Labour market reform can lessen the sting of graduate unemployment in South Africa.

 By: Norah Hashim Msuya

Graduate unemployment has increasingly been the topic of research interest as it grows in many counties. In many such contexts, the massification of higher education and the global economic recession of the late 2000s explains the challenge. The situation differs in South Africa. Graduate unemployment rates are low owing to the high demand for skilled labour. However, certain groups of graduates continue to struggle to find employment. South Africa’s employment problem is primarily structural, reflecting a disparity between existing labour supply and demand at prevailing market wages. Although it has fluctuated over time, South Africa’s unemployment rate never fell below twenty per cent during the last two decades. It even slowly rose to about thirty per cent, one of the highest levels in the world. This is the indicator that very high unemployment is structural. The Covid-19 crisis has hit the labour market hard, also in SA fostering massive cyclical underemployment.

On the supply side, low education and entrepreneurship tend to reduce the employability of job seekers. Yet high commuting costs raise reservation wages which is the minimum wage levels above which job seekers would be willing to take up a job offer. On the demand side, labour market institutions such as wage bargaining arrangements further raise wages above levels that would be needed to clear the labour market. These forces can be traced back to Apartheid.

It is evidenced that Apartheid directly contributed to low education levels among of a large fraction of the working-age population and the geographical remoteness of job seekers from job centres. It also indirectly led to a corrective set of institutions and regulations, such as collective bargaining arrangements and job protection, that emphasize formal arbitration and legal procedures over more informal social dialogue and conflict resolution, with adverse effects on employment and broader economic efficiency. Similarly, the suppression of formal black entrepreneurship under Apartheid partly accounts for the persistent negative perception of the informal economy among the population. In many other emerging economies, informality provides an important employment buffer, albeit at a productivity cost.

Labour market institutions’ reformation

A bold strategy to reform labour market institutions is needed to tackle the root causes of extreme structural unemployment in South Africa. To raise graduate employment and reduce inequality, labour market institutions need to function more smoothly with a focus on strengthening coordination among social partners, accommodating firm heterogeneity and reducing uncertainty. This requires reforms in collective bargaining and employment protection legislation, as well as careful minimum wage setting.

Collective bargaining

It is established that South Africa’s collective bargaining system lacks some of the key ingredients that have underpinned the success of sector-level bargaining in some other advanced countries. These include strong coordination between different sectors, high trust between partners, representative bargaining parties and a dose of firm-level flexibility. International experience suggests that to achieve higher and more stable employment, South Africa should either build these demanding ingredients into its sector-level bargaining system or, alternatively, decentralize bargaining at the firm level.

Wage bargaining coordination could be strengthened by adopting a norm that facilitates negotiation and having the government highlight the employment cost of excessive wage growth more prominently in the process. Frequent negotiations could also improve and gradually foster trust between partners, which would be an essential ingredient for greater coordination to pay off.

The current system could be improved in several other ways. The representativeness of bargaining councils could be strengthened by setting and enforcing clear quantitative criteria for whether they are sufficiently representative. Likewise, clear criteria for administrative extensions of collective agreements, such as a requirement that signatory employers’ organizations represent at least the majority of the total number of employers, would help, and in any event the Minister could retain the ability to reject the extension if not deemed in the economy’s interest.

Minimum wage setting.

Minimum wage setting should carefully balance reducing in-work poverty and enhancing the job prospects of disadvantaged groups to reducing poverty and income inequality. South Africa’s minimum-to-median wage ratio is high in international comparison. Over the medium term, as fiscal space is restored, one way to meet both employment and in-work poverty objectives could be to introduce in-work tax credits targeted at low incomes in exchange for minimum wage moderation. Firm-level flexibility is also crucial. Simply introducing flexible opening clauses that enable individual firms to adjust wages and hours worked when facing hardship could speed up the return to full employment in the wake of shocks such as Covid-19 and cut overall structural unemployment by a minimum of two percentage points. The recently introduced minimum wage will also significantly shape wage setting in South Africa, although the magnitude of this impact is still unclear and will vary across industries.

Effective enforcement of Employment protection legislation

Employment protection legislation provides essential legal protections against discrimination, but the obstacles it puts to economic layoffs should be kept moderate, simple and efficiently enforced. Employment protection legislation enforcement is burdensome and slow, and the outcome of dispute resolution processes can vary widely, creating undue uncertainty for employers and employees. Reform should focus on reducing caseloads, shortening further dispute resolution procedures, and strengthening the predictability of settlements. Streamlining Employment protection legislation enforcement would not only support productivity and income per capita but also reduce labour market dualism; employers could become less hesitant to offer regular jobs and rely less on temporary contracts, including temporary employment services. To minimize risks that easier Employment protection legislation might amplify layoffs in the short term, it could be enacted now with a provision that it will come into force only later when economic conditions are stronger or, alternatively, be grandfathered, that is, new rules and streamlined procedures would apply only to new contracts. Delayed implementation or grandfathering may also make it easier to pass Employment protection legislation reform in the first place.

Increase returns to work for job seekers.

The refining of the functioning of crucial labour market institutions should come hand in hand with reforms that increase returns to work for job seekers. These could remain too low for most job seekers to move into employment even with sound labour market institutions, muting the gains from reforming the latter. Boosting returns for work and jobs requires a combination of pro-competition product market reforms, particularly in transport, more vital entrepreneurship, including through improved access to credit for small and medium enterprises, enhanced education and apprenticeship schemes, and some “activation” of social benefit recipients. Boosting returns to work and employment requires a combination of pro-competition product market reforms—particularly in transport, stronger entrepreneurship, including through improved access to credit for small and medium enterprises, enhanced education and apprenticeship schemes, and some “activation” of social benefit recipients.

Many of these reforms will help disproportionately disadvantaged groups in the labour market, notably youth graduates. Empirical analysis using cross-country individual-level data done by International Monetary Fund in 2021 finds a very strong correlation between youth and adult employment rates, suggesting that a broad reform agenda to help the latter will disproportionately benefit the former more than measures that would be specifically targeted to youth. In particular, there is evidence that keeping minimum wages and Employment protection legislation moderate, and strengthening product market competition, disproportionately benefit youth graduates. Some consideration could also be given to introducing sub-minimum wages for youth in some other countries. Lastly, strengthening legal protection for women could help reduce youth gender gaps in labour market integration at a time when they are rising.

South Africa’s meagre graduate employment rate reflects low labour force participation and high structural unemployment. Very high unemployment, which was already on the rise before COVID-19, partly accounts for low involvement by discouraging job search.

Dr. Norah Hashim Msuya is an academician and researcher. She writes in her personal capacity.