Structural Unemployment in South Africa

by on September 27, 2010 at 2:01 pm in Economics | Permalink

Unemployment in South Africa is now running at 24% overall with significantly higher rates for blacks.  A shift away from low-skill labor combined with minimum wages and strong trade unions, however, has meant that it is very difficult to lower wages and reduce unemployment.  From a very good piece in the NYTimes:

The sheriff arrived at the factory here to shut it down, part of a national enforcement drive against clothing manufacturers who violate the minimum wage. But women working on the factory floor – the supposed beneficiaries of the crackdown – clambered atop cutting tables and ironing boards to raise anguished cries against it…

Further complicating matters, just as poorly educated blacks surged into the labor force, the economy was shifting to more skills-intensive sectors like retail and financial services, while agriculture and mining, which had historically offered opportunities for common laborers, were in decline.

The country’s leaders invested heavily in schools, hoping the next generation would overcome the country’s racist legacy, but the failures of the post-apartheid education system have left many poor blacks unable to compete in an economy where accountants, engineers and managers are in high demand….

Last year, as South Africa’s economy contracted amid the global
financial crisis, unions negotiated wage increases that averaged 9.3
percent [inflation is 5.1%, AT]….

Eight months ago, Mr. Zuma proposed a wage subsidy
to encourage the hiring of young, inexperienced workers. But it ran
into vociferous opposition from Cosatu, the two-million-member trade
union federation that is part of the governing alliance [insiders v. outsiders, AT], which
contended that it would displace established workers.

Hat tip: Brandon Fuller.

a big jerk September 27, 2010 at 2:19 pm

What a baffling turn of events. I’m flummoxed.

pbriggsiam September 27, 2010 at 2:42 pm

I disagree with your premise that the minimum wage adversely affects employment. That gets thrown about by free-market worshipers far too often as a solution to unemployment.

Yeah a race to the bottom will solve our problems…

Eddie Spelling September 27, 2010 at 2:58 pm

Now that the ‘opportunities’ provided by the soccer world cup are a distant memory, what next for South Africa? Even at the time of the event, there was a feeling that its legacy would not be lasting. Not sure lowering wages will have a good long term impact on employment, as the employed will have less to spend.

Eddie @ perfect golf swing

wlu2009 September 27, 2010 at 3:20 pm

pbriggsiam,

What do you call it when a group of workers is clamoring for the right to work below minimum wage rather than not work at all?

pbriggsiam September 27, 2010 at 3:39 pm

Try giving Kevin Drum a read….

http://www.washingtonmonthly.com/archives/individual/2006_06/009055.php

I agree that it is a problem when there is so little work that people are willing to work for less than minimum. It’s the method for solving it that I disagree with you on.

You think it’s fine for companies to exploit these people…because they can. The “short term” pain of these people working for low wages (slave wages even?) is somehow counterbalanced by the supposed long term gain of more employment.

I don’t think the ends justify the means. I think you too readily ignore the other factors that contribute to a situation in which there are so many low skill workers. I think corportists and free market worshippers would prefer it if we all were low skill workers, scraping by. It keeps us dumb, distracted, unable to affect the political process which is stacked against us, and keeps the profits heading to your base – the wealthy (or the wannabe wealthy fools who think they’ll all become members of that elite).

MeWantFurBurger September 27, 2010 at 3:42 pm

I’d clap for pbriggsiam, but it’s hard to clap with only one hand (the other is on my pocket-rocket).

Dan in Euroland September 27, 2010 at 4:13 pm

I think corportists and free market worshippers would prefer it if we all were low skill workers, scraping by. . .

—————————
What a vapid and yet personally revealing statement.

Andrew September 27, 2010 at 4:41 pm

Welcome to reality pbriggsiam. You can have it if you can take it.

farmer September 27, 2010 at 4:52 pm

again the “china lifting people out of pverty” doesn’t really hold in south africa. Some chap way out in the bundu makes 0 $ a year. Has no interaction with money at all. But when he’s hungry he gathers some bushmeat and has a braai. When he’s thirsty, he’s a watering hole. And he’s got a kraal, so no worries there for shelter.
Same guy goes to Capetown to work. He’s gone from 0 per year to xyz per year, but now no longer eats meat, no longer has safe drinking water, and lives in poor shelter.
There are many in Africa, inc. S.Africa, that have a standard of living that (initially)goes DOWN when their “income” (as in actual money) goes up.

anon September 27, 2010 at 5:00 pm

What if there was a “minimum wage enforcement fund” that guaranteed every worker affected by the closure be paid his wages for the next one year. And that fund could in turn be funded by fines levied on the firms violating the min-wage laws.

