Lighter touch will allow the labour market to work

Eustace Davie is a director of the Free Market Foundation and author of ‘Jobs for the Jobless’.Eustace Davie is a director of the Free Market Foundation and author of ‘Jobs for the Jobless’.

A booklet titled Jobs for the Jobless was published by the Free Market Foundation 20 years ago. The issues identified at the time to be barriers to entry into the job market — onerous termination procedures and minimum wage laws — remain a problem. Nothing has changed. In fact, the labour market has become less accessible, especially to young people with low skills, and people who do not have a record of useful work experience. 

Twenty years ago the job-creating potential of small firms was not being used, and that potential is still not being allowed to function. The government could have facilitated the ability of small firms to teach skills and create entrepreneurs by minimising burdensome regulations, but did not. 

Unemployment

During the past two decades, the government has adopted a labour policy that has worsened the problem and caused a substantial increase in unemployment. The barriers to entry into the labour market have been destructive. If the government had taken the advice contained in the Jobs for the Jobless booklet, the tragedy of mass unemployment that has befallen millions of South Africans would not have occurred. 

The booklet’s proposal was to leave decision-making about jobs with job seekers and not to establish a platform that would keep them out of the market. To rapidly absorb the unemployed into the labour market SA needed, and still needs, spectacular growth of the order of 7.2% a year for an extended period. That was the growth level required two decades ago to double the country’s GDP every 10 years.

South Korea and China averaged higher growth rates at the time, and 20 years ago it seemed feasible for SA to do the same, assuming the required policy changes were implemented. However, the full wealth creation and job creation potential of all firms would have had to be fully used to make such a high growth rate possible. 

Opportunities

SA needs to create a labour dispensation that will not reduce the high level of job security of the employed but will open the job market to small businesses, including those of individual employers, to give the unemployed the opportunity to secure jobs and learn skills.  

A young mother once appeared on a radio show to describe a labour problem she could not resolve. The single mother lived in a house in Soweto with her young daughter and a young childminder. The mother left for the city early every workday,  leaving her daughter in the care of her lodger/childminder.

The childminder prepared the child for school every morning (including making breakfast), dressed the child and walked her to school. When school closed for the day, the childminder/second mother would be waiting for her charge at the gate to walk her home.  

The mother provided the childminder with three meals a day and a furnished bedroom to herself, and bought her clothing from time to time. In addition, she gave her an allowance of R500 a month, which was all she could afford out of her salary of R20,000 a month (before tax).

Then she was confronted with the newly introduced national minimum wage of R20 an hour. According to the new legislation, it was not legal for her to deduct any of her costs from the newly imposed minimum wage. 

Members of a “housewives committee”  were present at the meeting where the young mother described her dilemma. When the meeting closed the members rushed to console the young mother, but none of their suggested solutions would have passed legal muster. For the sake of her child the young mother would have been forced to rely on the forbearance of her childminder friend. 

Special treatment

No special dispensation for small business is required in a low-tax, low-regulation environment. But when the taxes are high and regulations onerous, small firms need special treatment to reduce the competitive disadvantage they suffer because of their higher regulatory compliance costs per worker.  

The bias against small firms caused by high government-imposed costs should be removed or reduced, either by reducing such costs for all firms or by exempting small firms from some of the laws and regulations. Small firms in some instances become the victims of laws and regulations that are specifically intended to regulate the activities of large firms.

Identifying and exempting all firms from such “all-encompassing” regulations should be relatively simple. Instituting measures to ensure small firms are not accidentally ensnared by future legislation should also be easily accomplished. 

Barriers 

By removing the regulations that restrict or prohibit small firms and young people from entering into mutually beneficial conditions of employment, the government would allow the creation of a freely functioning jobs market that would rapidly absorb all unemployed people who wish to work.  

Small firms are primary job generators; all that is needed is for small employers and unemployed workers to be left alone to find a match with each other as fast as possible. No other policy proposal has the potential to reduce unemployment as rapidly and permanently as the policies proposed in this article. The fundamental reason is that the solutions are based on voluntary engagement rather than threats, prohibitions and force.  

Studies carried out in the EU found that small and medium-sized enterprises (SMEs) are the backbone of Europe’s economy, constituting  99% of all businesses in the bloc.  They employ about 100-million people, account for more than half of Europe’s GDP and play a key role in adding value in every sector of the economy.  

Opening up 

The SA government has not given sufficient attention to removing obstacles that retard the development of micro businesses. It is these small firms and individuals that have the potential to absorb millions of the unemployed. Owners cannot afford to spend a great deal of their time on studying, properly applying and dealing with labour laws, especially the Labour Relations Act.

In other countries it is possible to exempt micro enterprises with fewer than 10 employees from onerous labour laws. Adoption of a similar policy in SA would increase employment substantially and provide a considerable boost to the economy.