Hiding the unemployed who have given up searching for jobs

The two South African unemployment rates, the strict (official) and the broad measure, differ significantly from each other. According to the latest statistical release by Statistics South Africa (SSA) the number of unemployed people who actively searched for work (strictly unemployed) was approximately 4,283 million. However, a further 3,824 million did not actively search for work, but would work if there were jobs available. That means that between 4,3 and 8,1 million people are unemployed in South Africa.

Most countries favour the strict definition of unemployment, since it is assumed that the broad definition overstates the labour supply and that those that are not actively searching for work are simply voluntarily unemployed. Indeed, the strict version is the measure officially recognised by the International Labour Organisation (ILO). However, the ILO supports appropriate national tests that need to be adopted in unique circumstances. Therefore, in a country like South Africa where large numbers of unemployed people believe there are no jobs available, it is imperative to report the number of broadly defined unemployed.

In South Africa, with its low wage levels and long distances from rural areas to urban centres, where there are generally more job opportunities, it is reasonable to expect that there will be relatively large numbers of discouraged work-seekers who will make infrequent attempts to find jobs in the cities.

Many of the discouraged job seekers would actively search for a job if they thought that there was a realistic chance of finding one. But the cost of a job search is by no means insignificant. The jobless are forced to ‘borrow’ money from family and friends in order to search for jobs. But given chronic unemployment, this money eventually becomes a ‘gift’ when it turns out that the borrower is in no position to repay the loan. This ‘borrowing’ is far from costless as personal relationships are put under increasing strain. The individual suffers the emotional stress related to being unemployed and the ‘lender’ suffers personal financial loss. Society at large is also affected by a number of negative factors that are inextricably linked to the problem of unemployment, such as reduced economic welfare, increased crime and social instability.

The presence of a large body of job seekers, whether discouraged or not, has a dampening effect on wages, to the extent that the potential workforce is factored into the setting of wages. If discouraged work seekers, who make up part of the potential labour supply, are not included in the statistics, the figures will provide a skewed picture of the South African economy.

The cause of large-scale unemployment, according to neoclassical economics, is that wages are set above the market clearing level. In other words, high labour costs resulting in many cases from minimum wage laws, reduce the employment opportunities of unemployed people with few skills who would otherwise typically find employment in small and micro enterprises. The unemployed are prevented from gaining work experience while their productivity is not high enough to justify the wages employers would be compelled to pay them. Indeed, the World Bank estimates that if South Africa were to decrease wages by 10 per cent employment would increase by approximately 7 per cent.

However, those who are already employed argue that weakening of job-security legislation and erosion of minimum wages will lead to increased poverty. On the other hand, critics of South Africa’s current labour legislation, including the World Bank, are of the view that labour law reform is essential to transform South Africa into a low-unemployment country. Artificial constraints on the functioning of South Africa’s labour market must be removed in order to alleviate the current chronic unemployment problem.

Statistics South Africa’s intention to stop publishing the broad definition of unemployment is both unfortunate and inappropriate. Not publishing the real numbers may make our unemployment figures look somewhat more palatable, but it will downplay the misfortunes of millions of people who are currently facing the hardships associated with unemployment.

We should not attempt to ignore the reality of South Africa’s unemployment problem. On the contrary, we need to be constantly reminded that there are suffering families out there and that something needs to be done about them. Something simple can be done, such as allowing them to make their own arrangements with employers, deciding for themselves what wages and other conditions of employment they are prepared to accept.

Author: Jasson Urbach is an economic researcher at the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 13 September 2005