South Africa’s job security laws are inappropriate for a developing country

Is the logjam of union power and labour inflexibility breaking at last? The Skills Development and Employment Equity Acts are upon us. The Labour Relations, Basic Conditions of Employment, and Insolvency Acts have been 'fine-tuned to improve investor perceptions of the efficiency and flexibility of our labour market', says labour minister Mdladlana. His director-general claims that the Millennium Labour Council has balanced market flexibility with workers' rights.

How does the market respond? We continue to have low foreign investment, low growth, and unemployment obscenely high and rising towards 30%. Tinkering with union privilege hasn't opened any job creation floodgates. The International Monetary Fund says our plentiful and potentially cheap labour is over-priced (high cost and low productivity), denying us comparative advantage to produce more labour-intensive goods for export. The old apartheid subsidies favoured capital-intensive industry and the new labour-market rigidities do the same. Unionists take comfort that the International Labour Organisation disagrees. Government half-listens only to Cosatu and ignores the growing 'armies of the unemployed'.

Last year the Free Market Foundation published a monograph with the title Investment, employment and South African labour laws: An international comparison by WS Siebert. The monograph compares South Africa’s labour laws with a fairly representative eight industrialised and emerging economies.

The countries compared in the monograph had 1999 ratings (out of 10) for overall economic freedom (SA 7.0) ranging from Brazil's 5.1 to the 8.5 of Australia, Ireland and New Zealand. Their average per capita real growth rates during 1990-1996 (SA minus 1.2%) ranged from Poland's 0.4% to Korea's 6.7%. Their per capita 1996 income (SA $4513) ranged from Turkey's $5870 to Australia's $22809. And their 1996-1998 unemployment levels (SA 28%) ranged from Malaysia's 3.2% to Poland's 12.8%. South Africa sure has some catching up to do.

Seibert looked at levels and trends of trade union density (% of total workforce belonging to trade unions), real wages and unemployment. He examined job security – strictness of protection against dismissal in terms of difficulty, procedures, and required notice and severance pay. He compared per capita foreign direct investment, minimum wage levels, the tax burden, and potential employees’ educational attainment. His analysis showed how rising union density and rising real wages correlate with rising unemployment. SA has had relatively high increases since 1990-1994 in both real wages and unemployment, which he ascribes to the rising percentage of employees that belong to unions.

Still, the International Labour Organisation says our labour market is not inflexibly over-regulated by international standards. But Siebert found a major problem in SA's job security being comparable to that of the wealthy OECD countries. It is far too high for a relatively poor, relatively uneducated country. He made the point that although the level of SA's job security may not be atypical, its recent increase from quite unregulated job security to average OECD levels certainly is. Moreover it is in uncertain times such as the present, coupled with the long-deferred 'creative destruction' of outsourcing and other changes to products and methods, that job security regulation most interferes with needed flexibility and entrenches inefficiencies. With high unemployment, quit rates decline and labour reallocation becomes harder just when it is most essential.

Increased job security is also costly to workers. Its trade-off cost is normally a reduction in wages, or (what is the same thing, under inflation) a delayed wage increase. Poor countries cannot afford this – their workers need and prefer money rather than higher levels of security. Workplace safety, for example, is nice to have, but later, if the alternative is better take-home pay. If you impose extra job-security costs and prevent wages from falling, unemployment is bound to follow, and foreign investors will certainly be deterred. Korea and Malaysia also have extensive job security laws, but unlike SA they do not have strong union movements making powerful efforts and succeeding in persuading a sympathetic government to enforce those laws.

Multinational firms choose countries with laws and wage levels that offer them comparative advantage in net labour costs. They also like the flexibility to manage workers in their own preferred way. Presumably they favour a more educated workforce, at least to the extent that it improves shop-floor skills and productivity. Naturally, many factors affect foreign direct investment and it is both unscientific and impossible to isolate a single causal determinant. But it is at least indicative that Siebert found that the countries with the strictest job security laws (SA, Poland, Turkey, Korea) also get the least foreign investment of the examined group of countries.

The author’s correlation table, derived from the nine-country data from the early and late nineties, indicates that:

Unemployment decreases mainly alongside falling union density and declining real wages.

Union density decreases mainly as secondary school enrolment rises.

Foreign direct investment increases mainly in parallel with rising schooling, reduced union density and lower job security.

In the monograph, Siebert arrives at the conclusion that, given the prestige and political power of South Africa's unions, 'it is unthinkable that union density can be assailed'. Perhaps, from the distance of the UK where he is based, the author may be unable to envisage any local Margaret Thatcher or other phenomenon emerging to challenge and trim back excessive union privilege or sweep away the restrictive panoply of labour law.

This may be so. Maybe no overt challenge will emerge. But another, uniquely South African, process is already at work behind the scenes, quietly but remorselessly undermining union power by ignoring and bypassing counter-productive labour law at every turn. Minister Mdladlana regularly complains that few firms bother to jump for his Skills Development Act 'jellybeans' and recover any of their 1% payroll levies via approved training courses. Something is delaying obligatory annual Employment Equity Act reports on company plans to achieve their 'equity' quotas; plans and reports which will then be used by government to keep them moving or face fines. Horses led to water, not drinking?

Employers would, wouldn't they! And employees too? The hidden tax of currency inflation steals their buying-power while 'not one in a million' understands how. Perhaps inflating the labour laws does a similar shrinking trick on wages and job security, ably assisted by "yes, please, I want the job anyway". Recently there have been several cases of unions persuading the department of labour to raid factories where management is allegedly violating labour law. Sometimes the violations turn out to be both real and reprehensible. Sometimes they turn out to be both trivial and with workforce consent. Sometimes the firm threatens to shut up shop or move to somewhere like Namibia or Lesotho, and sometimes this actually happens. Would you rather be 'exploited' at work or out of work? The unions prefer the latter.

Anecdotes abound, but one telling one may suffice. Clothing and textile union Sactwu says of a Taiwanese factory near Newcastle that "when they see a union official approaching the factory, they shout at him to go away". Yet dawn raids by the department and Sactwu reinforce the message to the factory owners to comply with labour laws or take those jobs abroad. Labour law that provides excessive levels of job security discourages job creation, especially when it is applied. We need jobs, not rules. We should welcome market-determined wage levels, not spread unemployment by decree.

One employer restated what should be "the obvious": opening businesses and creating jobs cannot be forced, and government should merely keep us safe, spend our taxes wisely and keep the unions off our backs. Angry construction union CEIWU officials responded that such dinosaurs should leave the country. And indeed they may. While unions benefit from the union game and excessive regulation, unemployed workers and private firms lose. And while such negative conditions continue, we all lose.

Source: Dr Jim Harris is a freelance researcher and journalist. He maintains the Privatisation Update and Regulation Update that appear under Publications on this website. This article may be republished without prior consent but with acknowledgement. The patrons, council and members of the Free Market Foundation do not necessarily agree with the views expressed by the author.


FMF Article of the Week/03 April 2002