Wouldn’t this solve two problems at once? And also incentivize the reporting of firms that paid below minimum wage?

An additional twist would be if it was mandated that any shortfall in the “minimum wage enforcement fund” would be made good by levying a surcharge on all firms in the city the next year (as a part of taxes etc.) That might incentivize the reporting of below min. wage firms by the other players in the market. (yes, it does reek of stooge generation)

Note that I am not saying anything about the desirability of minimum wage laws at all. Nor about the level. Just trying to devise a scheme that would prevent outcomes of the sort described: “when the protected persons don’t want to be protected”. Given that min-wage laws do exist.

Ultimately, either have laws with teeth or none at all…..

Emil September 27, 2010 at 5:55 pm

“What if there was a “minimum wage enforcement fund” that guaranteed every worker affected by the closure be paid his wages for the next one year. And that fund could in turn be funded by fines levied on the firms violating the min-wage laws.”

Yeah, that’s surely going to encourage lots of companies to open factories in S.A….

“”when the protected persons don’t want to be protected”. Given that min-wage laws do exist.”

A, but they do protect the ones that are “protected”, only that those don’t include the workers losing their jobs

Isaac Crawford September 27, 2010 at 7:45 pm

“I don’t think the ends justify the means.”

And that is exactly the problem. I’m sure that those workers losing their jobs don’t care what you think. You are outraged, those people want to work. Who are you, who is anyone to tell them that they shouldn’t work? Why don’t people mind their own business?

It’s different if people are asking for help, but to have the government and supporters like you push these people into unemployment “for their own good” sickens me. Why do you think so little of them? Why do you not take their decision making calculations seriously? What gives anyone the right to tell them they are wrong? This is the thing I hate the most about minimum wage laws, the implied “You’re too stupid to know what you should do” attitude. Those workers know what they want, why get in their way?

Zoe September 27, 2010 at 9:23 pm

Why is nobody angry at the company that won’t pay its workers the minimum wage? Likely the American company, who will close its doors and move somewhere cheaper instead of paying an extra $1.00 an hour. If that. Sure, blame the unions.

Eleven Bottom September 27, 2010 at 9:50 pm

What is the WTO and/or IMF position on this issue in South Africa?

Paul Zrimsek September 27, 2010 at 11:02 pm

I’m impressed that that South African factory was able to hire an entire workforce of corporatists and free-market worshippers.

Chad September 28, 2010 at 12:01 am

The reason wages have to be lowered is because they got bid up to high by the unions, and then the businesses couldn’t operate profitably. It is the reason America is so far in debt, we thought we were more prosperous than we were, and now we have to pay the Piper.

We all have to make a sacrifice in order to get the global economy working again. People will never go for that because they have had it too good for too long. Brace yourselves for a collapse.

TGGP September 28, 2010 at 1:26 am

pbriggsiam, corporatists do indeed like lots of cheap labor. But the unemployed are not cheap labor, they do not labor at all. Who wants that?

To September 28, 2010 at 2:53 am

@Isaac Crawford: “I’d just like to say that I’m tired of people explaining what they’d do with other people’s salaries. we should let the people involved do what is best for them. That includes both the workers and the employers. The sustainable way that wages grow is when workers have lots of options, lots of alternatives. Do minimum wage laws give employees more or fewer options?”

Anybody suggesting that an uneducated worker in a developing country has any “options” needs a SERIOUS reality check. Minimum wage laws were passed because people grew tired of all the “freedom” their employers had in fixing their pays. The balance of bargaining powers is just not there, never was and will never be, irrespective of what some are dreaming.

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TracyW September 28, 2010 at 5:11 am

As for the SA example, maybe the company couldn’t afford to pay min wages. Maybe they could and were just playing the work market to raise profits, and this is a pure legal, not economic issue.

Au contrarie, this is an economic issue.

