The following article was originally published by the Free Market Foundation.
Devastating calamity of South African labour legislation
The Department of Labour and the labour unions constantly tell us that SA’s labour laws do not cause unemployment. Does anyone believe that? Mass unemployment is unnatural. It doesn’t just happen without a cause.
Common sense tells us that if we were to take away the labour legislation and rely on common law contracts to govern relationships between employers and employees, many more people would be employed. Specific labour legislation can’t avoid being biased in favour of either employees or employers. In fact, the purpose of such laws is to create a bias. This would not be the case if all employment was based on voluntary agreement with disagreements decided by the courts on the basis of contracts and the rule of law.
When we include those who have given up looking for work, almost 8 million people are currently unemployed according to the most recent statistics. Take away the labour laws, especially the Labour Relations Act, to allow employers and employees to come to agreement with each other and there would be a rapid reduction in the number of unemployed. I know this because the FMF has been told by so many business people that if the labour laws did not create barriers to employment they would employ many more workers. One CEO said that his company would employ 25% more people if the labour law barriers did not exist.
Mass unemployment is doing significant harm to the country’s economy. A large percentage of the unemployed are under the age of 25. The situation is being made much worse by the poor state of government schooling. Many jobless young people are poorly educated and lack basic skills. How can such a young person persuade an employer, any employer, to give them a job? If you are one of these young people, you have got to be able to offer employers a compensating benefit.
You can promise to work hard, do what you are told, always be on time, and show respect for your co-workers and your employer’s property. This is a good start. But there are two further benefits you must be able to offer. First, you must be able to price your labour at a level at which your production is worth more than what it is costing the employer. Second, you must be able to agree in advance that if you don’t keep your promises to work hard, do what you are told, show respect for your co-workers and your employer’s property, your employment can be terminated in terms of your agreement.
According to the labour laws, unemployed people cannot offer either of these compensating benefits. The law prevents them from cutting deals with potential employers. So they remain unemployed courtesy of the laws, imposed supposedly for their benefit.
The factors responsible for the high level of unemployment reduce the bargaining power of unskilled people. This has to change. SA will be the economic powerhouse that it should be when its unemployment rate drops from its current 36% to 5%. We have a very long way to go.
Large businesses tell me that they avoid hiring more staff because of the problems caused by the labour laws. They either try to mechanise or they stop expanding their businesses. Small businesses don’t hire at all. Whichever option they follow, the result is not good for SA’s future. The country can’t continue on this path.
Legally mandated job security for the employed, means fewer jobs for the unemployed, especially for the young, old, long-term unemployed, unskilled, inexperienced, poorly educated, or those with other factors that count against them. To test this argument, let’s take it to the extreme.
What would happen if employees had total job security? If the law said that employers were never allowed to dismiss a single employee? Clearly such a law would stop employment altogether. No one would employ anyone if the worker was to be tied to them for life. Having employees tied to you for even part of your life will discourage you from hiring anyone.
Another job-stopper is the minimum wage. COSATU’s Patrick Craven says the IMF is wrong to suggest that labour unions should commit to “wage restraint”. He says that even higher wages will bring about higher economic growth by stimulating consumer sales. Let’s take this argument to the extreme to see if it is valid. Pass a law that says every worker must be paid R50,000 per month. How many businesses would survive and how many people would still have jobs? Common sense tells us that such a high minimum wage would cause massive job losses. It also tells us that at any level, enforced minimum wages cause some degree of unemployment. There is no escape.
The De Doorns farm worker episode showed clearly that an increase in the minimum wage would cause unemployment. A farmer said, “Don’t look at the immediate job losses. Look at the situation in two years time when the farmers have had the time to mechanise their farms. See how many farm jobs are left then.” The effect on the Newcastle clothing factories of having bargaining council agreements extended to non-parties was immediately visible; the extension of the agreement to Newcastle clothing factories would result in huge job losses in an area that already suffered a 60% unemployment rate.
Despite the evidence, Patrick Craven says: “The (IMF) report also recommends – echoing the Free Market Foundation – that bargaining councils’ collective wage agreements should not be extended to non-parties. This would mean that workers could no longer practice solidarity with poorly organized workers, even when a union represents the majority in that sector.” This can be translated into saying, “This would mean that big labour and big business, through their bargaining councils, would be prevented from causing unemployment by interfering in the voluntary agreements between small business workers and employers who are not party to the agreements.”
Let’s look at the findings of some international studies, apart from the IMF, that find SA’s labour laws cause unemployment and harm the economy.
The World Bank’s 2013 Global Competitiveness report measures various “pillars” of economies by which their competitiveness can be judged. One of these pillars measures aspects of labour market efficiency and ranks the 144 countries in order from 1 to 144. SA’s rankings are: Co-operation in labour-employer relations 144; Hiring and firing practices 143; Flexibility of wage determination 140; and Pay and productivity 134. We are at the bottom of the scale.
In the Economic Freedom of the World rankings, SA has slid from 41st in the world in 2000 to 88th in 2011, predicting lower economic growth. This study measures the various factors that determine the level of freedom in the economies of the 152 countries measured. Overall, SA is ranked at 96th in the world on labour regulation. The various labour ratings (out of 10) are: Hiring regulations and minimum wage 4.43; Hiring and firing regulations 1.92; and Centralised collective bargaining 3.08.
Bear in mind that the researchers carrying out these studies have no axe to grind with our country. They are simply evaluating policies and their implications for economies. Instead of reacting negatively, the labour unions and the government should take heed of the findings and their consequences. Despite what the commentators from the tripartite alliance in government are saying, the livelihoods of almost eight million South Africans are at stake.
Mr Craven had this further commented: ‘It is also a myth, regurgitated once again by the IMF that South Africa’s ‘inflexible’ labour laws contribute to our economic woes. The ILO South African director Vic van Vuuren has disputed the view that South Africa’s labour regulations are “excessively rigid” and contributed to youth unemployment. “When we look at our labour laws and we analyse them and compare them to other best-practice countries,” he said, “I don`t think we have a rigid labour market that is preventing youth employment or employment in general”.’
I again ask; is there anyone who believes that the labour laws are not causing unemployment? Are the international researchers all wrong? Note that the ILO talks about comparing our labour laws with other “best practice” countries and that if you do that they are not “excessively rigid”. They are comparing our labour laws with those in OECD countries where 10% unemployment is a crisis. Compared to those countries, they say, SA’s laws are not excessively rigid. This is a nonsensical approach.
In a country with almost 40% of the potential workforce unemployed, a large percentage of whom are young people, our level of unemployment is an inexcusable calamity because there is a simple solution. Remove the rigidities from the labour laws. Allow unemployed people to make their own decisions about their own lives. Allow businesses to hire without fear. Allow voluntary agreements between consenting parties to create the millions of jobs our people so desperately need.
This article was originally published by the Free Market Foundation.