Five steps to address unemployment

By Nedgroup Investments

Nicky Weimar, the Chief Economist for Nedbank, provides insights into job creation and unemployment in South Africa and the five steps that can be taken to address or reduce the current unemployment rate of 32%.

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The size of the unemployment problem in South Africa
South Africa has always had very high levels of unemployment as a result of structural problems, which are a lot harder to resolve and require specific interventions over many years. This is one of the reasons why South Africa has always lived with one of the highest unemployment rates in the world, which goes hand in hand with the highest level of inequality in the world. Other countries are nowhere near the narrow unemployment rate in South Africa of 32.5%. This rate excludes about 2 million discouraged workers, people who have been looking for work for so long that they have largely given up and are almost unemployable. If we include discouraged workers in our broad unemployment rate, it is closer to 40%. Youth unemployment is well over 50% and is indicative of how the economy has failed to meet the needs of the bulk of the population.

Step 1: Government, business and labour need to face reality
We need to get the basics right, which will have a big impact on the investment environment and confidence in South Africa. This will start to attract foreign capital and investment and get South Africa growing again. Government, business and labour must accept that we have to create jobs for the labour force we have and not the one we wish we had. The bulk of the labour force is unskilled or semi-skilled and these are the kinds of jobs we need to create.

Step 2: Economic growth and profitability matters
You can’t move forward without economic growth. South Africa’s GDP experienced relatively good growth from 1994 with a fantastic spell from 2000 to 2008 when we were hit by the Global Financial Crisis. 2008 was followed by a slower paced growth, largely boosted by the 2010 soccer world cup. Thereafter, we lost momentum as a result of destructive interventions, such as the mining charter, the visa requirements that virtually strangled tourism, the mismanagement of SOEs, which resulted in rising costs, the unreliable nature of all SOEs and the economic infrastructure they provide. The most damaging was the energy crisis, which we’ve been battling since 2008. Covid and level 5 lockdown in April 2020 destroyed economic activity and more than a decade’s output, putting us back to 2010 GDP levels. From Q3 2020, we did see a recovery, albeit at a slower pace, and we are now back to around 2014 levels. An environment that represents the longest economic downswing in recorded history is not conducive to job creation. Our first priority must be to restore economic growth. SOEs are important as they provide the bulk of economic infrastructure that the private sector needs to produce and transport their goods. These factors need to be addressed to successfully kick start the economy. While we have slowly started to grow again, we remain firmly in negative territory with the economy shrinking by 4.2% on a year-on-year basis.

Companies who make a profit are able to employ people, pay salaries and start to anticipate that demand may at some point outstrip their supply capacity and will take pre-emptive action and expand their operations. The expansion of fixed investment activity is what creates employment. All industries saw a sharp decline in value added. Some industries managed to record profits, but these were down between 65% and 85%, which isn’t very optimistic for short-term job creation. Firms will have to restore their profitably in order to survive before they start employing people.

Step 3: Growth translates into expansionary fixed investment – the key to job creation
A growing economy and rising profitability results in fixed investment, key to job creation. Fixed investment has been decimated and we have fallen back to 2006 levels in absolute terms. Government has started to attract private sector investors, but the values are too small to make a meaningful difference to fixed investment levels and job creation. We need an environment that supports economic growth and investment as well as a favourable fixed investment environment with certainty around property rights, intellectual property rights, energy supply and transportation, etc. Even though the private sector has not been growing fixed investment, up until Covid, it maintained its level of capital expenditure. The main drag on this economy was the implosion in fixed investment activity and infrastructure investment by SOEs.

Step 4: Resolve the energy crisis
We cannot grow without electricity. This is a priority and legislation needs to change to allow more energy producers, outside of Eskom, to enter the market. We need to get rid of bureaucracy and streamline red tape within government administrative processes. If companies cannot expand their operations due to the energy crisis, they will have no reason to employ more people.

Step 5: Deal with the other structural constraints
South Africa’s long and painful history has contributed to our unemployment situation. The legacy of exclusion of the majority of the population means that we have huge deficits in education, skills and training, knowledge around how to start and run a business, financial skills, etc. While we can’t reverse the damage of 100 years in 25 years, we need to start to systematically address it. Over the last 10 years, we did not implement the interventions needed to do that. We need less of a capital intensive kind of growth that South Africa has always had, but more of a balanced environment where capital intensive industries flourish and co-exist alongside labour intensive industries. Tourism is an obvious example and its rejuvenation will be a product of how quickly we can roll out vaccines and put Covid behind us. Agriculture is another option. While land reform is an element of that, there are constructive ways to do it, which are well documented. Our education system is failing thousands of children and must be fixed. Our labour laws benefit those who are employed and there are significant barriers to entry. We don’t have enough entrepreneurship in SA to get small businesses going, which are major job creators. All these structural constraints have contributed to unemployment. We need to systematically deal with them and create a business-friendly environment for all individuals and industries and not just those that government has targeted.

If we take the market consensus of GDP growth, we could achieve an unemployment rate of about 21% within 10-15 years.