Unemployment and the South African labour market

Hendrik van BroekhuizenResearch on Socio-Economic Policy

Stellenbosch University12 September 2013

Concepts, figures, and statistics in this presentation: Primary sources

o CDE. (2011). A fresh look at unemployment: A conversation among experts. CDE Workshop Paper, Centre for Development and Enterprise

o StatsSA. (2013). Quarterly Labour Force Survey: Quarter 1 Press Statement. Statistics South Africa.

o CDE. (2013). Graduate unemployment in South Africa: A much exaggerated problem. CDE Insight. Johannesburg: Centre for Development and Enterprise.

o CDE. (forthcoming). South Africa’s education crises. CDE Insight. Johannesburg: Centre for Development and Enterprise.

o OECD. (2013). OECD Economic Surveys: South Africa 2013. OECD Publishing.

Why focus on unemployment?

o Unemployment and employment are measures of a country’s socio-economic health.

o Global employment crisis following financial crisis

o High and/or rising levels of unemployment are increasingly becoming • cause for concern• the target of policy interventions• The basis for political and ideological division

Figure – Peak-to-trough fall in output and employment (2007 – 2010)

Icelan

dTu

rkey

Finlan

dMexi

co

Denmark

Slovak

Repub

lic

German

y

Czech R

epub

licKo

rea Chile

Portu

gal

SOUTH

AFRICA

Austr

alia-15%

-10%

-5%

0%

5%

10%

15%

GDP ChangeEmployment Decline

Figure – Total employment in SA (2008 – 2013)

2008

Q120

08Q2

2008

Q320

08Q4

2009

Q120

09Q2

2009

Q320

09Q4

2010

Q120

10Q2

2010

Q320

10Q4

2011

Q120

11Q2

2011

Q320

11Q4

2012

Q120

12Q2

2012

Q320

12Q4

2013

Q1

12,20012,40012,60012,80013,00013,20013,40013,60013,80014,00014,200

1 000 000 jobs lost 646 000 jobs gained

Why focus on SA labour market?

o Engine of economic developmento Vehicle of socio-economic change

• For good or bad• Features and issues will propagate through

entire economy

The South African labour market

33 million Working-age Population

12.7 million

NEA

33 million Working-age Population

12.7 million

NEA

33 million Working-age Population

13.6 million Employed

12.7 million

NEA

33 million Working-age Population

13.6 million Employed

2.3 millionDiscouraged

work seekers

12.7 million

NEA

33 million Working-age Population

4.6 millionUnemploye

d

13.6 million Employed

2.3 millionDiscouraged

work seekers

Who are the unemployed?

65.3% long term

unemployed

HELP

49.1% females

70.7% between 15 -

34

59.4% have less than

matric

44% new entrants

The scale of SA’s unemployment crisis

Figure – Official and expanded unemployment rate (2008 – 2013)

2008

Q120

08Q2

2008

Q320

08Q4

2009

Q120

09Q2

2009

Q320

09Q4

2010

Q120

10Q2

2010

Q320

10Q4

2011

Q120

11Q2

2011

Q320

11Q4

2012

Q120

12Q2

2012

Q320

12Q4

2013

Q1

15%

20%

25%

30%

35%

40%

23.5%

25.2%28.2%

36.7%NarrowBroad

The scale of SA’s unemployment crisis I

o Official unemployment rate underestimates crises • Excludes discouraged work-seekers

o Employment rate may be more reflective

South Africa

Lower half of OECD countries

Chile

Israel

Slovenia

Estonia

India

Russia

Upper half of OECD countries

Indonesia

Brazil

China

0% 10% 20% 30% 40% 50% 60% 70% 80%

Figure - Employment rate in SA and select countries, 2008

Figure – Official LFP rate and ER (2008 – 2013)20

08Q1

2008

Q220

08Q3

2008

Q420

09Q1

2009

Q220

09Q3

2009

Q420

10Q1

2010

Q220

10Q3

2010

Q420

11Q1

2011

Q220

11Q3

2011

Q420

12Q1

2012

Q220

12Q3

2012

Q420

13Q1

15%20%25%30%35%40%45%50%55%60%65%

57.9%54.8%

44.3%41.0%

LFPER

The scale of SA’s unemployment crisis II

o Employment rate perhaps more reflective than official unemployment rate, but• Still includes underemployed• Even so, we are lagging behind

internationallyo To reach international norm of 60% ER

• requires 6 million more jobs than the current 13.6 million

o How do we create those jobs?

Economic growth and job creation

Employment and Growth I

o Economic growth necessary condition for job creation, but not sufficient

o Economic growth is not a sufficient condition for job creation

o Employment coefficient

Figure – GDP growth versus job creation, 1970s – 2000s

1970s 1980s 1990s 2000s-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

GDP Employment (public) Employment (private)

Employment and Growth II

o Why an employment coefficient of <0.4?• Decline related to many factors

− Economic, legislative, regulatory pressures− Drive industries and employers toward less

labour-intensive and more skill-intensive production

o To reach international norm of 60% ER requires• 33 mill + 7% GDP↑ for 15 years• 1.9%↑ in 33 mil + 7% GDP ↑ + >40 years

o Growth alone, even when rapid and sustained, cannot be a solution to unemployment

o How to increase labour intensity?

