Welcome to Econ3x3
The public debate on a national minimum wage sometimes appears to occur in different universes. Two recent contributions to Econ3x3 may help to take the debate forward. This article analyses and contrasts these views and finds that, though they emphasise (and underplay) different aspects, the differences may not be insurmountable – especially once one recognises that the proposals apply to different time frames. [A shorter version of this article appeared as an op-ed article in Business Day on 25 June 2015. See references.]
Although many children are maltreated at home, we know little about the effects of abuse on long-term child development. This article explores the association between different ways in which children are maltreated and two educational outcomes (numeracy test scores and dropout). Children who are physically maltreated (e.g. hit hard) regularly suffer severe adverse consequences in terms of their numeracy test scores and probability of dropout – and hence their chances of employment and higher earnings.
Most contributions to the debate on a national minimum wage adopt a narrow view of labour markets and accept that the structure of the economy will remain essentially as it is. We question both of these assumptions. Further, we argue that a national minimum wage, at a level to be determined through careful research, must be part of a well-designed package of longer-term policy reforms that look beyond the labour market and support employment growth through investment.
The layout of the township economy: the surprising spatial distribution of informal township enterprises
A small-area census of micro-enterprises in Cape Town townships reveals that informal enterprises are located throughout the township, including in the residential areas. Three-quarters of the enterprises are located beyond the ‘high-street’. The most common enterprises (liquor and spaza shops) are not situated in what one would expect to be the prime business area with its considerable pedestrian traffic, but are in residential areas. Policies to promote the township economy need to come to terms with this reality.
The share of labour in aggregate income in South Africa has declined significantly since 1993, while that of capital has increased. Concurrently, real wages have increased slower than productivity. This article argues that financialisation and the more aggressive returns-oriented investment strategies applied by large, global investment institutions have translated into investors requiring higher rates of return on capital. This, in turn, has led to the increased adoption of capital-augmenting, labour-saving technology that has reduced labour’s share of total income – with important consequences for income distribution.
While the share of capital increased, labour’s share of total income earned in South Africa fell significantly during the first two decades after 1994. These trends could contribute to a deterioration of income inequality, given that the ownership of capital – and thus the income from capital – is concentrated in fewer individuals than is the case with salaries and wages. This article explores labour’s falling share, with particular reference to the manufacturing and mining sectors.
The debate about implementing a national minimum wage obscures the key point, which is the level at which a national minimum wage should be set. A national minimum wage at a much higher level than the sectoral minimum wages currently set by the Employment Conditions Commission or agreed upon by unions under the Labour Relations Act is likely to result in job destruction, especially in the tradable sectors, with the result that poverty might be increased rather than reduced.
In developing countries, agricultural growth is generally employment intensive and pro-poor but this sector in South Africa has been subject to a drastic decline in tariffs, pricing, infrastructure and other forms of support. This has not been compensated for by alternative measures such as expenditure aimed at facilitating small-scale agriculture and effective land reform. The result has been poor economic performance and rapidly declining employment in commercial agriculture with little sign of revival in the small-scale sector.
If the National Development Plan is to be effectively implemented, we need clarity about the mechanisms through which growth and redistribution can be jointly advanced. Priorities include social security reform and quality improvements in social services, urban development, housing and public-transport investment. Expanding employment opportunities is the most pressing challenge, requiring policies that might include: support for labour-intensive industry and agriculture, small enterprise and informal sector development, well-targeted skills programmes, and wage or employment subsidies. Recognising the complementarity between redistributive and growth-enhancing measures is essential.
A recent IMF study of several countries provides robust evidence that a high level of income inequality weakens the prospects of sustained economic growth and reduces the duration of growth spells. Redistributive steps, by contrast, do not have a noticeable negative effect on growth. Therefore, a reduction in inequality that is achieved through redistributive steps could have a net pro-growth effect. The policy challenge for South Africa is to find the best policy mix to achieve that.
While everybody seems to favour the pursuit of inclusive growth, this concept is rarely clearly defined in the policy debate. Inclusive growth is often confused or conflated with pro-poor growth or broad-based growth. A recent definition from researchers at the UNDP integrates the latter two concepts to include employment, poverty and inequality. A derivative Inclusiveness Index shows that South Africa has a very low degree of inclusiveness compared to other developing countries and that its growth since 1996 has not been inclusive.
