Why causing unemployment is politically popular

That the Parliamentary Portfolio Committee on labour is calling for submissions on youth unemployment does not mean that they will necessarily be able to do anything about it. Economic myths have too strong a hold on the beliefs of the general public.

People are inclined to believe that legislation can solve all economic problems. If employees are not earning a ‘living wage’ why not pass a law forcing employers to pay more? The reason government should not do so is that economics tells us that as a consequence of such legislation some people will lose jobs and others will not get jobs.

Even Governor Arnold Schwarzenegger of California, who is considered to have a good understanding of such issues, is reported to be in favour of raising his state’s legislated minimum wage from $6.75 an hour to $7.75 by July 2007. Economist David R Henderson estimates that the proposed 15 per cent increase would destroy about 35,000 to 70,000 jobs in the unskilled labour market – putting 1.5 to 3 per cent of young Californians out of work.

Overall, Henderson estimated that the 15 per cent increase in the minimum wage would destroy between 70,000 and 140,000 jobs. The reason for the job destruction is that making higher wages obligatory does not simultaneously make workers more productive. So why would the Governor want to do such a thing when he probably understands the consequences perfectly well? The answer is that, despite the evidence, minimum wage laws are politically popular.

Statistics SA reported in its last Labour Force Survey (LFS), which is arguably the most comprehensive indicator of employment in the country, that approximately 26.7 per cent of the available work force was unemployed in September 2005. This represents a marginal increase in the unemployment rate from March 2005 (26.2%). Approximately 4.4m people (1.5m aged 15-24 and 1.8m aged 25-34) are therefore unemployed. If we include those that have given up searching for work, an additional 3.3 million must be added, bringing the total to a staggering 7.7m people.

Neo-classical economists have repeatedly demonstrated that the reason for unemployment is that wages are set above the market clearing level. In other words artificial barriers such as minimum wages, laws providing high levels of job security, and high compliance costs, prevent the market from functioning correctly. Reducing chronic unemployment in SA requires government to remove artificial constraints on the functioning of the labour market.

It is therefore unfortunate that the Department of Labour last year increased the minimum wage for sales assistants in the wholesale and retail sector. The new minimum wage for sales assistants in urban areas will be R2,289 per month, while the minimum for their counterparts in outlying areas will be R1,860. In rural areas the minimum will be R1,720. The increases in minimum wages ranged from 5,6 per cent in urban areas to 7,5 per cent in rural areas. Larger firms already pay more than the prescribed minimum wage. However, many of the small, medium and micro enterprises, the biggest employers of labour, will hire fewer people because the new laws are simply too onerous. The result of the minimum wage is that small firms will tend to avoid hiring strangers, rather choosing to employ family and friends or rely more on technology.

SA’s labour laws were adopted with good intentions. They were intended to provide a high level of job security for those that are employed. In plain language that means making it harder for employers to fire workers. In that they have succeeded. Everyone with a job is very satisfied with the situation and their consciences don’t trouble them as long as they can shut their minds to the economic realities.

The downside of laws that provide high levels of job security or artificially bump up wages, reflect in the unemployment numbers. The sayings, ‘If you can’t fire you don’t hire’ and ‘You can’t hire those who don’t earn their keep’ may be unpalatable to politicians but they are harsh realities of employing responsibly.

Impressive political mileage can be gained in creating attractive conditions for the employed but the unemployment that comes with it can be a real and continuing political nuisance. Reversing the situation, even marginally, to allow the young, old, handicapped, unskilled and otherwise disadvantaged to get jobs can be more than a nuisance. It can be a political nightmare as France’s Prime Minister Dominique de Villepin found to his cost. Introducing less rigorous requirements for the dismissal of young French workers would have opened opportunities for the large number of unskilled and unemployed youth in France. However, the eminently sensible idea was torpedoed by the privileged university-going youth, who were not prepared to give up their job security for the sake of the underprivileged unemployed.

Anyone believing that SA’s labour unions will voluntarily give up job security for their members to allow the young or not-so-young unemployed to get jobs is being naive. That is why the FMF booklet, Jobs for the Jobless, proposes an alternative that will not disturb the job security of the employed yet give the unemployed the opportunity to find jobs. Give anyone who has been unemployed for more than six months a two-year exemption from the labour laws, it suggests, and allow the exempted person to make any written arrangement with an employer she or he wishes. The proposal will not solve the unemployment problem overnight but it will give hope and provide job opportunities to the currently hopeless.

Authors: Eustace Davie is a director and Jasson Urbach an economist at the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the authors. The views expressed in the article are the authors’ and are not necessarily shared by the members of the Foundation.

FMF Feature Article/ 09 May 2006 - Policy Bulletin - 20 October 2009