Drivers of economic growth in SA

o Driven primarily by unsustainable ↑ Government spending since 2000

o Local markets small = reliance on exportso Employment growth requires labour-intensive

exports and competitivenesso Detrimental factors

• High cost of doing business, cost of labour, exchange rate (volatility)

• High transport costs• Regulatory burden• No economies of scale

The role of labour market regulations

Employment, labour costs, and productivity

o Employment = f(Labour Productivity, Labour Cost)o Labour cost

• Wages and benefits (direct)• Training, other benefits, complying with regulatory

requirements (indirect)• Risk → increases potential labour cost

o ↑∑LC fewer job offers and jobs createdo ∆Employment = f(LP/LC)o Employers have two responses to high labour costs:

• Pass costs on to consumers• Employ fewer high-cost, low-productivity labourers

Figure – Average changes in productivity and real wages per decade, 1970 - 2009

1970s 1980s 1990s 2000s-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Wages Productivity

Unions and collective bargaining

o Empirical evidence• Unionised workers’ wages 10% - 20% > non-

unionised• Firms covered by collective bargaining have

↑ wage rates ↓ employmento Only third of formal economy covered by

centralised bargaining• Sectors concerned among most critical• Provide benchmark for wage ↑ in other

sectorso Severs link between productivity and wages

The Costs of dismissal

o Cannot hire low-productivity cheaply, so don’t hire at all

o Exacerbated by non-wage costs and risks associated with employment.

o The more risky, the less likely to be employed• Young• Unskilled• Inexperienced

o Costly and risky to dismiss employees

The Costs of strikes

o Labour regulation in SA perhaps on par internationally

o Real crux is ‘militancy’ of SA trade unionso Raise the risk-adjusted wage and non-wage

costs of employmento Strike action heavier in public than private

sector (in general)• Knock-on effect i.t.o. services protests,

disruptions, and further strikes

Figure – Number of working days lost due to industrial action (2005 – 2012)

2005 2006 2007 2008 2009 2010 2011 20120

2,000,0004,000,0006,000,0008,000,000

10,000,00012,000,00014,000,00016,000,00018,000,00020,000,00022,000,000

Days lost Days lost (other sources)Average

The Costs of strikesStrike action in 2012 – scale of militancy

o 17.3 million working hours lost due to illegal or unprotected strikes

o 99 strikes of which half illegalo 118 200 workers involved, 100 850 in the

mining sectoro Strikes often accompanied by violence and

destruction of property

The Costs of strikesStrike action in 2013 – implications of militancy

o 3-week strike in automotive manufacturing sector• Gained:

−Wage increases >>>> inflation• Lost:

−45 000 vehicles, R20bn in potential revenue−GDP, tax receipts, workers pay, employment

numbers−Allure as FDI destination

o SA motor industry = 30% of industrial output and just under 5% of GDP.

o Strikes rob SA of business opportunities – i.e. employment opportunities

The role of labour market reform

o Little agreement on labour reforms between labour and industry

o Need to identify reforms that will stimulate establishment of labour-intensive enterprises.• More medium and low-productivity firms with

lower employment costso SA’s ‘missing middle’o Reforms are on the table, but…

Matching labour supply and demand

Social grants and LFP

o SA LFP rate low (54.8%)o Historically low among women and blackso Does social welfare incentivise or disincentivise

LFP?• Mixed empirical evidence in SA• Increase in access to social grants coincided

with increase in LFP rateso Increases in LFP not commensurately met by

increases in employment• Rising unemployment

Figure – Labour force participation rates in 25 countries (2008)

SwedenNew Zealand

U.K.Germany

JapanPortugalRussioa

Czech republicIndonesia

PolandItalyIndia

Turkey

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Figure – Social grants versus labour force participation rates (1996 - 2009)

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

-10%

0%

10%

20%

30%

40%

50%

60%

0

2,500,000

5,000,000

7,500,000

10,000,000

12,500,000

15,000,000

Reservation wages

o Reservation wages and LFPo Mixed evidence for SAo However, long job queues suggest not…o Expanded Public works Programme and labour

brokering, e.g.o Most unemployed have never been offered a

job rather than turning down wage offerso Reservation wages likely to play more of a role

at the upper end (skilled labour)

Recruitment practices

o Job search affects unemployment and recruitment practices affect employment• Firms screen applicants based on productivity

signals• Firms wanting to fill low-skill entry-level jobs

may use other selection methods−Experience and in-house recruitment−Mitigates risk

• May not advertise jobs−Does not affect # jobs on offer, but makes

access to employment more exclusive

Figure – Share of working-age adults employed in informal sector

Indonesia Brazil India Chile SOUTH AFRICA

Russia0%

10%

20%

30%

40%

50%

Skills and unemployment

o Skills shortage and mismatch o SA has skill-biased employment growtho 59% of unemployed

• Have never worked• Have never had the opportunity to acquire

on-the-job skillso Lack of vital skills and aptitudes for

employment central to unemploymento Riskiness of labour market raises appeal of

experienced work-seekers

A vicious cycle?Abundance of inexperienced,

unskilled unemployed

Need low-wage, low-productivity

industries & jobs

Labour legislation & Economic

Policies

High productivity, high-wage industries

High costs of

dismissal

Firms prefer low-risk job applicants

Firms employ mostly

experienced, highly skilled

workers

Solving the unemployment crisis

o Short-run: ???????o Lon-run: more skillso Not just more education, but better education

• Focus must shift from quantity to quality• Employers look for productivity signals• Is education a good productivity signal in SA?

Developing skills

o FET colleges?o Artisanship training?o University?o Support for job-seekers?o Youth employment incentiveso Expanded public works?

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Nar

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mpl

oym

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(%)

1995

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2005

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2008

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2011

Year

DiplomatesTertiariesGraduates95% CI

Figure – Narrow unemployment rate for tertiaries

Figure – Graduate Narrow Unemployment Rate (2008 – 2013)

0

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8

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Narrow Unemployment Rate 95% CI

Estimated slope coefficient for linear trend line: 0.11 (0.02)

Thank you