COSATU, Zille, Apartheid and the Youth Wage Subsidy

The DA asserts that a youth wage subsidy, would create 423 000 jobs. But does any of this withstand scrutiny?

Nearly four in ten South Africans in the labour force, over four million people, are unemployed. Of these, 44 percent have never worked before, 68 percent have been looking for work for a year or longer, and 71 percent are ‘youth’.

This crisis existed prior to the Labour Relations Act of 1995, and COSATU’s participation in the ruling Alliance. Large scale unemployment began in the 1970s and by 1994 was, broadly defined, already 30 percent. At that time, when the first nationally representative statistics were published, South Africa’s unemployment rate was arguably the highest in the world.

Two thirds of ‘working people’ in South Africa earn less than R1,000 per month, notes government’s New Growth Path document. This salary supports, on average, more than four other members in a poor household.

A 2010 OECD study on South Africa shows that since 1997 the top 20 percent ‘were the only ones to experience any growth in real wages. All other deciles suffered a decrease in real wages.’ During this period real wages of the bottom 10 percent almost halved. ‘Ultimately’, concludes the OECD study, ‘the highest decile enjoyed the highest increase in real wages while the lowest decile suffered the highest decrease, further entrenching wage inequality.’

According to Abhijit Banerjee, professor of Economics at MIT, all that COSATU has achieved is to keep ‘the wages of the unionized unskilled from falling as fast as they otherwise would have.’ As a result, according to professor of Economics at UCT, Haroon Bhorat, COSATU has acted as a mild check on growing inequality in the private sector.

The International Monetary Fund now recognises that ‘it would be a big mistake to separate analyses of growth and income distribution’. Inequality generates instability which dampens investor confidence, increases debt levels and in turn prospects of financial crises, and encourages corruption.

The clamour from workers for higher nominal wages – to maintain their real wage – is connected to the extreme concentration of our local economy. The working class spend a considerable portion of their income on bread, chicken and other commodities, the prices of which are driven up by cartels.

Moreover, the Competition Commission has found that the cost of doing business is inflated by monopolies like Telkom, and oligopolies like banking; not simply by high labour costs. All this dampens competition and in turn innovation – the key driver of increased productivity and growth.

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There is scope for considerable reform related to the inefficient functioning of labour-related institutions, and the administrative complexity – particularly for small businesses – of managing employees. But this is not the crux of the matter. If labour costs and market flexibility were all that mattered then Ethiopia, with a minimum wage of R160 a month, would have industrialised decades ago. As anyone who has enjoyed injera in Ethiopia knows, this is not the case.

In fact, the ongoing de facto deregulation of the South African labour market proceeds apace. Bhorat, has found that 45% of workers covered by bargaining council agreements get paid wages below the legislated minimum, with the average depth of shortfall being 36% of the minimum wage. The obsession with a suffocating labour market is plainly disingenuous.

‘Labour market efficiency’ is only one of twelve ‘pillars’ used by the World Economic Forum to construct its competitiveness index. The index places more emphasis on factors which enhance the productivity of labour, such as health, education, infrastructure, and the macroeconomic environment.

The weak productivity of labour is central to the challenges faced by the South African economy.

The apartheid labour system was a ‘cheap labour’ system, developed with migrant labour that was the basis of exploitation in mining. The system aimed to keep the black population uneducated and out of the cities, thus pitting itself against that inexorable market force: urbanisation. Labour that was ‘cheap’, proscribed and distant became unproductive and relatively expensive in the context of a more sophisticated, urban economy.

Capitalism’s tendency to gradually replace labour with machines is progressive when rising education and training enable the take-up of skilled employment in the context of the improved technology. This hasn’t happened in South Africa. As Oxford historian, the late Charles Feinstein, noted in his book, ‘An Economic History of South Africa’, capital intensity in manufacturing nearly doubled between 1974 and 1994, but output per worker made negligible gains. Technology progressed but people did not.

South African workers find themselves on the wrong side of an increasing global demand for skilled relative to unskilled labour, and a widening remuneration gap between the two. Utterly pivotal therefore is improving the quality and equity of education – an ongoing failure of government. Without this, businesses will struggle to enter into higher value-added export markets.

While substantial increases in investment are central to reducing unemployment, the non-household private sector currently sits on R700 billion worth of deposits, the majority earning low interest in one-day demand accounts. In our obscenely unequal economy the surplus piles up on one end, unable, or unwilling, to be reinvested.

Thus, as Chief Economist of Stanlib, Kevin Lings notes, ‘South Africa’s high unemployment requires a far more complete and bolder solution’ than a single-minded focus on wages.

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In the face of structural unemployment what role could a youth wage subsidy play?

The proposed subsidy will provide R5bn in tax credits to businesses over an initial three year period. It will cover half the wages of an employee aged 18 to 29 earning below the income tax threshold. Each employment subsidy lasts for a period of two years.

A review of international experience compiled by the Southern Africa Labour and Development Research Unit concedes that large firms with market power are likely ‘to capture some of the subsidy’ as profit.

The DA asserts that 430,000 new jobs will be created. According to Treasury, the source of this figure, only 178 000 new jobs – still a significant amount – would be created, since the rest would have been hired anyway.

The strongest argument for a youth wage subsidy is that formal employment, even if temporary, has been found to have a lasting benefit for young job-seekers. That experience of life in the world of work is a critical advantage.

COSATU’s opposition is rooted in an expectation that the subsidy so far proposed will cause bosses to contrive to discharge non-subsidised (i.e. older) workers; that when it expires in two years, businesses will retrench the previously subsidised youth or induce everyone to take a wage cut; in short that it is the thin end of the wedge in a general attack on wage levels.

Such an attack on employed workers is precisely what follows from the DA’s diagnosis of the fundamental problem as ‘the high cost of hiring labour’. But this approach does not treat the core of the problem, and its inherent dangers are increasingly understood at the level of the global economy.

Every business needs to drive wages down in pursuit of profit, but at the same time needs other businesses to sustain consumption by paying higher wages. With globalisation, this applies globally. While attackingdemand at home through wage cuts, businesses want a flourishing export market reliant on high foreign wages. For this reason Western exporters now look to rising Chinese wages with optimism.

Cutting this Gordian knot requires globally agreed and enforced minimum wages and conditions, which prevent the DA’s race to the bottom, but allow for a competitive race to the top. COSATU needs to place much greater emphasis on strengthening the international process in this direction. But even now it should be possible to use the resources proposed for the wage subsidy, and more, to achieve similar ends, without threatening existing jobs, and in a way which expands the economy as a whole.

The attempt to return South Africa to reliance on cheap labour is wrong-headed and ignores the vital lessons of the past. Strong employment growth will require wide-ranging investment and a healthy, educated and productive labour force. The youth wage subsidy does nothing to address these fundamental and urgent tasks.

Doron Isaacs (@doronisaacs) is the Coordinator of Equal Education. Ilan Strauss (@ilanstrauss) is a researcher in the School of Economic and Business Sciences at Wits University.