Labour and Unemployment

The release of the Employment Statistics by the Department of Statistics of South Africa raises a number of interesting questions.  Some of these are addressed below.

The rate of unemployment in the economy has declined by 3,1% in the second quarter to 25,7%.  That has occurred at a time when the country is completing a ‘year of economic recovery’!  The population has grown by 1,2% in the quarter, of which the Black population has grown by 1,9%, while the White population has declined by 1,0%.  The proportion of Blacks employed has increased by 1,6%, while the proportion of Whites employed has decreased by 23,4%!  (Each of these values relates to the age group 15 to 64 years, i.e. employable age.)

These values are very instructive.  There can be no doubt that the economic value of an employee increases as he or she gains experience.  This value is directly translated into productive activity, and so into job creation.  The Post-Apartheid policy of the Government has been to replace (experienced) Whites with (inexperienced) Blacks.  The results of this have been very clear – rampant corruption and incompetence at all levels of the economy.  This is not a Black-related situation; it relates entirely to experience and traditions, built up necessarily over many years of work experience and exposure.  By removing this base of experience, the Government has created a situation in which experimentation has taken the place of knowledge and understanding.  The education system is a perfect example, but one cannot ignore Eskom, the SABC, the fight against AIDS, the fight against poverty … the list goes on and on.  One of the clear results is shown in the unemployment statistics.  By replacing experience with inexperience, the Government has thrown away a large reservoir of competence, and a large capacity to develop the economy in the interests of all of its citizens.

Another matter that arises from the statistics is the time bomb that is ticking ever more loudly.  The number of new entrants to the job market in the quarter was 2 036 000, an increase of 137 000 compared with a year ago, while the number of students included in the ‘not economically active’ group was 173 000.  The number of jobs added was only 34 000.  At that rate, the absorption of students into the workforce will take over five quarters.  The problem in this area is destined to grow exponentially.

Another concern is that the rate of unemployment among the Black population is 30,0%, while that among the Whites is 5,0%.  Part of the reason for this disparity is clearly the lack of adequate education and training of the Blacks – we have already alluded to the failure of the education system and the dismantling of the technical training institutions under the Post-Apartheid Government – but there is also a clear indication that many of the qualified Whites have given up on the country and are seeking their future in other economies.  It is an unfortunate fact that the best qualified are those who are most likely to be offered employment and opportunities elsewhere.

A further frightening statistic shows that the number of employed in non-productive activities increased, while those actually producing declined.  Job numbers in agriculture decreased by 5,1%, in mining by 10,5% and in construction by 0,6%, while they increased in community and social services by 4,5%.  These changes are a warning that the country is becoming an internally-serviced service economy, while actual production is becoming less important.  This is in compliance with an ANC stated objective in the 1990s, but is hardly likely to create the thriving export-oriented economy that is necessary to create the jobs required by the growing population.

Perhaps the most frightening aspects of the discussions around employment are highlighted by a speech made on the day of release of the unemployment statistics by an ANC representative, in which he declared, aggressively, that the fact that the Whites remain in control of the means of production in the economy, and that this fact needs to be changed in order to redress the unemployment situation.  Perhaps the ANC needs to understand that Whites built the economy step by step, from a rural and mining economy to become the powerhouse of Africa.  The Whites represent a valuable store of economic capability, and they are more than willing to assist their fellow citizens to elevate themselves to an adequate level of economic capability.  Taking the foundations of this capability away will not add to the ability of the economy to equalise the opportunities available to the unemployed.  Only honest and competent government, good and relevant education, investment of capital and the gaining of experience by the unemployed sectors will achieve that objective.  Political rhetoric and popular posturing will not. 

If the ANC is not capable of jumping over its own shadow, it should step aside and let more competent managers of the economy take the helm.

How to help the 'Poorest of the Poor'

There are many examples of foreign aid that went wrong.  These have alienated many who would have supported the donations, and, in many cases, has generated a system that is essentially corrupt.