It is important to know whether a social grant such as the old age pension eases financial constraints in rural areas, thereby allowing young men to migrate to urban areas for work – or whether these grants encourage idleness and dependency. This study finds no evidence of the latter. Instead, for young rural males there is an increase in their chances of migrating and finding work when a member of the household starts receiving the pension. Notably, these effects are only present for young men with at least a matric.
The child support grant has been praised as one of the government’s most successful anti-poverty programmes. The rapid extension of the grant increases the importance of ascertaining its effectiveness: does the child support grant make any real difference to the lives of the millions of children who receive it? Using the 2008 NIDS data, a recently published study identifies a significant positive impact on recipient children’s health, nutrition and education as a result of receiving the grant.
South Africa’s large racial gap in enrolment in tertiary education can be attributed to the widely varying quality of primary and secondary education rather than to the low incomes of most black and coloured households. Thus, easing credit constraints for prospective tertiary students via increased financial aid is expected to have a limited impact on African and coloured enrolment. Instead, policymakers should focus on improving educational quality at schools attended by children from low-income households.
Former homeland areas continue to have significantly higher levels of deprivation and poverty than the rest of South Africa. Of all the former homeland areas, the erstwhile Transkei in the Eastern Cape has the highest levels of deprivation (measured using the Index of Multiple Deprivation for 2011) as well as income poverty. Indeed, the deprivation gap between former homelands and the rest of South Africa has not declined in the period 2001 to 2011.
Amidst a decline in general poverty rates since 2000, women and people living in female-headed households still are significantly worse off. Women are up to 30% poorer than men on average. There is an even larger poverty gap between female- and male-headed households – a difference of as much as 100%, despite improved education, health and basic services. Better health, water and sanitation services, especially in rural areas, should narrow these gaps significantly.
What happens when a previously unregulated labour market is regulated? After the introduction of minimum wages and mandatory employment contracts for domestic workers, wages increased markedly while neither employment nor hours worked declined; some formalisation of working conditions also occurred. All these occurred despite a lack of monitoring and enforcement, suggesting that such actions (often costly) are not essential for regulation to have a significant impact on informal employment conditions, at least in the short run.
How suitable is a ‘developmental state’ to tackle unemployment, inequality and poverty in South Africa?
The National Development Plan envisions the achievement of a ‘capable and developmental state’. Developmental states are usually associated with high economic growth. Such states in East Asia often are seen as models for SA to emulate. However, given the structure of the SA economy, state and society, a developmental state is not suitable, nor attainable. The concept of a social investment state is a better alternative, but it will need key institutional and policy reforms to work.
In a developing, highly unequal country such as South Africa, it is unlikely that a definition of the middle class that is based on an income threshold will adequately capture the political and social meanings of being middle class. We propose a multi-dimensional definition, rooted in the ideas of empowerment and capability, and find that the ‘empowered middle class’ has expanded significantly since 1993. It also is much larger than when measured in terms of income.
There is a widespread view that countries no longer need to industrialise in order to develop. However, in South Africa manufacturing remains the core driver of GDP growth and direct employment while other sectors – particularly many services sectors – are likely to increase employment on the basis of growing demand flowing from a growing GDP. A nuanced understanding of the direct and indirect linkages through which diversified manufacturing growth can boost economy-wide employment is essential.
Cape Town is the urban centrepiece of a globally unique and highly diverse natural environment which should take priority in conservation management. But these biological assets also directly serve a local market of over 5 100 traditional healers and herbalists. The author discusses this important informal economy, business and cultural activity in the face of the broadening threats to conservation in the region, and the growing potential tension this presents in terms of policy and management.
How did hunger levels in the former homelands catch up with the rest of South Africa? A hundred years after the Land Act of 1913
A century after the Land Act of 1913, and 20 years after the abolition of homelands, differences in poverty persist between the former homeland areas and the rest of South Africa. However, remarkably, hunger gaps between the former homelands and other regions have been eliminated in the post-apartheid era. The main cause has been the disproportionately high number of persons eligible for social grants in the former homelands, rather than increased food production or higher labour market incomes due to land reform.
