South Africa is experiencing a prolonged bout of labour market pains. Employment data released by StatsSA for the second quarter of 2022 reveal that amidst already high levels of aggregate unemployment, the situation is particularly dire for the country’s youth.

Whatever marginal gains might have been achieved in the most recent quarter, no sane person should be cheering a 44% unemployment rate, especially not against the backdrop of hundreds of billions of rands of deficit spending and fiscal and monetary stimulus. We are now confronted with more debt, less growth, and millions of people out of a job. Much of this can be attributed to our interventionist ruling party.  

The proportion of young people who are adding value to local and international supply chains is a key indicator of a country’s likely economic trajectory. In South Africa, the number of people aged between 15 and 34 who are not employed, in education, or in training (the so-called “Neets”) has climbed to 4.8 million. This sets the stage for growing social alienation and discontent, marked by violent protests, as a large section of the population struggles to eke out an existence. 

Of the group that is supposed to comprise the most dynamic and energetic people in South Africa, youth aged between 15 and 24, more than 70% are without a job. These people are supposed to be entering the workforce, gaining on-the-job experience and upskilling, but instead, they find themselves at the mercy of an increasingly hopeless regime. Of those aged between 24 and 34, more than 50% are jobless. That is nearly six million youth apparently written off by the ANC, deemed unworthy of contributing value to society. 

The rest of the workforce is left to compete for jobs in a highly volatile labour market, while the majority of available low- and semi-skilled positions come with tenuous job security. Often they do not carry the benefits that accompany occupations requiring high levels of expertise.

South Africa’s extreme labour market participation crisis cannot be solved by the ruling party. This is because the requisite labour market policy reforms are fundamentally at odds with the ideological inflections of the ANC. 

The current policy environment is not focused on generating growth and income across the board. Onerous labour legislation effectively prices unskilled and inexperienced people out of the labour market. 

Raising the minimum wage to a level that many employers battle to match, extending race-based legislation, shifting the focus towards localisation and protectionism, and buying into the fallacy that increased government deficit spending unleashes growth, all lie at the heart of the ANC’s interventionist agenda. 

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On 1 March 2022, the Minister of Employment and Labour, Thulas Nxesi, raised the National Minimum Wage to R23.19 per hour, essentially equalling the median wage of South Africans at R24.06. The highest minimum wage to median ratio in the world jeopardises the legal employment status of nearly half of all formally employed labour in South Africa, and it is therefore no coincidence that the world’s highest unemployment rate coincides with the world’s highest minimum wage to median wage ratio. 

As inflation begins to rocket, it’s useful to understand the impact of the minister’s actions upon price escalation. 

Nxesi’s rationale is that an increase in minimum wages should lead to a rise in disposable income. In turn, more disposable income should conduce to greater expenditure, which, through various multiplier effects, is thought to expand the overall aggregate demand of the economy. 

In isolation, this reasoning may seem sound. In truth, it is divorced from reality. An economy is an interconnected network of markets in which individuals’ lives are inextricably linked to (and affected by) the actions of others. Every action has immediate visible and invisible effects.

When the income of workers increases due to a rise in baseline pay without a commensurate upsurge in productivity, the interconnectedness of the labour market results in upward pressure on every other market. This inevitably leads to production cost increases, as higher wages force producers to raise their prices, which essentially lowers the purchasing power of consumers. Most employers have competitive gross margins, meaning that rising wage costs in the absence of rising prices lead to a loss in prior profitability, which acts as a buffer and hedge against ever-present uncertainty.

Lower-income groups feel the immediate impact of soaring prices as they find their relative real incomes reduced due to increased demand which is generated as artificially increased wages disperse through the market. 

Policies and directives such as those issued by Nxesi disincentivise the hiring of new employees. They incentivise retrenchments and a shift towards automation. 

It is clear that we need to deregulate the labour market so that private sector firms can be freed up to employ predominantly low-skilled workers at scale. This is the only way in which the majority of South Africa’s jobless will ever gain a foothold on the ladder of employment.

We must cut red tape and do away with all those features of our labour market regime which serve to exclude and disadvantage the unemployed, especially the automatic extension of collective bargaining agreements to small and newly established businesses. 

Equally, we must gear up for the future of work in an economy no longer dominated by the agricultural, manufacturing and mining sectors, but one which is service- and finance-led and demands high levels of skills. 

Labour market participation in South Africa is correlated with levels of skills and education. According to Stats SA, 51.6% of unemployed people have not completed matric, compared with 2.4% of unemployed persons who are university graduates.

Poor educational outcomes have led to significant skills mismatches in the economy as the Department of Education seems more focused on achieving high throughput rates instead of fostering a culture of meritocracy and achievement among learners. It produces a large number of school leavers each year who do not have a good qualification and who will find it very difficult to compete in an economy focused on the expansion of the tertiary and service sectors. 

The current regulatory framework has merely served to rigidify the labour market, such that the youth (the country’s most valuable asset) are denied opportunities from the get-go. However, where the DA is in government, we are trying to initiate reform. 

The Western Cape government has so far been the most successful provincial authority in opening up and liberalising the nation’s otherwise inflexible labour market. Currently, the Western Cape maintains the lowest expanded unemployment rate at 31%, having created 87,000 jobs year-on-year in the last quarter. This is in spite of the national government’s ongoing efforts to prolong South Africa’s labour market pains. DM