Let’s take your case of where a company could pay minimum wages without going bankrupt. Economists separate between normal profits and super-normal profits. In both cases, a binding minimum wage (by which I mean a wage above the market-clearing rate) increases unemployment. I’ll take the two cases in turn.

Firstly, the normal profits. The person who owns a profit-making company, and has capital invested in it, only does so because they expect to make a sufficient amount of money from it. This is most obvious with people who fund their companies by borrowing money, or by working it in themselves (eg doctors with their own practice, or owner-managers), but even a company funded by someone with their own money, who passively invests and hires a manager, has the option of putting their money instead into government bonds. Consequently they only go to the hassle of hiring managers to hire workers, setting up a corporate form, etc, if the income they expect to receive from this is at least the same as that from the alternative forms of investing, after accounting for risk. This is the normal profit. If a company owner could receive $100,000 a year from investing his money in risk-free bonds, then the company owner is not going to invest that money in a company unless they recieve more than $100,000 a year, and probably more because of the risk. Consequently, if a rise in the mimimum wage means that the rate of return falls from, say, $120,000 a year to $80,000 a year, the company owner is going to see about taking that money out and putting it into bonds, even though they’re still making an accounting profit. Thus the workers would lose their jobs, and thus all their income, which is bad for the workers. Now, it might take a while for the company owner to be able to take their money out, say it’s tied up in machinery that can’t be sold for much, so there might be years over which employment slowly declines, and there’s all sorts of messy risk affects in there, but it matters. So if a company is only making normal profits, a minimum wage can reduce employment even if by accounting profits it is still profitable.

The other possibility is that a company can be making super-normal profits. The amount of money Bill Gates made from Microsoft is almost certainly far far more than he could have made from plausible alternative investments of his time and money. But these sorts of super-normal investments encourage an influx of others eager to share in those super-normal profits, if at all possible. If our South African company is making super-normal profits because it’s paying a wage far below the value of its marginal workers, then lots of other people will want to copy them. So they’ll set up factories next door and start hiring local people, reducing unemployment. So in that case even though a factory could pay a higher minimum wage, even in an economic sense and not just in an accounting sense, letting them make that supernormal profit encourages more and more workers to find jobs. An economic issue again.

To September 28, 2010 at 1:39 pm

If our South African company is making super-normal profits because it’s paying a wage far below the value of its marginal workers, then lots of other people will want to copy them.

Except if they see excessive risk in investing in SA. It takes time to set up a factory (secure additional funding, buy land, build, buy machinery, hire workers…), and in the meantime, a second dip of recession may be upon the world economy.

As for Bill Gates, of course, the extra profits generated by Microsoft are mostly due to a persisting lack of competition. They locked the market in with software (in)compatibility and patents. Go compete.

Tracy W September 28, 2010 at 5:10 pm

To: Supernormal profits are defined as those that are high even after adjusting for risk. If SA local factories are only making normal profits, once you have adjusted for demand-side risks, country risks, and any other relevant risks, then a binding minimum wage will cause the existing companies to reduce their hiring of people, sooner or later, depending on the rate of fixed capital turnover.

As for Bill Gates’ use of IP, yes, patents and copyright are two ways of keeping super-normal profits. But there still were, and are, massive numbers of other software companies, hiring programmers (SAS, Google, Apple, etc). Supernormal profits attract other people trying to make supernormal profits, and employing people along the way.

Xmas: more people means more demand as well as more supply. Every illegal immigrant comes with a mouth as well as a pair of hands. Those hawkers, barbers, mechanics, etc, are also potential consumers. The economy is not zero-sum.

TracyW September 29, 2010 at 3:57 am

Ok. But then you lower the minimum wage: more companies may survive and/or lay off fewer workers. Some will simply increase profits, and, to cover risks, put the extra cash into safe bonds (not hire more, nobody does that currently).

If you buy bonds, then someone must be selling bonds. Consequently that someone winds up with all the money you paid them. The person who sold the bond can be one of two people, the original issuer or someone who already bought it. I’ll take the two cases:
1. They’re the original issuers of the bond. So they have to repay the interest on the bond. Why would they pay interest on a bond? Because they need money now for some project, be that a consumption good (like building an extension onto their house), or a profitable investment. If they need money to build an extension onto their house, then they are hiring people to do it, so employment goes up. If they are making a profitable investment, either they need to hire people to do the work, or they increase their profits and have plenty of more money to spend on something, so employment goes up.