This article examines the contrasting business models in the spaza shop sector, and compares foreign-run businesses with South African businesses. We argue that foreign shop keepers are more successful than South Africans because of the strength of their social networks, which provide them with access to labour and capital and enable collective purchasing and market domination. The article argues for a two-pronged policy that would formalise larger shops whilst permitting and encouraging informal micro and survivalist businesses.
The Employment Incentive Tax Bill offers tax subsidies to firms to employ new young workers. An evaluation of the impact of a wage subsidy voucher indicates that employment incentives increase the likelihood of young job-seekers being employed; they also increase the time young people remain employed. There is no evidence of older or existing workers being replaced. Such incentives are a relatively cheap and effective way to create employment, but are unlikely to create large numbers of jobs for young people.
Increasing levels of youth unemployment and learners’ poor performance at school have led to claims that the matric certificate no longer has much value in the labour market. However, the evidence does not support this claim. While the labour market conditions facing secondary school graduates have indeed worsened with time, the value of a matric certificate relative to that of grade 10 and 11 has remained positive both in terms of earnings and the likelihood of finding employment.
What caused the increase in unemployment in the late 1990s? Were education policies partly responsible?
In the late 1990s the Department of Education restricted the re-enrolment of over-aged learners and the number of times underperforming learners could repeat a grade. This was intended to reduce the number of learners in the school system, but may have contributed to a sudden increase in measured unemployment. Of the 2.3 million increase in the number of unemployed between 1997 and 2003, up to 900 000 may be due to unintended effects of these policies which brought hidden (youth) unemployment into the open.
Access to a comprehensive set of basic infrastructure services is essential to attain social development goals and ensure equal opportunity for all people to participate in a country’s economy. This article investigates whether the delivery of basic infrastructure has a significant positive effect on growth and development in South Africa and whether the effect is different for urban and rural municipalities. A complex picture emerges, necessitating care in making such infrastructure investment decisions.
Marginalised businesses provide livelihood and income opportunities for a large section of the population. However, these businesses are not able to capture growth opportunities because of several constraints; they continue to operate on the periphery of the mainstream economy. Yet they could become a major source of employment growth. Efforts to unlock this potential must concentrate on exploiting value chains and making government policy more responsive to the unique needs and challenges of marginalised businesses.
The measurement of poverty should include dimensions of well-being that cannot be measured in monetary terms. Data on health, education and standards of living can be used to calculate a so-called Multidimensional Poverty Index (MPI). Results suggest that both the prevalence and the intensity of multidimensional poverty fell significantly from 1993 to 2010. The decline in multidimensional poverty is much greater than the decline in poverty as measured in terms of income and/or expenditure. Better social services and infrastructure have played a large role.
Two very different pictures emerge when one compares income changes of the relatively affluent ‘middle class’ with those of people in the literal middle of the income spectrum. In the affluent middle there has been significant racial transformation and growth of the ‘black middle class’. However, households in the actual middle of the income spectrum have experienced the lowest income growth of all groups since 1993. Both perspectives are crucial for the pursuit of an equitable path of development.
New evidence suggests that non-searching unemployed people are significantly less satisfied with their lives than people who are not economically active. Indeed, the non-searching unemployed have hit rock bottom. Assuming that people do not freely choose an unsatisfactory state of living, a case is made that the non-searching unemployed – or ‘discouraged workers’ – are involuntarily unemployed and should be included in the definition and measurement of the labour force. Consequently, a case is made for the adoption of the broad measure of unemployment.
The introduction of minimum wage laws in five non-agricultural sectors has not been associated with a significant loss in employment in the years following their promulgation – a period when most sectors also saw a significant increase in real hourly wages. Indeed, several sectors recorded an increase in employment. However, in some sectors there is evidence of a relatively small reduction in the hours worked by employees. On the whole, the effects of minimum wages are varied.
Past studies have found that trade union members earn substantially higher wages than non-union workers. New results suggest a much lower union wage premium (6-7%) when the impact of the size of the firm, the type of employment and non-wage benefits are properly taken into account. On the other hand, bargaining council agreements have a higher impact on wages than unions do, so that the cumulative wage premium of unions and bargaining councils averages more than 16%. For the public sector this can be as high as 22%.
