time workers be exempt from certain labour laws in order to encourage job creation and youth employment. The difficulty of a review of labour legislation, is raising the ire of trade unions who argue that they are not prepared to forego the gains made to improve the working conditions and job security of workers. A relaxation of labour laws may lead to a catastrophic stand-off between government and the labour movement which could have serious repercussions on the markets and foreign investment. On the other hand, businesses are bearing the brunt of a legislative framework which is often seen as complex and a disincentive to employment growth. 6.3 Skills development In 1998, the National Skills Act was promulgated and in 1999 Sector Education and Training Authorities (SETA’s) were created in order to drive skills development within sectors. Many SETAs have been bedeviled with claims of corruption and inadequate provision of skills planning. It has also been lamented that many employers have not capitalized on the opportunities presented by SETA’s and have viewed it as another inhibiting, bureaucratic feature of the labour market. It is often cited that a lack of skills inhibits employment opportunities, and furthermore, skills acquisition should be targeted towards appropriate growth sectors. It is debatable whether the education and training system in the country is properly geared to meet the skills gap. Much mention has been made about the paucity of maths and science graduates which impacts on the country’s quest to build a modern, globally-competitive economy. 6.4 Small business development The government planned to set aside a portion of its R300 billion infrastructure expenditure over the decade from 2005 to 2015 for small, medium and micro enterprises with the aim of establishing 100 000 new small businesses (Business Day, 22 November 2005). In his recent budget speech, the Minister of Finance has also announced tax incentives for small businesses which could act as an encouragement to aspirant entrepreneurs. 5. Accelerated and Shared Growth Initiative for South Africa (AsgiSA) Information released by government about AsgiSA reflects the following (http://www.info.gov.za/asgisa/asgisa.htm): “Government’s investigation, supported by some independent research, indicate that the growth rate needed for us to achieve our social objectives is around 5% on average between 2004 and 2014. Realistically assessing the capabilities of the economy and the international environment, we have set a two-phase target. In the first phase, between 2005 and 2009, we seek an annual growth rate that averages 4,5% or higher. In the second phase, between 2010 and 2014, we seek an average growth rate of at least 6% of gross domestic product (GDP). In addition to these growth rates, our social objectives require us to improve the environment and opportunities for more labour-absorbing economic activities. More broadly, we need to ensure that the fruits of growth are shared in such a way that poverty comes as close as possible to being eliminated, and that the severe inequalities that still plague our country are further reduced. Our vision of our development path is a vigorous and inclusive economy where products and services are diverse, more value is added to our products and services, costs of production and distribution are reduced, labour is readily absorbed into sustainable employment, and new businesses proliferate and expand.” 7. Conclusion This paper has concentrated on an issue of great importance – the rise of unemployment. An attempt has been made to look at the main trends and contributing factors, thereby enhancing an understanding of this complex problem. It appears that continued economic growth has been insufficient to create the requisite number of jobs required by a growing economically active population. A complex labour legislative framework possibly constrains job creation in an already highly segmented labour market. This could discourage investment and could be perceived at odds with government’s endorsement of trade liberalization. It is hoped that the government’s shared growth plan, AsgiSA would spur better job creation which is undoubtedly a precursor to stemming poverty and inequality. References Arora, V and Ricci, L. (2004). Unemployment and the Labour Market. (Article contained in study material) Barker, F. (1999). South African Labour Market: Critical Issues for Renaissance. Pretoria. J.L. van Schaik Publishers. Business Day, 11 August 2005. Business Day, 22 November 2005 Business Trust. (2004). Employment and Unemployment in South Africa: A brief description. Auckland Park. City Press, 31 July 2005 Finance Week, 20 July 2005 http://www.reservebank.co.za/ http://www.info.gov.za/asgisa/asgisa.htm Larsson, A and Nybom, M.( Spring 2006). Government response to poverty and unemployment in South Africa: A micro-level evaluation of the Expanded Public Works Programme. Department of Economics. Uppsala University. Statistics South Africa. Labour Force Survey, September 2004. Statistics South Africa. Labour Force Survey, March 2005. Statistics South Africa. Labour Force Survey 2000 to 2005 Comparison. Statistics South Africa. Quarterly Employment Statistics, March 2006.