South Africa should have some lessons to teach here. We have enough experience to expect some insights. Sadly, I’m not sure we’ve done much except become accustomed to it.

Long-term unemployed – one definition is those who have been unemployed for longer than 27 weeks – increasingly find themselves unemployable with stale skills, stigma and demotivation driving them out of the labour force.

A Brookings Institute paper talks to the greater problem that even on returning to work, the long-term unemployed often find themselves unemployed again.

only 11 percent of those who were long-term unemployed in a given month returned to steady, full-time employment a year later.

The paper and related videos and infographics are worth a read.

Another telling statistic is, that for a given month (between 2008 and 2012), of those who were “long term unemployed” a third were not considered part of the labour force 15 months late. They’d stopped actively looking for work. Barely more than a third work employed and many of these didn’t have regular, full time work.

Meanwhile, short term unemployment rates in the US have been falling as the steady jobs created figures trickle in month after month.  Short term unemployment at 4.0% is actually lower than average. This relatively low short-term unemployment rates mean that at some point, wages will likely increase adding to inflationary pressures (a way off still, but it will come modestly eventually) which just increases the cost of living for those long-term unemployed who still don’t have work.

If you’re South African, this should sound horribly familiar. Even with our idling economy, those unemployed with skills and recent employment will probably find a job fairly soon. There are plenty of areas where filling positions is hard. We have upward pressure on wages across the board for skilled, semi-skilled and even unskilled workers. A combination of imported inflation, pressures and intentions to decrease wage gaps, powerful unions and restrictive labour laws mean that the long-term unemployed are left well by the wayside even while wages tick higher.

In the US, long-term unemployment rates are coming down but are well above their long-term averages. Part of this decrease also reflects exits from the labour force as unemployed stop looking for work. The graph above shows the scale of the problem in Greece and Spain and the fairly remarkable recovery for Germany.

From the Brookings paper by Alan B. Krueger, Judd Cramer, and David Cho of Princeton University:

Past research has found that the longer a worker is unemployed, the less time they spend searching for a job, the fewer job applications they submit, and the less likely they are to be called in for an interview for the jobs to which they do apply.

Again, this perfectly describes a South African between the ages of 18 and 25 without matric or even with matric and no further education struggling to find work.  Too many of these are being supported by parents and grand-parents.

The situation in the US is similar – those with less than a “college degree” are far more likely to be unemployed and far more likely to be long-term unemployed. Interestingly though, those aged 16-34 are more likely to be short-term rather than long-term unemployed, whereas for older ages the reverse is true.

So we’re back to familiar ground.  Education drives job opportunities. Youth without skills struggle to find work, become long term unemployed and steadily become less employable, less likely to find regular work. Let’s just hope our “austerity budget” recognises the critical importance of educations, skills-training and youth employment projects before it sets us further back on our two-decade journey to economic decrepitude.

European five year inflation expectations

It really does seem that UK / US policies are, more slowly than necessary, coming right and the economies are slowly shrugging off the GFC and are moving forwards.  The rest of Europe is not.

The problem is that high schools are failing learners and many accounting students start out with significant literacy and numerical weaknesses in their learning.

Now, as it turns out, I’m not a supporter of increasing the required length of study because some students (even, perhaps, a majority) need more time to complete the work.  I see no reason to enforce an arbitrarily longer study period on students who are perfectly capable of making it in the current and long-standing term of the programme just because some students are entering with inadequate preparation.

I’m not oblivious to the challenges of education in South Africa. I’ve blogged regularly on how education shortcomings are the number one cause of economic challenges and unemployment in South Africa. I’m also not saying that we should simply raise entry requirements as that would exclude many students with the potential to be successful CAs because of imperfect high school level preparation.

What I suggest is an optional (at the choice of students or the university) post matrix, pre-CA year to cement the basics.

The nature of this course would be that the majority of candidates electing or being required to attend this extra year would be previously disadvantaged. I also see it as a perfect opportunity to make tuition cost for this pre-CA year count fully towards cost in the first year of the BComm or BBusSci course should the student meet the requirements. Thus, there is no free year of university grade education for all and sundry, but rather for those who benefit from the programme and successfully enter the mainstream CA stream studies their will be limited financial penalties.

In some ways, this subsidy could potentially save the universities and National Treasury some money – better pass rates in later years should shorten the amount of time to graduate, reducing other university and government subsidy costs.  I haven’t worked the numbers, but it is an offsetting impact to consider.

I understand that UCT, certainly for actuarial students, has a very successful programme of tweaking the education route for this with poorer preparation. I don’t have the numbers at hand, but the results apparently have been quite staggering.

Of course, SAICA has a somewhat silly response:

Saica’s senior executive for professional development, transformation and growth Chantyl Mulder said the duration to qualify as a chartered accountant (CA) is already seven years and thus lengthening university studies is not viable.

Stating that it isn’t viable doesn’t actually say anything. The same could be said against a seven year study period of the current were six years. The same could be said against the seven to twenty (and beyond for an unlucky few) years of study for actuarial students and medical specialists. As it is, my understanding is that UCT students pursuing their CA career via B.Bus.Sci have a four year undergrad degree (and what a magnificent degree it is too) and then a final year of GDA study before starting a three year articles period.