The frequently reported ‘crisis in graduate unemployment’ in South Africa is a fallacy based on questionable research. Not only is graduate unemployment low at less than 6%, but it also compares well with rates in developed countries. The large expansion of black graduate numbers has not significantly exacerbated unemployment amongst graduates. Contrary to popular perception, such graduates – many from ‘formerly disadvantaged’ universities – have been snapped up by the private sector. Black graduates are, however, still more likely to be unemployed than white graduates.
The middle class is a hot topic in media and policy circles. But how should the middle class be defined, particularly in a country with high levels of inequality? Individuals and households which fall in the actual middle of the income distribution in South Africa have a standard of living well below a ‘middle-class lifestyle’. Defining the middle class on the basis of the ‘actual middle’ versus ‘relative affluence’ provides vastly different pictures. This necessitates great care in using these conceptions, especially in policy design.
It is estimated that less than half of the present main budget deficit of 5.7% is explained by cyclical factors. The remainder reflects a non-cyclical, structural component of the deficit. The increase in the structural budget deficit since 2008 may constrain the ability of government to sustain its present revenue and expenditure policies. An in-depth understanding of the structural component of the fiscal position as opposed to its cyclical element is important for sustainable long-term government financing and planning.
Many economists have argued that the government’s fiscal stance in the recent budget is verging on the risky. This article argues that the fiscal stance is both correct and prudent. In addition, the article puts the budget in a broader developmental context, highlighting its contribution to long-term growth and development and to tackling poverty and inequality.
In trying to reduce unemployment in South Africa, the pursuit of higher economic growth is the single most agreed-upon policy strategy. The consensus on this ‘obvious solution’ may blind us to the fact that economic growth, though important, may only be half of the solution. Attempts to fine-tune and turbo-boost the formal-economy ‘engine of growth’ to absorb more labour are fundamentally constrained. Economic policy makers must look at other options for generating employment and self-employment for unemployed people.
The official rate of unemployment includes only the unemployed who are actively searching for work. However, findings from new data challenge this practice. The ‘searching unemployed’ are no more likely to find employment than the ‘non-searching unemployed’. This casts doubt on the idea that non-searchers are not committed to finding work. Furthermore, many people find jobs through social networks – but this job-finding strategy is not adequately recognised as ‘searching for work’ in official statistical surveys. StatsSA should reconsider how they count the ‘officially’ unemployed.
Adcorp’s estimated unemployment rate is so low that it disposes of the unemployment crisis. But Adcorp uses a crude currency-demand method to estimate the size of the unrecorded economy, despite researchers’ strong criticism of this method. To estimate informal sector employment, Adcorp mixes up definitions of informal employment and the unrecorded economy and guesses at the labour intensity of the unrecorded economy. They also guess at the number of illegal immigrants. Moreover, Adcorp’s estimates have no statistical precision. Its figures are neither reliable nor credible.
Adcorp’s employment and unemployment figures are not taken seriously by researchers – yet they can do much harm
Adcorp’s unemployment figures are derived from weak research and is repeated too often by gullible journalists. Based on a flawed methodology and dubious assumptions, the Adcorp figures imply that only about a million people are unemployed and that the total unemployment rate is 5%. At the same time, Adcorp has published an inflated figure for graduate unemployment (600 000) – a grave inconsistency. Whilst serious researchers will not touch Adcorp data, it can harm decision-making by policymakers and potential university students and their parents.
A job-search subsidy has been proposed as a measure to help people find employment. At least three criteria need to be met to create new jobs for those who receive the subsidy. First, it needs to be used only to search for jobs or to remove the financial constraints that prevent people from searching for jobs; second, firms need to recruit through the channels which subsidy holders actually use to seek employment; and third, the relative cost of labour needs to fall.
Any growth strategy for South Africa should include elements that address inequality explicitly. This article identifies reforms that are likely to support growth in the long term and proposes a policy framework to ensure a more equitable distribution of the dividends of economic growth. These relate to high-quality education for the poor, progressive taxation, a social safety net, anti-monopoly policies and labour market reforms to promote the employment of low-skilled people.
