Vicious Cycles

There has been much talk recently about the damaging long-term impact on employment and economic potential of prolonged cyclical unemployment. South Africa doesn’t have as much a cyclical unemployment problem as it does a structural unemployment problem, but there are some common worries.

Long-term cyclical unemployment damages thee commit prospects through the stagnation of skills amongst the unemployed, the interruption of normal career progress for new school and university leavers, and through reduced investment in capital since there is so little pressure from tight labour markets to push up wages and motivate for increased investment in capital.

This means that the growth in potential GDP slows down, lowering average living standards even if the economy eventually returns to full employment.

The tragic turn if this story is when we relate it to long term structural unemployment (a mismatch of skills available and required and additional market failures that mean wages can’t automatically adjust downwards to increase the demand for the over supplied skills).

Fundamentally broken education over decades provides the oversupply of unskilled labour in South Africa. Minimum wages, labour inflexibility, large distances between places of work and homes and expensive transport options amongst others give rise to the structural unemployment in South Africa and the inability of wages to decline to the level required to mop up unskilled labour. Sadly, shortages and high prices (i.e. wages) of skilled labour through emigration also serves to reduce demand for unskilled labour.

These unskilled and unemployed persons gain no or little workplace experience. They rapidly become unemployable, permanently unemployable. Eventually they will fall out of the traditional definition of unemployment rates since they will become discouraged job-seekers and stop looking for work. Some of the other problems facing South Africa, such as crime, are at least partly intertwined with hopelessness and unemployment.

The boom in economic growth in the US after WWII is a product of many things, but one of these is the increase in the labour force participation rate as women increasingly left the home and worked, had careers and contributed more directly to the economy. In South Africa, the labour force participation rate is too low because of exactly the same reasons as unemployment is high. These discouraged workers are lost to the economy, placing our economic potential way below what iSight have been.

Structural unemployment begets structural unemployment and reduced labour force participation. Income inequality begets social immobility and more income inequality as totally deficient public schooling for those with the least means sentences children of poor families to near-lotto chances of breaking free.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.