The recognition that some CAs take longer than seven years could be taken as evidence that some students need longer. Surely it’s better to prepare a robust eight year programme for those very likely to take longer than seven years rather than leave them to the wolves and an eight or nine year struggle with inadequate preparation? Or even if a parallel rather than serial solution to improving the basic skills is the answer, this has nothing to do with seven years being the magical “right” number.

The final worry itching at the back of my head is that we have all accepted the pernicious degradation of matric quality and have therefore already become used to lower entrance requirements at universities, adding pressure to admissions and possible decreasing the average level of learning. This route as only one destination – lower skilled employees, less international competitiveness, lower economic growth and higher unemployment.

There is plenty more to the story than just manufacturing increasing in the US – it also includes an historical perspective on the sources of labour in the textile industry over the last two centuries.

The relevance for me and South Africa is – even with our 40% duties on imported textiles, why are we still shedding jobs? In the US, it’s been a desire for higher quality, more reliable quality, shorter turnaround times, cheaper transport costs and a growing discomfort with safety conditions in Asia.

The higher average incomes in the US also make price less of a overriding factor than in South Africa. The COSATU t shirts that were made in China at least once is a clear reminder of how cost impacts buying decisions above almost all else in big parts of our economy. I don’t know whether the quality of our production and the appreciation for buying locally made products is great enough locally yet. The NY Times article spend several paragraphs talking about the need for strong English and Maths skills. We’re still struggling with our legacy of broken education even while we fail current learners. None of this helps to take advantage of these trends.

Manufacturing growth in the US and other developed markets is also driven by increased automation. Higher real wage are less critical when automation in eras decreasing the amount of labour required. Possibly counterintuitively, this increases the demand for labour in developed countries even while decreasing global demand for labour.

Wages for cut-and-sew jobs, the core of the apparel industry’s remaining work force, have been rising fast — increasing 13.2 percent on an inflation-adjusted basis from 2007 to 2012

If you look at a graph of the share of US GDP that goes to labour compared to capital, it’s been a steady decrease for decades. I can only imagine the same is true in South Africa. The increased use of automation (including new robots that work more interactively with humans in auto plants) may drive this even further.

So is this a story that bodes well for South Africa? We should be a low (lower than the US and Europe anyway) wage producer so developed market manufacturing should hurt our export industry. Given that we import textiles from China, should we maintain hope – against all experience of the last two decades – of regaining a meaningful textile industry? Or do we need to recognize that Africa should be our biggest export area and we should leverage our proximity, both geographical and cultural, and focus on our competitive advantages over the Chinese? Where is our Industrial Policy in any of this?

There is no question that higher pay is better, all else being equal. I expect the overwhelming majority of eyes that have ever glanced at this blog belong to beings that earn more than R4,500 a month.

There is no question that lower income inequality would be more desirable. There is no question that we would be a happier society with fewer people living off very little income.

There is also no question that a higher minimum wage would, all else being equal, lead to an increase in unemployment and therefore quite likely an increase in income inequality and a decrease in the productive capacity of our country, a likely increased tax burden on tax payers and greater social ills.

Let’s look at this a little more clearly. This took me all of a couple of minutes to draw, so I can’t believe Vavi hasn’t seen the same drawing somewhere. (If he disagrees with it, fine, but then he should address the problem head-on and not just ignore the problem.)

The starting position

• The demand for labour is downwards sloping. More labour is demand if it costs less. Theory says, quite sensibly, that companies will add more labour as long as the marginal cost of labour (the cost of hiring another employee) is less than the marginal product of that labour.
• The supply of labour is interesting. Mostly it’s upwards sloping. The higher wages are offered, the more labour will be supplied. (This is true up to a point, a point far away from where we are here.)  The increase in supply comes from two causes.  Firstly, people who are happily not working or under-employed because they value leisure time, because it’s expensive to have someone to look after dependants, because the cost of getting to work is too great, some of those will go to work if the wage offered is higher. Some of this then doesn’t reflect a decrease in unemployment since it reflects an increase in the labour participation rate. However, for some it will definitely reflect the ability to get a job because the search for employment can extend farther from the home. Then, those who are currently working may opt to work 6 days rather than 5 or more or longer shifts. So overall the supply of labour is upwards sloping.
• The supply of labour curve does something interesting at a certain low point. It becomes zero for all values of P (the price of labour of the wage) below a specific point. This is because below a certain wage, the costs of working (including in large part transport) are higher than the wage offered for virtually all labour. Thus, no labour will be supplied. If I were to draw the diagram again I might have made the curve more differentiable, with a gradient starting nearly flat and moving to vertical at full employment to reflect this relationship more accurately. But this one explains the point well enough.
• Where we are now is at Pc and Qc, the current price (wage) and supply of labour. I’m also naively assuming that there is no minimum wage now either (I think another graph is actually needed to show that deadweight loss already.)
• The current problem is twofold.  Pc is viewed as too low by many, and Qc is far below Qf (the full employment level of supply of labour, where the supply of labour should really be vertical…) which is a catastrophic problem.