Average wages in agriculture have risen substantially in all provinces since the introduction of minimum wages in 2003 - the gap between the actual and the minimum wage has declined significantly. Compliance has been highest in the Western Cape and Gauteng, where average agricultural wages were close to or above the minimum wage even before it was introduced and wages have continued to rise thereafter. Although enforcement appears to have had a limited impact due in part to limited penalties, more effective inspection would be an important way to improve compliance.
Firm-level data for the period 2005 to 2011 indicate that job creation and destruction rates in South Africa are only slightly lower than among OECD countries. Around 10% of existing jobs are destroyed each year, while the number of new jobs is around 9.5% of existing employment. Larger firms have higher rates of net job creation than small firms. The relatively high reallocation of employment across firms suggests lower rigidities in the South African labour market than is sometimes believed.
Small and medium-sized firms hold the potential to absorb most of the unemployed in South Africa. In this the NDP may be correct. However, the NDP may not be correct in arguing that exports can be the main catalyst of the growth the country needs to address poverty and employment. Several factors hinder such a strategy. A more domestically-focused policy aimed at production (and services) for local consumption might bear more fruit.
The tragic events at Marikana raise the question whether the events and subsequent developments are indicative of a fundamental change in labour market relations and wage bargaining relationships in South Africa - and whether such patterns of behaviour are likely to spread beyond the mining sector. We identify five contributing factors that are specific to the mining sector. These relate to labour relations, public services and migrant labour. Since these factors do not characterise the rest of the economy, we conclude that a spreading of Marikana-type bargaining is unlikely.
The debate on unemployment is fragmented into at least three sub-discourses, i.e. those of macroeconomists, labour economists and poverty analysts. This results in inconclusive analyses and narrow, flawed proposals to address the problem. This fragmentation feeds into the policy field. Sustainable and consistent remedies for unemployment and poverty will require an integrated analysis that covers the formal sector, the informal economy and survivalist activities – and especially linkages and barriers between these segments.
In spite of policy statements prioritising labour-absorbing growth, de facto policy support has favoured heavy industry and been damaging for employment. Industrial policy should be less concerned with ‘beneficiation’ and technological upgrading and more concerned with promoting economy-wide efficiency. In the context of massive unemployment, this means tilting the playing field towards labour-absorbing growth to mobilise the huge potential of an under-employed and poorly-skilled workforce.
How structural inequality limits employment and self-employment in poor areas (or: Why South Africa’s informal sector is so small)
Given South Africa’s high levels of unemployment, the relatively small size of the micro-enterprise sector is a conundrum. This article argues that structural inequality is the reason for this – in particular, inequality in the structure of the economy, the legacies of spatial inequality and the continued inequalities in human development. Their combined effect is to limit the scope for poor people to escape poverty via self-employment. This explains the limited extent and small range of informal employment.
Government’s vision for the development of informal business is that, with the right support, these enterprises will achieve formal status, contribute to economic growth and create jobs. However, few informal businesses produce goods for which the formal economy has any a demand. Moreover, informal producers are structurally prevented from accessing the formal economy without the facilitation of intermediaries. This implies the need for an enabling institutional and legal environment which (a) supports intermediaries that assist informal producers to access formal markets and (b) provides incentives for formal-sector retailers to enter into contracts with intermediaries on more equitable terms. BEE is a possible way to provide such incentives.
The South African government continues to pursue efforts to 'migrate' informal enterprises to the formal sector. This article examines the impact of regulations and law enforcement on the 'lived' economy of informal micro-entrepreneurs. Spatial analysis shows how the scope and distribution of informal economic activities are directly affected by regulation, land use planning and other controls. Such controls that effectively disallow informality are poor-unfriendly and harm livelihoods, self-employment and employment.
As part of perpetual policy experimentation and search for that elusive ‘silver bullet’ to deal with unemployment, the South African government recently introduced the Jobs Fund and continues to mull over the idea of youth wage subsidies – vehemently opposed by trade unions. The success of these programs is highly dependent on effective design and administration. This article evaluates program design features against a number of factors.