Is South Africa in a drive to forcibly suppress wages?
PRETORIA – The interesting development in the last two or so years is what appears to be a conscious attempt to ‘rigiditize’ wage structure in the South African economy. Starting with finance minister Tito Mboweni’s drive to reduce the wages in the public sector, the private sector also heightened similar activity through retrenchments and dismissals.
This is an interesting period for everyone. It is thus necessary to explore what exactly is happening and what the ultimate goal is.
The article revisits research conducted by the author a decade ago at the School of Economics at the University of Johannesburg. Titled ‘The impact of wage-setting institutions on the creation and long-term survival of small, medium and micro-enterprises (SMMEs) in South Africa‘ (2010), the study concluded that there was insufficient evidence to suggest that wage-setting institutions stifled the growth and development of SMMEs in the South African economy.
In agreement, the ILO's 1999 ‘Report on Social Consequences of Globalisation in South Africa’ also found that the South African labour market was “extremely flexible and no evidence exists that a further relaxation of employment conditions and labour laws will create more jobs." However, mainstream economists long held an opposing view and this explains the vigorous push for labour reforms which has gained momentum in recent times.
Neoclassical economists and other decision-makers believe that labour laws create rigidities and constrain economic growth and increase unemployment in South Africa. For instance, Frans Cronje of the Institute of Race Relations wants the government “to repeal all race-based empowerment legislation, deregulate the labour market and abandon minimum wage laws … to stage an economic recovery.”
These views are prevalent all over but they remain untested. As a result of this thinking (and in tandem with other plans to restructure national assets), efforts to forcibly bring down wages in the South African economy are underway. An argument can thus be made that the killing of mine workers in Marikana in 2012 was just the beginning of a long haul to undermine the country’s good record in respecting and protecting labour rights.
The plan is not only about wages but there are ideas to emulate what befell both Britain and the US over three decades ago - the destruction of trade unions and worker-friendly labour laws and institutions. Looking at comments in liberal media it looks like a guillotine has long been prepared for trade unions.
Writing for the Daily Maverick (13/03/2019), Ivo Vegter says trade unions “enjoy too much power in South Africa.” Basically, trade unions are targeted for their role in protecting workers. University of Stellenbosch’s Dieter von Fintel mentions that unions “have played an important role in improving both pay levels and job security.” Without trade unions, workers could become extremely vulnerable. Unions fought gallantly to save jobs at South African Airways, whose life still hangs in the balance.
Nevertheless, the present conditions created by the coronavirus pandemic have kicked started an irreversible process that was hatched many years ago of reducing wages with the belief that this will boost the economy and also create many jobs. At the extreme, the National Treasury forecasts that over seven million people could lose jobs in all sectors and industries across the country as a result of the COVID-19 crisis.
This number will join an estimated 6.7 million to 10 million people who are unemployed in South Africa. In their open letter to President Cyril Ramaphosa, Lawrence McCrystal and Hein van der Walt outrageously suggest labour reforms could deliver tons of jobs, but don’t mention the nature of jobs. Maybe their idea is to turn South Africa into another Bangladesh where wages aren’t only low but they perpetuate poverty and starvation.
Understanding structural reforms and job insecurity
With its long history of discrimination and unequal pay due to apartheid, in 1994 SA created a very strong labour regime of laws and institutions that many commentators blame for high unemployment as well as for increasing the cost of doing business. Academics Nicoli Nattrass, Jeremy Wakeford an Samson Muradzikwa state there are several wage-setting institutions in the labour market.
These include individual employment contracts, bargaining councils, national minimum wage, and, to a lesser extent but important, the National Economic Development and Labour Council (NEDLAC). Overall, the market-friendly adherents would want these laws watered down or scrapped altogether.
Writing in the Business Report (11/05/2020), development economist Bheki Mfeka says that traditional orthodox commentators (also called neo-liberalists) demand structural reforms, which for them refer to “market liberalization, privatisation of the SOEs, and crowding in of the private capital in the market at all cost, maintaining a lean and mean government.” In their book titled: ‘Macroeconomics: theory and policy in South Africa’ (2002), Nicoli et.al. long pointed out that the National Treasury pursues a growth strategy with strong neoclassical underpinnings (market forces), whereas the Department of Labour (now the Department of Employment and Labour) appears not to be allowing the market forces to determine wages.
However, Mboweni disputes that the foreseen structural reforms are similar to what the Brettonwoods institutions prescribe to countries. In 2019, the National Treasury introduced a paper titled ‘Toward an Economic Strategy for South Africa’, and it is said this document “seeks to provide a roadmap for increasing economic growth by up to three percent a year.”
This document identifies what it calls a “combination of impediments“ (i.e. a high regulatory burden, inflexible labour markets and high levels of concentration) which it sees as significant obstacles for SMMEs. Amongst many proposals, it suggests reforms to reduce rigidities in such things as an extension of collective bargaining wage agreements and the national minimum wage, as they apply to SMMEs. But the latent wish is that this to apply to across the board.
The argument is therefore that even long before the setting in of the coronavirus pandemic there was a well-orchestrated strategy to forcefully bring down the average national wage. This is now gaining momentum under the guise of overstated economic hardships created by the present crisis. The elements of this strategy include driving as many people as possible into outright unemployment, precarious and poorly-paying work. The weakened trade union movement has little or no power to stop job losses and, by extension, a possible drastic decline in wages in future.
Labour market and the unemployment problem
The labour market involves primarily two participants, namely workers and employers. Workers need income to purchase goods and services. So, they enter the labour market to get employment (jobs) which are provided by employers: workers offer their labour in exchange for a wage “above which (or equal to) the rate at which they are indifferent between working and not working.” On the other hand, employers participate in the labour market not to supply jobs, contrary to what is often said, but to engage workers in order to produce goods.
