For South Africa to avoid an economic and social breakdown, the country must solve its high unemployment rate and soon, according to the writer. Photo: Leon Nicholas

THE NEED to create jobs in South Africa is accepted as our most urgent priority. Jobs put money into people’s pockets, reducing their dependency on the state, increasing the choices open to them and their families, and swelling their sense of self-worth.

A high rate of unemployment is not a uniquely South African problem. It is a world-wide phenomenon and countries are trying to implement different job creation policies depending on their economic circumstances and political dynamics.

Former Gallup chairman Jim Clifton sums up the scale of the challenge in his book, The Coming Jobs War: “If countries fail at creating jobs, their societies will fall apart. Countries, and more specifically cities, will experience suffering, instability, chaos and eventually revolution. This is the new world that leaders will confront.”

What is a job?

South Africa’s 37 percent unemployment rate (to take the wide definition) is one of the highest in the world and is proving to be an intractable problem. For South Africa to avoid an economic and social breakdown we have to solve it, and soon.

In trying to figure out how we create jobs, the starting point must be to ask the question, what is a job? This is not so trivial a question as it might seem. Commentary on the issue is clogged up in political ideology and rhetoric without a proper appreciation of the fundamentals.

A job is created when a person sells his or her labour to someone else for money. Turned around, my employer is buying my labour, time, expertise, skills or work capacity because it needs it to produce goods or services that it sells to customers.

In economics, labour is known as a factor of production. Other factors include capital, land or property, technology and entrepreneurship. These inputs are combined together in a business to produce outputs and the efficiency and productivity of this production will determine whether they generate profit or loss. Profits lead to expansion, while losses lead to decline and the eventual closure of the business.

So a job is understood first and foremost in economic terms. One of the first laws of economics is that of supply and demand. For more jobs to be created, demand for jobs must grow and there needs to be a ready supply of appropriate labour. How do we optimise supply and demand to create more jobs?

There are various ways, all susceptible to analysis by common sense and economic theory. Increased demand for a factor of production (such as a job) generally, though not always, follows a reduction in price or an increase in the utility or value of that factor.

As a free agent wishing to sell my labour, time or expertise, I can price it to maximise the likelihood of an employer buying it, at a rate that we are both prepared to accept. If lots of other people offer the same as me I become a “price taker”, in other words the employer can bargain down my wages because there is lots of supply in the job market.

To increase the value or utility of my time, labour or expertise I need to improve my skills so what I offer an employer becomes more attractive and it is willing to pay me more for it.

Theoretically, because of our high rate of unemployment, the potential supply of labour is close to being unlimited. Trouble is, most of this labour is not what employers need or is priced too high, making it unattractive. We have too many unskilled and not enough skilled people.

Increasing demand

The inescapable conclusion is that to stimulate demand for unskilled jobs we have to reduce their price. To increase the supply of skilled people we have to invest in education and skills development.

A complicating factor affecting the supply and demand for jobs is the cost imposed on the employer once a job is created. This includes the time, money and frustrations involved in complying with regulations and red tape. The higher the costs, the greater the disincentive for the employer to hire more people. By reducing those costs, or incentivising the employer with benefits to offset those costs, it will be more likely to hire.

Another way of increasing demand for jobs is growing the number of job creators – entrepreneurs. Entrepreneurs create businesses, which create jobs, so finding ways of encouraging entrepreneurship is vital to stimulating job creation.

To create jobs we have to increase the demand for them by either raising their utility value or reducing their cost. This simple equation brings such issues as minimum wages, decent (that is high-paying) jobs, flexibility of labour markets and mechanisms for stimulating entrepreneurship into perspective. Every policy initiative and reform should hone in on how to solve this equation with the goal of creating more jobs.

In the past 20 years, South Africa has produced a raft of legislation not suited to an economy at our stage of development. There is too much emphasis on protecting those with jobs and not enough on finding ways of creating new ones.

This applies to large and small businesses alike. Large businesses are increasingly shedding jobs in favour of labour-saving equipment and technology. As such, economic growth does not translate into new jobs.

The ANC is obsessed with dividing the existing economic cake through punitive laws and regulations when it should be more concerned with growing the cake. This is why we have economic growth of 1.5 percent not 5 percent, unemployment of 37 percent not 10 percent and a budget deficit inflated by an unaffordable government wage bill rather than a budget surplus fuelled by increased corporate and income tax revenues.

A root and branch review of legislation and regulations that hinder job creation should be at the top of Small Business Development Minister Lindiwe Zulu’s New Year to-do list. Her department must be willing to inject fresh thinking into government circles and challenge tired notions of state-led growth and state intervention in all spheres of the economy.

This fresh thinking will start with getting back to economic fundamentals.

Only then will we unlock the potential of our economy to grow, so increasing and spreading wealth and reducing levels of poverty and unemployment to acceptable levels.

Toby Chance is the DA spokesman for Small Business Development