Statistics SA announced the bad news a few weeks ago that unemployment in South Africa increased to 43.2% in the first quarter of the year, but the problem is much worse when one looks at the real number of unemployed persons and compares it with economic growth.
The figures show that unemployment in SA has been getting steadily worse over the long term. Stats SA counted 6.4 million unemployed persons in SA March 2008. According to the latest Quarterly Labour Force Survey (QLFS) there are now more than 11.4 million. That’s an increase of 77%.
The working age population increased by 30% from 20.9 million to 26.4 million over the same period as SA’s young population reaches employment age, but the number of jobs increased by less than 3.9% – from 14.4 million in 2008 to just below 15 million in 2021.
The figures suggest that our economy added only 600 000 jobs over the last 12 years, compared to the increase of more than five million in the number of work seekers.
Comparing the employment rate (simply the inverse of the unemployment rate) with actual GDP shows that employment fell during the 2008 global financial crisis and never really recovered relative to the size of the labour force. Covid-19 dealt employment another blow.
Employment versus real GDP
Izak Odendaal, investment strategist at Old Mutual Wealth, says SA did win back the jobs lost in 2008.
“Looking at the QLFS, SA lost about a million jobs in the wake of the global financial crisis, but had regained these by 2021. Employment then grew fairly steadily until the Covid-19 crisis when employment fell about 1.4 million.
“Employment has improved somewhat from the low point in the second quarter of 2020 when the economy was in hard lockdown, but clearly is still well below pre-pandemic levels. This does reflect the fact that certain sectors are not yet at full capacity, such as tourism and leisure that are very labour intensive.
“The problem is not that SA cannot create jobs, but that we cannot create jobs fast enough to absorb new entrants to the labour force,” says Odendaal.
Employment lags growth
He points out that employment tends to lag GDP. In a downturn, employers don’t immediately retrench; they use retrenchment only as a last resort. In an upswing, businesses don’t immediately add jobs because they are unsure that the upswing will last and they don’t want to be stuck with unnecessary workers on their payroll.
“This is especially true in SA where labour laws make it difficult to retrench people or hire workers only part time,” says Odendaal.
Koketso Mano, economist at FNB, says that any crisis often has a lasting impact on the economy.
It is clear from the figures that employment losses during the global financial crisis and Covid-19 shocks have been more pronounced than output losses.
“Even as employment growth tracks economic growth, we should expect some permanent losses in in both, with employment suffering the most. In addition, population growth does not necessarily contract during a recession.
“When the economy contracted by 1.5% in 2009, the working-age population grew 1.9%. Between 2010 and 2019, working-age population growth has averaged 1.8% and employment increased 1.4%, but employment losses of 7.9% in 2020 were coupled with 1.5% working-age population growth,” says Mano.
He says that while employment growth does follow GDP growth, most work-seekers still end up unemployed or discouraged. “This reflects structural labour issues, such as a skills mismatch, which causes persistent disequilibrium in the labour market,” says Mano.
In short, the figures show that the population has been growing much faster than the economy for decades, while the nature of economic production has evolved in ways that use less labour.
Labour force compared to number of employed persons
Solutions are difficult
There isn’t an easy solution, says Mano, indicating that SA should get used to an unemployment rate of 25% – leaving one in four would-be workers without an income.
“SA has had periods of robust economic growth, but unemployment levels have remained elevated. Estimates of the natural rate of unemployment are around 25%,” says Mano.
That translates to a ‘normal’ situation where SA will have at least five million unemployed and unemployable people – forever.
Mano lists a few measures that would help to create employment:
- Robust economic growth with the assistance of strong structural reforms,
- Further support for inexperienced workers through contractual and lower-wage employment,
- Reskilling of workers and ensuring that the labour force is better prepared for an evolving global economy,
- Growing and strengthening of the informal market and township economies, enabling them to provide more employment opportunities, and
- Improving the ease of conducting business as well as support for novice entrepreneurs, especially small, medium and micro-sized enterprises (SMMEs), which tend to be labour-intensive.
Odendaal says SA needs faster economic growth, which in turn requires a whole bunch of other things, including investing in infrastructure, reducing red tape, policy certainty and better service delivery.
“But economic growth by itself is not enough, we need growth that absorbs unskilled workers and some sectors are better than others [agriculture, tourism, construction]. There isn’t a single solution, he says.
His list of interventions includes changes to:
- The way we educate young people,
- The way companies hire (you can’t get a job without experience, and you can’t get experience without a job),
- Labour laws that are discouraging employment,
- Urban transport costs that make working expensive and looking for work even more expensive, and
- Policies that tend to encourage capital intensity over labour intensity.
Employers often have a different take on employment. While agreeing that labour laws are too restrictive, they also say that skilled workers are scarce and that SA’s education system is not producing employable workers.
Figures seem to bear this out. Unemployment among younger people is higher than for slightly older persons, while unemployment is much higher among unskilled workers than those with better skills, training or work experience.
Mano points out that the unemployment rate for graduates aged between 15 and 24 is 40%, much higher than the 16% for those aged 25 to 34.
“People have acquired more skills, but issues around experience and skill choice would dictate how valuable these added skills are. The type of skill a student chooses to acquire can also affect their employability, in line with demand for that skill in the labour market.
“Graduates have a higher probability of being employed, but many remain unemployed and it could be because of a lack of experience or limited demand for a particular skill,” says Mano.
Demographics play a role. “For now, these demographics [a young population] exacerbate issues related to experience and how it affects the ability of youth to secure employment.”
Immigration might also play a role, but Odendaal says it is difficult to comment on the effect of immigration without accurate data.
“SA makes it relatively easy for unskilled immigrants, and very difficult for skilled immigrants to work here. More skilled immigration would be a boost to the economy and job creation,” he says.
Yale economist Arthur Okun studied the relationship between a country’s unemployment rate and its economic growth rate in the 1960s, concluding that an economy must grow two percentage points faster per annum than its potential GDP growth to reduce unemployment by one percentage point.
SA’s potential GDP growth rate is often quoted as 3.5%, meaning that unemployment will fall one percentage point for every year that the GDP grows by 5.5%.
If this holds true, a very rough calculation shows that we need 5.5% growth every year for the next 18 years or so to reduce the unemployment rate to the ‘normal’ level of 25% quoted above. We probably need even more growth to account for population growth.