Mike Schussler has crunched some numbers and suggests, very strongly, that SA unskilled labour is vastly overpaid compared to international peers. My recent posts about the cause of structural unemployment in SA have mentioned the supply and demand imbalance of unskilled labour and the downwards rigidity of wages. If Schussler is right and the current wage levels are far too high to be internationally competitive then we have an even larger, even longer term problem to solve.

What Schussler doesn’t look at, which would be telling, is whether there are differences in the costs incurred by workers in SA and, to use an example that he does, India.  Comparing price levels is one thing, but if a typical Indian worker lives 500m from his or her place of work and a typical South African worker lives 15km from his or her place of work, then that is an infrastructure problem that must also be solved before we can be internationally competitive.

Just not in the way some readers want to think. Check out the shocking graph of government employment in the middle of the worst period of financial performance since the Great Depression.

(The sharp spike has nothing to do with stimulus an everything to do with temporary census employment.)

The US Government is contributing massively to US unemployment

[I've been asked to include a graph on total expenditure rather than just employment. Ok then.]

Same story - real (inflation adjusted) US Government spending is down.

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.