A glaring example of such misdirected Foreign Aid was the donation of corn by the United States to the starving poor in Zimbabwe.  One shipment alone, of 20 000 tons of corn, was sent via a freight terminal in Durban, South Africa, to Zimbabwe.  The corn was shipped in bulk, and the freight terminal was paid to pack the corn into bags marked “Gift of the people of the United Sates of America.  Not for sale.”  A worthy gesture on the face of it.  What actually happened is that the corn arrived, and a representative of the Zimbabwe Government informed the freight terminal opewrator that the bags would not be acceptable.  The Government supplied its own, unmarked, bags.  The corn was duly packed in the anonymous bags and railed to Zimbabwe, where it was sold by members of the ruling Party to favoured groups.  Those who did not support Robert Mugabe were not permitted to buy the grain.  The effects of this ‘worthy gesture’ were fourfold.  First, the value of the corn flowed directly into the personal coffers of Robert Mugabe and his henchmen, strengthening their oppressive grip on the country.  Second, the flow of corn into the country reduced the value of corn produced by local farmers, reducing their economic stability even at this basic level of near-subsistence farming and increasing their poverty dramatically.  Third, the purchase of the corn by the American Government increased the world market price of the commodity, making it more expensive for Aid Agencies to purchase this basic food commodity, but adding to the perceived support of that section of the American agricultural sector by the ruling Party in the United States – a purely internal political handout.  Fourth, within the economy of the United States, the payment for goods which were withdrawn from the economy had the effect of ‘destroying’ that small part of the economic cycle, leading to an inflationary effect in much the same way as a war would.  The end result?  Everyone lost, except the dictator in Zimbabwe who had brought about the economic plight of his nation by his depredations and his inept operation of the previously-thriving Zimbabwe economy.

The worst of this story is that, when notified, the American Government, directly and via the Embassy in Pretoria, of the destination of the Foreign Aid, they did not even the have courtesy to reply!  One can only assume that the American Government knew of the facts and condoned them.  One can only wonder why!

No doubt there are many instances of Governmental Foreign Aid that have had a similar outcome.

In a separate story, the Government of Robert Mugabe, itself a basket case economy, made the gesture of sending a military ‘peace-keeping force’ to assist the Government of the Democratic Republic of the Congo.  This fine act of ‘international solidarity’ was rewarded by the President of Zimbabwe and his Minister of Defence being given a 50% shareholding in four of the most productive diamond mines in the DRC, which were grabbed from their rightful owners for the purpose!  The effect was that the peacekeepers were given the freedom to rape and pillage in the desperately poor DRC, the then unstable Government of Laurent Kabilla was propped up by undemocratic means, and two vicious politicians became even wealthier than they had been able to manage in their own collapsing country, while the poor people of Zimbabwe became even poorer.

There are also many Government handouts to the ‘poorest of the poor’, and many Government policies that, while passing themselves off as well-intentioned, are aimed not at uplifting the poor of the nation, are, in fact, no more than payments transferring wealth from the ‘tax-paying elite’ of the nation to those whose votes are influenced by the minimal handouts to ensure that the ruling Party behind the Government is re-elected.  These payments have no sense in economic terms, and, in fact, are positively destructive of the economy.

The effect of a redistribution of wealth from tax-payers to the poor represents a conversion of potential capital to consumption.  The money that could have been used to invest in new manufacturing plant and other capital investments is handed over to people who spend it on current living.  This has a long-term negative effect on the economy.  This negative effect is compounded when one realises that the tax, taken from the productive members of society, produces the effect that the tax-payers are forced to earn more in order to maintain the standard of their existence, whether as a manufacturer (in the form of increased costs) or as a salary earner (in the form of an increased wage demand).  This increases the costs for all, leading to a spiral of increased costs, increased wages, increased subsidies to the poor, and so on.  The only way to get out of this spiral is to break it, and the most obvious point to break it is to freeze or cut the transfers to the poor, with the intention of creating more earning opportunities for them in the medium term.  While apparently hard-hearted, this has to be done.  In economics, there ain’t no such thing as a free lunch!

Let us look at an example.  A project was launched in the Eastern Cape Province of South Africa in the mid-1990s to create at least 350 000 jobs.  During a discussion with the then Premier of the Eastern Cape, the project leader was astounded to hear from the Premier that he was unwilling to divert some of the funds for the building of houses to the establishment of small factories to enable the people to become economically active.  “How would I explain to my 84 year old mother that she would have to wait another year for her house?” he asked in explanation.  The answer to the question now, 17 years later, is that she and the 6 000 000 unemployed in that Province are still waiting, still have no means of earning even a basic minimum income, and still have no hope in life.  There can be little doubt that the creation of many new jobs in that Province would have started a positive spiral of income, job opportunities and increasing wealth for the people that would have had a much more beneficial effect than the construction of a few thousand brick and corrugated steel huts, barely usable as a cowshed, has achieved.