The relationship between workers and employers is not based on good hearts and humanitarianism - employers whose motive is to produce goods cannot do this without workers, and workers need income to survive in a capital-driven society. Michael R. Strain of the US-based Aspen Economic Strategy Group explains this relationship in the following manner: “Assuming the labour market is ‘competitive’, firms take the market wage as a given, operating under the assumption that they cannot influence it. They hire workers up to the point at which the additional revenue generated by hiring an additional worker is equal to the wage rate (i.e. the additional cost of employing that worker).”
The explanation above indicates that if there is a promise for a higher wage, more people will avail their labour to employers. On the opposite side, lower wages in the economy mean that a greater number of people will be willing to hire workers. Economic theory suggests that the market reaches an equilibrium wage rate, where these two opposing expectations are reconciled. This means, “everyone who wants to work finds a job, and every firm that wants to hire workers finds all the workers it wants,” argues Strain. The labour market stabilizes when the number of workers who want to work equals the number of workers firms want to hire.
Unemployment, therefore, occurs when too many people chase fewer jobs available in the market. The latest unemployment rate figure for SA is estimated at least 29.1%. The problem is that the South African economy has not really grown to a point it could absorb scores of people. Even the temporary positive growth in the 2000s could not solve this dilemma. Hence, it was called a jobless growth. At the same time, there are many reasons that are given why SA has high unemployment including skills, levels of education, etc. There are equally numerous reasons to explain the state of the economy. But everyone agrees that SA faces a huge problem of unemployment.
Forcing wages down
There is a view that if SA could lower its average wage the problem of unemployment will go away, or it will be substantially reduced. What this means is, there is a drive to set wage rate at a national level below the equilibrium wage in the hope that this would ultimately result in many jobs that will at least accommodate the scores who are unemployed. Market forces have in any way failed to create an efficient labour market.
For market fundamentalists, the problem is created by the rigid structure of the South African labour market and the power of unions as well as by provisions of bargaining council agreements. They argue that the main problem of bargaining councils, for example, is that bigger firms tend to set minimum wages above the level that is feasible for smaller, labour-intensive firms in the same industry, thus forcing them out of business.
The contrary view is that if firms had more bargaining power, then they would “be able to push worker wages to the lowest wage workers will accept.“ However, this proves more difficult in unionised environments - this is exactly what frustrates Mboweni and other reformists most. The employer has tried every trick in the book to bypass or even renege from the standing wage agreement.
As with the rest of the labour market, the long-term goal is to tilt power relations to favour employers at the expense of workers. Organisations such as the Free Market Foundation have always complained that labour laws in SA are biased in favour of workers. The strategy doesn’t only affect unionised workers but anyone in formal employment. Those in informal employment are not so much of problem, in fact, the idea is of deregulation is based on formalisation of employment relations in the economy.
Many people who are not unionised employment arrangements are losing jobs in large numbers. It is easier to dismiss these types of workers compared to those who are trade unions. This is not based on the obvious fact that the latter group has someone who will take up the fight for them. The Labour Relations Act (s.189) proves quite onerous for employers who want to dismiss workers en masse. However, the difficult economic climate created by the coronavirus has emboldened employers to go on an overdrive. To date, the Commission for Conciliation, Mediation and Arbitration (CCMA) has received 17 applications for large-scale retrenchments and 151 smaller applications. In addition, there is also a spike in domestic worker dismissals.
Yale University’s Gabriel Winant observes, “We tend to think of employment as a market interaction: supply and demand meet to set a price, and that’s the wage you get paid.” However, reformists seem to think that it is fine for economic growth should be achieved in an environment of suppressed pay cheques. Expanding economy, stagnant wages is a relationship they prefer.
Conclusions and way forward
The permutations articulated in this opinion piece aren’t far-fetched at all. Those who want structural reforms don’t just demand a drop in in wages, death of unions and deregulation, they also want all structures for labour market regulation to perish. “For unbiased, objective, streamlined and transparent administration the office of the Industrial Registrar of the Department of Employment and Labour needs to be incorporated in the DTI,” argues McCrystal and Van der Walt. When he assumed power in 2019, Brazil’s right-wing president Jair Bolsonaro scrapped the ministry of labour and its functions were moved to other ministries.
The intention is to fight what is generally perceived as the worker-friendly dispensation in SA. Labour therefore needs to detach itself from politics and capital before it is too late. And it will be a great pity that labour issues that have taken centuries to attain can fizzle in a whim. But at the same time, there is more need to create a Swedish-style of industrial relations based on mutual respect and need to maintain productivity as well as contribute to economic growth. However, this can only be possible in conditions where economic freedom is also enjoyed by the black majority. Any structural reforms to the economy that still retains an old ugly face of apartheid and colonialism can only mean a huge disaster if the intention is to further exclude black workers or to pay them slave wages.
In terms of what is envisaged with the labour market reforms is an overall reduction of wages in the economy. Anyone forced to leave employment at the moment as a result of retrenchments or dismissals will not earn an equitable salary when entering months later. In fact, millions have had their salaries reduced as a result of a lengthy lockdown. This is something that interest rates have have failed to do over the years. The overall impression from the predicted jobs bloodbath is that it can be avoided through macroeconomic policy interventions as it is happening in the United Kingdom.
Therefore, the next stimulus package should release real money to employers, workers and households (as well as the unemployed) as a way of ramping up both demand and supply. The recovery of the economy needs to rise with living standards of the population, thus an engineered free fall on wages should be allowed to happen.
Siya yi banga le economy!
Based in Pretoria, Siyabonga Hadebe is an independent commentator on socio-economics, politics and global matters.