There isn’t one labour market

I’ve heard it said (of the US) that there is no national property market, but rather than local property markets are relatively independent of each other. I guess this was more true before 2007 than it is today.

Property in one area is a weak substitute for another property in a nearby area, and an awful substitute for property far away.  Supply and demand is determined at least partially independently in each area.

I’m suggesting that in South Africa, we don’t have a single labour market. We have several different labour markets, with fairly independent supply and demand for labour in each, and with each labour in each market being a limited subtitute for labour in neighbourhood markets and with limited portability between markets.

Supply and Demand for Labour
Supply and Demand for Labour (2007 Census data)

Unskilled labour suffers massive unemployment and low wages for the employed

The supply of labour in the unskilled labour market is huge, while the demand for labour in that market is low. Supply is renewed through simple population growth in the absence of good education and skills training. Demand decreases as technology provides more efficient ways of performing the tasks. You can view Chinese competition as either an increase in the supply of cheap labour or a decrease in the demand for South African cheap labour.

Skilled labour has little unemployment and high incomes

The supply of labour in the highly skilled labour market is very limited and the demand very high. Emigration of educated and skilled citizens reduces supply and immigration of skills is limited. Efficiency gains of high technology most help skilled workers to be more productive, increasing the profit from the products and services they offer, thus further increasing demand.

What the table tells us

  1. A matric/national certification without university exemption subjects and marks is poor preparation for employment.  18% of the labour force has it and a third of them are unemployed. In 2007, this group represented over a million unemployed South Africans.
  2. Worse than completing a dubious-value national certificate is leaving school without one. Nearly half (44%) of those with Standard 9 / Grade 11 and wanting to work are employed.
  3. Only 50% of those with Standard 9 / Grade 11 are even part of the labour force. This jumps immediately to 68% for those entering Grade 12 and to 77% for those completing high school without university exemption, suggesting that it’s not only a question of leaving school to live a life of leisure, but more likely a significant proportion of those out of the labour force are discouraged workers, amplifying the real employment problem with this education level. Curiously, the labour force participation rate for those completing Grade 12 and obtaining a university exemption is only 66%.

I’m not for one minute suggesting that if everyone had a masters degree our employment problems would disappear. There are many moving parts. However, any discussion of unemployment or wages by income or race or gender that doesn’t first and foremost consider education is worth ignoring. For that matter, any comparison against other countries that doesn’t at least talk to differences in education levels is also best quietly ignored.

Welcome to structural unemployment

A key feature of structural unemployment is that unemployment isn’t universal. Pockets experience close to full employment and inflationary wages while other groups have high unemployment. South Africa couldn’t be a better example.

Calling a patch a patch

Any economic policy that doesn’t recognise that until education is fixed, we will suffer high and persistent unemployment is dishonest or ignorant. Anything we do in the interim to magically “create jobs” can only hope to be a patch to lift incomes and dignity until education can decrease the supply of unskilled labour and genuinely grow our economy through an economically productive population.

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.

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