To explain the Multiplier Effect of job creation, we need to understand how an economy works in real life.  If an entrepreneurially-minded person starts doing some economically-productive work, say making shoes from hides produced by a local farmer, a number of economic activities start to move.  The farmer has a buyer for the hides, which he has tanned for him by a local worker.  The farmer now has some money to spend, and so does the worker tanning the leather.  The man making the shoes sells them for a price, and he now has the funds to buy more leather and thread, to send his children to school and to buy food.  Each of these activities generates a flow of money, and so produces economic activity beyond the original entrepreneur.  Each of the beneficiaries has funds to spend or invest, and each of them plays a role in the creation of further flows of money.  This is how the European economies, and others, got off the ground in the first place.  Each activity that has an economic outcome creates further activities, and each of those does the same.  Research in Western Australia, Germany, the Caribbean Islands and other widely disparate places shows the same result. 

Each new job has the effect of creating between eight and twelve additional spin-off jobs!

In several cases, where the jobs have an immediate local effect and the types of activity promoted have been chosen to provide the greatest level of development net effect, it has not been unusual for the Multiplier Effect job creation factor to be as high as eighteen!

Contrast this with the effect of an unemployment subsidy.  The small amount transferred to the poor, usually not sufficient to maintain any life, never mind a reasonable standard of life, does no more than enable the recipient to buy food for the week.  The Multiplier Effect is minimal, as the suppliers of food are already established at a level where the additional business is only marginally beneficial.  The transfer of funds away from the taxpayer, if he or she is an individual, is fairly substantial, often leading to a forsaking of the opportunity to save or invest the funds, or, if it is a company, depriving it of a portion of its capability to invest in bigger and better productive capability.  The net benefit to the economy is, at best, barely positive.  At worst, the transfer of the funds has a substantially negative Multiplier Effect on job creation in the narrow view and on the economy in the wider view.

In summary, it is safe to say, from an economic point of view, the handing of social welfare payments to indigent recipients is, at best, neutral and probably damaging to their economic prospects.  From a sociological point of view, long-term social welfare handouts are demeaning and demotivating, and contribute in a most negative way to the building of an equitable economy.  In this light, the humanitarian aspects of long-term handouts, particularly if not accompanied by an economic development program with components of education, training, funding for business activity and a meaningful job creation activity, are at least questionable. 

Walmart in South Africa

Walmart – MassMart

During a recent radio talk show on SAFM in South Africa, Mr Phillip Jennings, purportedly an international union leader, alleged that Walmart has a very ‘bad reputation’ for banning labour unions, preventing collective bargaining and exploiting workers.  He admitted that Walmart employs 1 500 000 workers in the USA.  These statements beg for a rational evaluation of their content, apart from the hype that Mr Jennings built around them.

At the lowest level, a worker is free to choose his or her employer.  If Walmart is a poor employer, for whatever reason, every potential employee may choose not to become employed by Walmart!  The opposite is not necessarily true – Walmart may be limited in deciding whether or not to employ a particular person, or to discontinue such employment if the person involved is not satisfactory in a general way.  The fact that Walmart employs some 1 500 000 workers in the United States must say something positive about the company, even if it is only that any job is better than no job!

At the next level, employment by Walmart of people at a ‘low level’ of wages and benefits, i.e. at a lower cost to the employer, has the result that Walmart is able to offer goods to customers at a lower price than its competitors.  Analysing this fact, it is immediately clear that high wage and benefits packages increase the cost of operations to the employer, and so the necessary selling price of the goods it sells to the public.  This leads logically to the conclusion that the effect of union wage and benefits demands results in an increase in the prices paid by the public!  This is not a particularly profound deduction, but the effect of it is that the unions play a role akin to the Government in ‘taxing’ employers, with the ‘tax’ being paid over to the employees, and a portion of it landing in the pockets of the union!  If this is such a desirable practice, one that no intelligent consumer would object to, why not set up a system of having prices set at the economic lowest level by the retailers and other sellers, with an optional ‘wage surcharge’ being added to the total.  The proportion of the total of such optional surcharge that is actually paid would show very clearly the support by the public for the demands of the unions.  It is unlikely that more than 5% of customers would voluntarily support such wage demands.  What this points out is that the unions are using their monopoly powers to extort an unfair (in the view of the ultimate customer) price for labour.  By avoiding this extortion, Walmart is able to offer the benefit of lower prices to the very large public.  If Walmart were to employ 100 000 persons in South Africa, those people would, in the argument of the trade unions,presumably, be able to obtain employment at lower than union rates but at a higher level than the very small unemployment benefit.  Against that small number, about 50 000 000 people – five hundred times as many! – would enjoy the benefit of lower costs.  Is that not an example of democracy?  If the majority of the customers did not like the way Walmart paid its workers, they would be free not to buy at Walmart and so express their disapproval!

