Unemployment in South Africa The unemployment rate

Unemployment in South Africa

The unemployment rate in South Africa is one of the highest in the world and has increased in recent years. 0 5 Thailand Norway Singapore Korea Netherlands Switzerland Malaysia China Mainland Japan Mexico Denmark Hong Kong Luxembourg Romania Australia New Zealand Czech Republic Taiwan India Kazakhstan Israel United Kingdom Belgium Italy Philippines Ukraine Canada Germany Finland Sweden Brazil Poland Bulgaria USA Peru Slovenia Greece Indonesia Portugal Russia France Hungary Venezuela Chile Slovak Republic Ireland Estonia Colombia Turkey Croatia Lithuania Spain South Africa Source: OECD Economic Outlook June 2009 National sources 10 15 20 18. 10 25 24. 00

Unemployment in South Africa is affected by supply and demand side effects and tempered by local institutions. Institutions Supply Demand Labor Force Participation Training & Education Social Programs Reservation Wage Infrastructure Real Wage Non-Wage Costs Labor/Capital ratio Macroeconomic Indicators Labor Regulation

The structural shift of the economy and increased global competition have caused a greater demand for skilled workers in South Africa. Employment by Sector, 1970 -2005 • • Source: Banerjee (2006). Why has unemployment risen in the new South Africa? South Africa has experienced a structural shift away from agriculture and mining (traditionally low-skill jobs), and manufacturing has not grown to absorb excess capacity. At the same time, growth in skill -intensive sectors has driven up the demand for skilled labor. High-skilled workers have seen their employment share and their real wages increase as industries as the economy as a whole shifts towards more skilled workers. Maintaining a competitive edge will require skills upgrading of the labor force.

The legacy of apartheid has frustrated the necessary structural adjustment of the labor force. The supply of labor increased after the fall of apartheid, driven largely by an unprecedented influx of black women into the labor force. On the whole, these new entrants have tended to be relatively less-skilled. Education has not kept pace with the needs of the labor force: § There is a mismatch between the skills being taught in the schools and the skills needed in the workplace. § Though educational enrollment and graduation rates have increased, the quality of education is uneven, a particularly pernicious legacy of the apartheid. The institutions of education and adult training, and therefore the skills development of the work force, have not kept up with needs of more modern economy. As a result, there is a lack of sufficiently skilled professionals, managers and artisans.

Unemployment rates are higher and increasing among those with less education. Source: Haroon Bhorat, S. M. Ravi Kanbur, eds, . Poverty and Policy in Post-Apartheid South Africa (Human Science Research Council, 2007).

Whereas businesses in many of our major competitor countries have found it easier to access skilled labor, South Africa reports lower and declining access to skilled labor. Ranking by Businesses as to the Availability of Skilled Labor (0 -10) 10 9 8 7 South Africa 6 China 5 Colombia 4 Malaysia 3 Thailand 2 1 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Qualitative question in survey to firms about how skilled labor is readily available. Source: IMD WCY Executive Opinion Survey based on an index from 0 to 10

On the demand side, rigid wage and non-wage regulations meant to protect workers have had the opposite effect of discouraging hiring and depressing employment levels. • Although businesses had been promised liberalization reform in 1996, in fact new legislation introduced wage floors and wage-bargaining policies that have actually served to introduce new rigidities and have the opposite effect of raising the cost of hiring. • In the manufacturing sector, this had the effect of encouraging businesses to replace unskilled labor with machines, rather than to protect unskilled labor. • Small business have been especially hurt, a fact that explains their mediocre performance in terms of contributing to GDP growth and employment.

South Africa has powerful labor unions, which has paralyzed businesses from responding to growing pressures of globalization. Source: Botero, J. , S. Djankov, R. La Porta, F. López-De-Silanes y A. Shleifer (2004). “The regulation of labor”. The Quarterly Journal of Economics, November.

Although our overall Doing Business ranking is relatively high, employing workers is a major business obstacle. Doing Business Ranking (1 -183) Minimum-wage and fixed-contract regulations have made it difficult to hire workers, … Difficulty of hiring index (0 -100) East Asia & Pacific Middle East & North Africa OECD South Asia Eastern Europe & Central Asia Latin America & Caribbean Sub-Saharan Africa South Africa 56 0 10 20 30 40 50 60 …and labor laws prevent us from adjusting to economic downturns. Rigidity of employment index (0 -100) Sub-Saharan Africa South Africa Eastern Europe & Central Asia Latin America & Caribbean OECD South Asia Middle East & North Africa East Asia & Pacific Source: Doing. Business. org, World Bank 0 10 20 30 40

South African businesses have a high burden of non-labor costs thanks to a relatively high responsibility for providing social security, health, and unemployment benefits. Source: Botero, J. , S. Djankov, R. La Porta, F. López-De-Silanes y A. Shleifer (2004). “The regulation of labor”. The Quarterly Journal of Economics, November.