2. They’re a secondary seller, who now has x dollars (or rand), that being what they sold the bond for to you. The secondary seller could take that money and spend it on consumption goods, increasing demand, or they could invest it in something else. Either way, creating employment.

There is also the possibility that people invest their money offshore. With a domestic currency and a floating exchange rate, to invest offshore you have to sell rand (or whatever) and buy the foreign currency. That requires someone to sell the foreign currency and buy rand. They then have to figure out what to do with their rand, either spend it or invest it. If very few people want to buy rand, and lots of people want to sell, then the profits from moving your money offshore are very very low as you have to pay a high currency cost, so investing in SA becomes much more atttractive.

As for no one hiring more people currently, if that’s true then that raises the probability that the minimum wage is binding and is causing high unemployment (there are theories that can explain mass unemployment for macroeconomic reasons too).

Nyongesa September 29, 2010 at 11:13 am

Interestingly, officials in Kenya, a country who’s education system has produced a surfeit of skilled labor relative the it’s modest economy, there is much hand wringing about all the doctors and accountants emigrating to South Africa. Although, it is counterbalanced by the equal exit of lawyers as well. You lose some, you win some.

Tracy W September 29, 2010 at 6:00 pm

To: Ok,then…. (it’s getting ridiculous)

Not at all, I admire your search for a thorough understanding. And talking with you sharpens my own understanding, so I appreciate your questions.

what if the profits made by the employer result on demand of goods that result in little direct additional employment for lowest-skill workers

Then the makers of those goods get more money, which they will either spend or invest. And the recipents of that spending or investing will then have more money, and so forth.

What bothers me about the kill-the-minimum-wage solution to unemployment is that while the economy adjusts to the increasing aggregate demand, wages are down and so are living standards of the working “poor”, until the “pool” of unemployed workers is exhausted. This kind of solution, for the benefit of the unemployed, asks the most of those just a notch above them in the social ladder, while the boss (in most of your examples) is making profits.

I think I understand your concern (my apologies if I have gotten this totally wrong), and it is a serious one. While there definitely are the gains to newly employed workers, there will be some existing workers who lose income. It’s a very unpleasant situation, to ask people to take short-term costs like this. What I come down to is, well, what is the long-run alternative? Leave people unemployed for years? And, the other side of this, things are not free even for those low-skill people who do have a job at minimum wage – they are at risk of losing it in a way that someone in an economy with full employment is not. To have to knuckle under to a boss, to, if sexually-harrassed, have to face either the expensive and far from certain of a legal case, or to have to grin and bear it, versus being able to find a new job? And, on the other side, we are looking at stresses around the world, including SA, of rising healthcare costs, of needs to invest in new infrastructure, of an ageing population, that imply that increasing SA’s total wealth is very important.

That’s what makes me think that high unemployment is the worse of the two evils, but your take on it will, of course, be your own. Our discussion here can sharpen both your and my thinking, but it cannot provide an answer to the question of the distribution of benefits and gains that is as certain as a mathematical proof.

My favorite solution still is the negative income tax, which corrects for the natural inequalities of this system.

That’s a good point, the negative income tax has a lot of merit, independently of whether there’s a minimum wage or not. Do you know if there’s a negative income tax, or equivalent scheme, in SA?

Note that even without legal requirements, there is a minimum wage: the cost of transportation to the workplace, preschool for kids, etc, under which it is not worth, depending on a person’s situation, to get a job. This kind of cost in the US (a few $1000/year for a car used for commuting daily, for example) is probably greater than a normal salary in (say) China, until the latter develops and catches up.

To which I will add that these costs do tend to rise with rising incomes, eg I understand preschool costs are mostly labour. That said, removing the minimum wage might still leave some people unemployed in remoter areas – say ones who have a family member who is employed but would take work if it could cover these sorts of costs you mention. What removing the minimum wage does is increase the options for low-skilled workers and would-be workers, and creates an incentive for employers to find ways of making use of such employees, it doesn’t eliminate all costs of employment.

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