Mr Jennings stated that companies like Pick n Pay would be forced to retrench large numbers of employees once Walmart becomes established in South Africa and that, in fact, it has already started such retrenchments by laying off 3 000 employees.  What Mr Jennings failed to inform the public is that Pick n Pay was subjected to a very damaging strike in 2010, the settlement of which resulted in considerably higher operating costs, leading directly to the need to retrench less economically-significant employees!  The cost of the strike itself was also, obviously, a significant factor in the reduced profitability of Pick n Pay, leading to a substantial reduction in the listing value of its shares. 

A further argument used by the Unions has been that retailers would reduce purchases of South African products and increase in the importation of foreign products.  The simple fact of this situation is that the cost of South African goods is excessively high in comparison with foreign competitors!  This was shown very clearly when a number of factories in the textile sector in Newcastle were closed, resulting in thousands of jobs being lost.  The owners of the factories declared that it was not possible to operate the factories under the high labour cost and restrictive labour legislation prevailing in South Africa.  They were supported in this contention by the workers, who declared that they would be willing to work at a rate of pay less than the minimum wage for the sector, in preference to being unemployed!  Another side of this argument is that the same low-cost imports are available to other retailers and these companies do, in fact import them.  A glance around any of the major retailers will show very quickly that numerous products are presently imported from China, India, Thailand, even Mauritius.  The activities of Walmart would not change this situation except, perhaps, by competing actively with those companies, forcing them to reduce their high mark-ups.

It is very clear that any rational person would buy an equal quality good at the lowest cost.  This applies to the end customers as well as to the manufacturer or retailer.  The ‘good’ might be an hour’s labour or a new television set, or a factory.  The choice of seller is open in the widest sense.  A potential employer has the choice of choosing from the range of job-seekers, and will make the choice based on the skills set offered, the attitude to the work and productivity, the cost of the labour, and similar factors.  This choice covers not only the Gauteng region, but also the nation as a whole and, in the wider sense, the world.  If a manufacturer can choose between equal quality labour in Gauteng, in South Africa and in the world, the cost of the labour package will play a significant role.  This package would include the direct cost of labour, the benefits required to be offered, the productivity of the labour and the flexibility of the labour laws, and the likelihood that these costs will change compulsorily.  Other factors, of course, are those related to the security of the investment, of the senior employees, the extent to which the investment and the investor will be subjected to illegitimate demands by, for example, the tax authorities, the protection against the additional cost elements posed by employment equity (which, in effect, demands that employees may be chosen not only on the basis of their ability to add to the economic effort of the employer, but must also comply with racial and gender limitations), and the need to fund the acquisition of a share in the business (i.e. compulsorily donate) by the members of a particular racial group.  In most of these aspects, South Africa falls woefully short.  The sharp reduction in foreign direct investment in South Africa is testament to this.  This broad trend is likely to increase, with existing privately-owned businesses relocating to neighbouring or other more distant countries, and with a reducing level of new investment by foreign companies in manufacturing in South Africa.

One result of the increasingly difficult problem posed by a rampant trade union movement is the conversion of previously labour intensive activities to automated manufacturing.  Labour effectively prices itself at a level where it is more cost-effective to buy new equipment.  This change, once it has occurred, cannot be reversed.

A Management Consultancy company, active internationally, which has a section specialising in the evaluation of possible locations for the establishment of new manufacturing entities by European and American companies, has, over the past year, assisted in the establishment of new factories with an investment value of several hundred million Dollars, employing nearly a thousand workers.  These plants have been set up in several countries, including, remarkably, California and Britain.  These locations were chosen on the basis of a large number of factors, all relevant to the companies making the investment.  They included overall cost of labour, flexibility of labour, Government policies relevant to the protection of free enterprise, peaceful relationships with potential workers, the even-handed application of clear laws by Government bodies, and several other similar factors.  In each case, South Africa dropped out of the running at an early stage.  The country was simply not able to put up a case to match those of the large number of competing locations!  Application of the Multiplier Effect of job creation, a theory that postulates that each new direct job created results in the creation of several additional jobs in supplier and support activities, would have generated, in the evaluation of the Consultancy, of more than twelve thousand new jobs within a year!

Has the Government heard the story of Harold Mac Millan, the Labour Prime Minister of Great Britain, who came to power with the intention of sharing the prosperity of the nation amongst its people?  He found that his policies were unable to do this, so he settled for sharing the poverty of the nation!

Can South Africa continue to afford the destruction of its economy, the destitution of its people, which is the inevitable result of continued implementation of policies demanded by the Trade Union movement?