The first impact

So that’s the starting point, with all the problems clearly identified. Now comes Vavi’s R4,500 minimum wage. We’re presenting this as an increase in the minimum wage from Pc to Pv

• Instantly, this causes the quantity of labour that wants to be supplied to increase to “?”. This is the mystery magical hoped for number that doesn’t exist, because the demand for labour decrease to Qv0.
• At higher wages, the point where the marginal cost of labour is equal to the marginal product of labour comes at a smaller amount of labour. Thus we have a reduction in employment and an increase in the rate of unemployment (possibly also a decrease in the labour participation rate, which is only slightly less bad than an increase in unemployment since we are still losing productive capability in the economy and families are still not getting the income.)

The double whammy

That’s the first negative impact. The second negative impact is that all those newly unemployed people are now consuming less.

• The reduction in income is (Pv-Pc)*Qv0 – (Qc-Qv0)*Pc-0.5*(Pv0-Pc)*(Qc-Qv0) although that last compound term is a clear approximation. The triangle is in fact the deadweight loss to society from the minimum wage since nobody is benefiting from that component any more.
• For a range of assumptions (although not all to be fair) the result will be an overall decrease in income, which will give rise to a decrease in consumption.
• The decrease in consumption will decrease the demand for labour overall, shifting the labour demand curve from 1 to 0. This further decreases the quantity of labour demanded at Pv to Qv1.
• The change from Qc to Qv1 reflects an increase in unemployment and a decrease in the labour participation rate.
• It also means lower GDP per capita, lower tax revenues, more income inequality and more social problems

So well done Vavi. Genius.

What we should be trying to do

• Shift the supply of labour curve downwards by reducing the costs of working, specifically the cost of getting to work (an awful Apartheid legacy)
• Shift the demand for labour upwards (training, skills development, youth wage subsidies, maybe payroll tax credits)
• Maybe, just maybe, decreasing the total cost of employment to employers through very careful, very limited increases in labour market flexibility. But very carefully and very limited.

The problems with our country’s labour force are structural. We need problems that fix the underlying structural problems, not populist and germ-infected band-aids that actually stop the sores from healing.

This story about absenteeism amongst South African teachers goes some way to explaining the problem.

Teachers in our public school system took an average of19 days of sick leave per year. I also blog about the dangers of averages. For every teacher that doesn’t take sick leave (and I’m sure there are many) there are teachers taking more than 19 days of sick leave per year.

What’s interesting here is that not only is this an astonishingly high number, it’s also clearer more than the 10 days per year on average on a rolling 3 year basis that is allowed under the Basic Conditions of Employment Act.  Let’s also not forget that while teachers should probably be paid more in an ideal world, they do also get vastly more annual leave than most already.

I’d also like a four day week every second week thank you.

How exactly are these teachers allowed to take so much sick leave? Well unfortunately the answer is the same as why our education system is in such a sorry state. Poorly trained, poorly motivated teachers without a culture of pride in their work, overly strong unions and no political will to do anything about it.

And now both Capitec and African Bank are reporting worse default experience (respectively through temporary strike-blips or through a cyclical downwards trend) and are pulling back on credit extension.

I think I buy African Bank’s more pessimistic view than Capitec’s “blip from the strike and growth will slow”. The reality is economic growth has been very low for several years and much of the consumption over this period has been through a reinflating credit “bud”.  It’s not at bubble proportions, but when that bud starts slowing in growth the true impact of several years of poor economic and basically non-existent employment growth will be felt.

I still need to update 2013 predictions, but so far I’m not feeling particularly optimistic about being a credit retailer and certainly not enough to justify the still-high PE multiples.

I get randomness. I understand that we don’t know exactly where the UK would be without austerity policies.  We don’t have a control group, there’s no clear comparison. But come on, the result is as predicted by those who said austerity was a bad idea and totally different from what proponents were claiming. Huge double dip recession at an accelerating rate in the UK.

So why isn’t their an admission and about-turn? Because no clear measure of how to measure the success of the policy were ever put into the public space. So now proponents can, and probably will, say how much worse it would have been without austerity.  Nonsense.

All major policy proposals should include an analysis of what the impact is expected to be with and without the policy, reviewed by credible, independent observers.  (Like the CBO in the US.)  Then, when the policies turn out to be rubbish, let’s haul out the predictions and see what was promised.

Madness.

Not at all helpful.

This is the part that really disappointed me:

according to the World Economic Forum’s latest Global Competitiveness Report, which ranks South Africa 133^rd out of 142 countries for the overall quality of its secondary and tertiary education systems, and 138^th out of 142 countries

for the quality of its maths and science education

Felicity goes on to mention that even Chad outperforms us in education.

We can talk for as long as we want as hard as we want, but as long as we don’t recognise that our education system is completely broken and must be fixed as a priority over all other priorities, massive, structural unemployment will be part of South Africa for decades. Everything else we achieve will be overshadowed by poverty, crime and unhappiness.

This is very depressing.