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Experience shows if firing is easier, hiring is more likely

WITH barely 40% of adults working, South Africa’s labour market is in deep crisis. Depending on one’s assumptions about population growth and the relationship between economic growth and job creation, getting to the global norm of 60% employment levels could require economic growth of 7% a year to be sustained for a generation. South Africa ImmigrationReforming the labour market is one of the country’s most significant policy challenges. It is also one of the most controversial. Comparing South Africa’s labour-market challenges with those of Brazil, India and Malaysia provides some useful insights. Of the four countries, South Africa’s labour market is the one in which unskilled and inexperienced workers struggle most to gain purchase. This is reflected in the vastly higher levels of unemployment in South Africa relative to the other economies. Last year, South Africa’s unemployment was 26%, Brazil’s was 8% and both India and Malaysia had unemployment rates of 4%. The proportion of South Africa’s adults in the labour market (at 52%) was also lower than India’s (56%), Malaysia’s (60%) and Brazil’s (70%). These divergent labour market outcomes both shape and are shaped by different labour market policies and institutions, which are, in turn, embedded in each country’s history and development. This makes it inadvisable simply to transplant the specifics of policies from one country to another. There are, nevertheless, lessons to be learnt. Brazil and South Africa have economies with similar sectoral compositions, and comparable rates of growth over the past decade. But Brazil has far lower levels of unemployment and has seen a substantial decline in poverty in recent years. Both labour markets are heavily regulated, but a critical difference is that there are no restrictions on Brazilian employers who wish to dismiss workers. The key lesson to draw from Brazil is that you don’t have to fix everything at once. Despite high levels of regulation and taxation, substantial employment has been generated in Brazil by minimising the employer’s risks when taking on new staff. Easy dismissal helps the labour market to perform more efficiently and encourage employment. South Africa and India share a political history in which a national liberation movement, closely allied to organised labour, established comprehensive legal protections for workers on coming to power. In the past decade, India’s economic growth has averaged 8% a year. But this has not been matched by employment growth, particularly in the formal sector, which has barely grown since 1994. More than 90% of Indian workers are in the informal sector, a result, mainly, of extremely complex labour market regulation. The effect of excessive labour market regulation on formal sector job creation in India is an important lesson for South Africa, as is India’s (unhappy) experience of overregulating contract labour. With South Africa’s government moving to limit and even prohibit, the use of contract labour, India’s experience suggests that this is unlikely to work. It is, in any event, clear that nonstandard employment, including temporary employment and employment through labour brokers, is increasingly common around the world. And this trend will not be halted by workers or governments. Malaysia and South Africa looked very similar in the 1980s. At that point, they had similar levels of output per head, used technologies of comparable levels of productivity, and had similar levels of human capital. Both also relied heavily on primary commodities for exports. Today, Malaysia is a development success story that looks very different from South Africa. Malaysia committed itself to a low-cost, export-oriented industrialisation policy, which, among other things, put limits on wages. This approach produced economic growth that was consistently more than 3% a year. It also resulted in large numbers of formal sector jobs. Today, unemployment is only 4%. It is clear that managing labour costs can play an important role in encouraging employers to hire more workers. Millions of South Africans have no work. Improving education and skills development is vital but this will take time. In the meantime, this generation of unemployed deserve better. For South Africa to accelerate employment growth, the country has to reform its labour markets. In doing so, there are important lessons from other developing countries.

  • An excessive regulatory burden on employers hinders the growth of formal sector employment;
  • Excessive labour market regulation encourages growth in subcontracted employment. This is frequently done through labour brokers, resulting in the difficult and unfair situation where people doing the same jobs are paid differently;
  • More generally, heavy regulation increases the size and role of the informal economy at the cost of employment growth in the formal economy. This is clearly undesirable, as informal workers have few if any prospects for growth, training or many of the other benefits of formal employment; and
  • Even with high levels of regulation and taxation, as in Brazil, employment growth can be generated when it is "derisked", for example by allowing easy dismissal.
Addressing these issues requires substantial reform of South Africa’s labour market. Brazil, India and Malaysia show that labour market reform is difficult. While each of these countries has attempted reform, this has proved elusive. In the absence of determined and visionary leadership, it is hard to strike the deals required to manage the "insiders" who fear the loss of protection and privileges of existing regulations. In many ways, labour market institutions are a critical part of the social contract, shaping the way they think about labour markets and their reform. Nonetheless, some countries, such as Germany, have in the past decade achieved significant labour market reform. By driving up wages and making it difficult and costly to dismiss unsuitable workers, South Africa’s labour market regime has helped put the economy on an increasingly skill-and capital-intensive growth path. South Africa needs to find ways to make it easier for employers to hire unskilled and inexperienced workers. This requires making dismissal of unsuitable or redundant workers easier, ensuring that pay increases are in line with productivity growth, and creating a more enabling environment for business, especially labour-intensive small and medium-sized firms. The imperative to reform South Africa’s labour market derives from our very high unemployment, our very low levels of new firm creation and relatively low levels of investment (foreign and domestic). We are not like Brazil (which has absorbed millions into its urban economy), India (where economic growth is rapid), or Malaysia (where employment levels are high). The differences in South Africa’s circumstances make labour market reform more urgent here than in India, Brazil and Malaysia. It is no exaggeration to say South Africa’s future depends on its ability to make the necessary changes. It is essential that the country acts decisively on labour market reform. Leadership from the government is urgently required. This will entail defining what is in the national interest and dealing with special interests that prevent progress. Source: http://www.bdlive.co.za/opinion/2013/06/24/experience-shows-if-firing-is-easier-hiring-is-more-likely

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