The Unnatural Unemployment Situation in South Africa

depression-unemployment

By Piet le Roux

The widespread, persistent unemployment in South Africa is an unnatural situation. At its root lies an artificial disconnect between employers’ propensity to hire and employees’ propensity to accept employment.

As with all statistics, the extent of reported unemployment depends crucially on a definition. The standard definition used by Statistics South Africa includes persons not employed and available for work in the reference week, and who had been actively looking for work in the four preceding weeks.

However, if we wish to understand unemployment’s causes further scrutiny is warranted.

Understanding unemployment

Contrary to what is assumed for statistical purposes, prospective employees do not merely ask themselves: “Do I want a job?”. Rather, they ask: “What do I want in return for accepting this job?”

Prospective employers ask themselves: “What will I offer this person to do this job?”

Employers and employees share two ingredients to their questions: a job and its price.

The prospective employee has at any time a minimum required remuneration – a reservation wage – for a specific job and similarly the prospective employer has a maximum offer in mind. If the parties can meet somewhere between these upper and lower bounds, there exists an “employment window”. On this middle ground each gains more than what they were willing to accept, resulting in mutual profit.

Trade unions like Solidarity, amongst other things, inform this bargaining process on behalf of its members so that an agreeable position somewhere within the employment window can be found.

It is, however, a quite natural and common occurrence – even if unseen -  for there to be no employment window between many prospective employers and employees. A prospective employer may, for example, want someone with a certain skill set to do a certain job, but offers too little in compensation, so that an active job seeker declines the offer, since it’s below her reservation wage.

In fact, it would be cause for concern if a work relationship did come about in the above case. Either the “employee” would have had to be forced to work for less than she was willing to accept – a form of slavery – or the employer would have had to be forced to dispose of his property against his will in order to “pay” his “employee” – a form of theft.

Unnatural unemployment

In contrast to the natural, unalarming situation described above there can exist an unnatural unemployment problem.

An unnatural unemployment situation exists when a third party’s dictates raise the minimum remuneration a person can accept and/or lower the maximum remuneration a prospective employer can offer, narrowing or closing the employment window.

This unnatural unemployment situation strongly manifests in South Africa, the intricacies of which are not accessible for precise quantitative analysis because of the dynamic nature of society, but are nevertheless very real.

Artificially raising the minimum

To the prospective employee, wage is the most readily quantifiable consideration.

Each prospective employee weighs benefits and costs differently and comes to unique conclusions about preferred work-leisure balance. These conclusions adapt dynamically. Just as a first soft drink is preferred to a second soft drink, the prospective employee also values more highly the first R2000 than the second R2000 – he would probably like both, but he cares more for the first. This is why people don’t work 24 hours a day, 7 days a week – at some point almost no wage will compensate for an employee’s desire for time off.

Such stepwise estimation implies that if the employee can find alternative income streams that enter his valuation process before a wage does, he will care less for the wage in the same way that he cares less for a second soft drink. Reasonably so, an otherwise working person might now rather spend more of his time on leisure than on work, such as working half day.

If this alternative income stream constitutes drawings on his savings or investments it can be considered natural, even if arguably questionable on grounds of prudence.

However, if the alternative income stream is unconstrained by the prospective employee’s own previous savings or investment -possibly an unnatural situation – then a structural problem may result. Consider social grants: if a person is guaranteed a R1000 per month government grant, then the wage that would entice him to accept any specific job would most likely need to be higher than if no grant was available, because his more urgent wants have already been satisfied.

Grants are not necessarily bad: if a charitable organisation such as Solidarity Helping Hand provides temporary assistance to a needy family, there exists the intention and feedback mechanism to wean assisted families after a reasonable adjustment period. Caring people can prevent structural dependence abnormalities.

Government grants, however, artificially raise persons’ reservation wage and clouds unemployment statistics.

Similarly, minimum wage regulations raise the minimum a person may work for, without increasing the maximum an employer is willing to offer, leading to the likely situation that fewer potential employers and employees can meet in the employment window – again an unnatural unemployment situation.

Artificially lowering the maximum

A prospective employer has a certain maximum expense in mind when he considers employing someone – this maximum tends toward the value the employer considers the employee to add. If the employer is for some reason forced to divert additional resources to other expenses, there is less available to offer the employee.

Government restrictions tend to have this consequence. Businesses have very few options but to obey government dictates to spend money on onerous regulations, tax bills, ill-considered labour legislation, burdensome black economic empowerment requirements, etc. – leaving less money to offer their employees.

Not all rules are to be rejected simply because they involve costs, but it should be judiciously kept in mind that every additional layer of regulation lowers the maximum remuneration employers can offer employees. Again, trade unions, with their ears to the ground, can play a pivotal role in discovering mutually beneficial rules of the game such as conditions of employment.

The less an employer has left to spend on a new employee, the less likely his wage offer will exceed the candidate’s reservation wage, narrowing the employment window and leading to an unnatural unemployment situation.

At Solidarity we observe unnaturally low wage offers regularly, when employers are unfairly pressurized to equalize wages across a company. Many skilled artisans receive far less than they would have under a free market, because employers are bullied into percentage wage increases for lower skilled labour that exceed those of more highly skilled workers. Additionally, this is detrimental to the South African skills base over time, not least because it discourages skills attainment.

Solutions

Lest it seem odd that a union points out the above, note that Solidarity cares both for its members and the society in which they find themselves, and therefore must oppose unnatural unemployment. Yes, we certainly wish to improve the working conditions, job security and remuneration of our members, and we realise that possibilities of unequal power relations remain.

At the same time, whatever our and anybody else’s solutions are to be, it must be in recognition of the fact that a number of ill-conceived government interferences artificially narrow the employment window from both sides and contribute to aggravated, unnatural unemployment.

Piet le Roux is a senior researcher at the Solidarity Research Institute. Follow him on twitter

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  • Seppie

    Well written, Piet