Labor regulation and generous benefits have protected the wages of union workers, but it has generated structural unemployment for the rest of the population. 1 1 1 w 1 Wages should 3 fall 1 w’ u w w’’ Supply increases 1 Unions created 4 a wage floor 1 1 2 1 L’ L’’’ 1 Structural 5 unemployment 1 Demand falls L The nominal decline that would have been necessary to clear the labor market was simply too large to be politically or socially acceptable

From the perspective of business leaders, the problem of unemployment in South Africa is caused by poor education, excessive labor market regulation, and high non-wage costs. Education The training of the labor force has not kept pace with the skill level necessary for South Africa’s increasingly sophisticated production, which has led to a mismatch between jobs and workers. Labor Regulation Powerful labor unions have won stricter labor regulation that benefits union members, but have increased costs to businesses and driven a wedge through supply and demand for labor that contributes to structural unemployment. Non-Wage Costs Because the private sector is responsible for providing social security and other nonwage benefits, labor costs are especially high, which has discouraged hiring new workers and encouraged the replacement of low-skilled labor with machinery.

the problem is lack of job-creation for unskilled labor why? > technological adoption > structural shifts to less laborintensity Combined with large unskilled labor inflow and labor market rigidities

recommended solution is to grow the non-traditional manufacturing sector main constraint > lack of profitability in non-traditional, export-oriented manufacturing how to resolve 1 > fiscal & exchange rate policy 2 > industrial policy 3 > trade and immigration regulation

< 1 > enhance competitiveness of tradable sector through macro policies FISCAL POLICY EXCHANGE RATE POLICY DIAGNOSIS – pro-cyclical; given current account position, unsustainable to grow through demand DIAGNOSIS – real exchange volatility and overappreciation of Rand; > hurts import- and export-competing sectors POLICY GOALS – prudent, counter-cyclical fiscal policy to enable lower interest rates (to prevent appreciation) POLICY MECHANISM – policy of fiscal restraint to lower interest rates and change deficit calculation methodology (take account of business cycle and commodity prices) POLICY GOALS – reduce exchange-rate volatility and prevent episodes of strong currency appreciation POLICY MECHANISM – Introduce controls on "hot money" capital inflows; lift restrictions on capital outflows; help Reserve Bank intervene in forex market to prevent large appreciations > > > supports profitability and investment in the tradable manufacturing sector, without threatening macroeconomic stability

< 2 > strengthen IDC, reorganize DTI, and facilitate public agency coordination INDUSTRIAL POLICY DIAGNOSIS – self-discovery externalities, coordination externalities, and missing public inputs hinder investments in manufacturing (increasing cost and risk) POLICY GOALS – decrease costs to invest in manufacturing sector (especially in new industries) to make more attractive to new investors POLICY MECHANISM – 1. strengthen IDC to finance and incubate new activities self- 2. reorganize DTI with an ‘open-architecture’ approach to incentivize organization in society to identify needed inputs 3. facilitate coordination between public entities to implement < 2 > by allocating a central budget and improving information flows > > > helps fix self-discovery externalities, coordination failures and missing public inputs to enhance investments in the manufacturing sector

< 3 > make it easier to do business and begin ‘brain refill’ TRADE REGULATION DIAGNOSIS – poor performance in across-border trade due to cumbersome trade regulations: thick bureaucracy, high cost, and long time lags POLICY GOALS – simplify and streamline the export and import approval process by removing red tape. IMMIGRATION REGULATION DIAGNOSIS – brain drain + complementarity of high- and low-skill = bad POLICY GOALS – attract educated and highskilled workers to south africa POLICY MECHANISM – streamline ‘irksome’ process of getting work permits POLICY MECHANISM – 1. decrease the number of required documents by combining documents and instituting electronic filing system 2. implement risk management techniques and after clearance > > > enhances the manufacturing sector by streamlining import and export processes, and bringing in skilled-labor

simulation impact of the manufacturing sector expansion on employment under different scenarios of GDP and labor intensity expansion Sources: South African Statistics Institute, EIU and UNDP 2005. *Assumes manufacturing growth is as projected by EIU until 2010, and 3% onwards. **Assumes manufacturing growth is as projected by EIU until 2010, and 5% onwards. ***Calculations assume that labor intensity growth is the same every year (but it accumulates to 3% or 5% on 2015 depending on the scenario) Labor intensity in manuf. sector = employment in manuf. in 2004 / manuf. GDP in 2004 (= 6. 6 jobs per million Rand)

ü technically correct ü administratively feasible ü politically supportable