One On One

Q & A – Loane Sharp

South Africa’s official unemployment rate increased by 0.5 percentage points between January and March this year to 27.6 percent compared to the fourth quarter of 2018. The expanded unemployment rate, which essentially includes people who have given up looking for work, increased by one percentage point from 37 percent at the end of last year to 38 percent in the first three months of this year.
The Weekly’s Martin Makoni asked Labour Economist Loane Sharp why the country’s employment prospects continue to deteriorate and what could be done to address it. Makoni also asked Sharp if the employment gains recorded in some sectors could be of any significance to the country’s employment hunger. Excerpts:

Statistics South Africa (Stats SA) says the country’s unemployment rate now sits at 27.6 percent and that officially, there are 6.2 million unemployed people in the country, what would you attribute this latest increase to?
The overwhelming cause of unemployment over the last few years is the poor state of growth in the economy. When the economy grows between three and four percent, for nine months or more, employment starts to pick up. So, the problem of joblessness is mainly a problem of a lack of growth. I know people talk about the failing education system, the cost of labour and other things, but the only way you can get rising employment and rising wages at the same time, is through robust economic growth. There has been very little grown in the economy in the last decade. And unfortunately, I can’t see where the growth will be coming from.

Are you therefore suggesting that despite efforts pronounced by government to create jobs, unemployment is likely to remain high?
Business growth leads to investment in capital equipment and it leads to investment in human resources. So, business expansion is really the goal to drive employment up. Just an interesting point on the cost of labour, often people make the claim that wages are not what drives employment, and that for business, there are many other factors that drive employment, and that’s true.
The national treasury released some figures recently to show how successful employment incentives have been. This is what was previously known as the youth wage subsidy. If you take the number of people who have applied for these inventive and the amount that treasury lost in tax incentives, it turns out that for just R300 per employee per month, this incentive created over a million jobs, which is extraordinary. It means that if we reduce the cost of labour by as little as R300 a month per employee, we would create a million jobs because that’s the value of the tax incentive per employee. Yes, the economy is sensitive to wages but this could be very important to the future of employment in the country.

So, given such a potentially positive scenario, why are we still having lack of growth, in terms of jobs and why are wages, especially for young people, not responding to market signals?
Well, most young people today have very unrealistic expectations about what wages they could earn. A lot of that, I think, is fuelled by very generous packs and salaries in the public sector. If young people are not earning R20 000 a month from the onset in the formal sector, they are not interested in the work. They are going to look out for something new, they jump jobs very quickly. The days of building your CV and building your reputation and work experience seem to be over for them. And I think a big problem there is that, if you think employers can be induced by R300 a month per employee to create a million jobs, you can imagine what young people’s wage expectations are doing to reduce their employment prospects. But ultimately, the problem with unemployment is lack of growth.

There have been proposals in political circles that the SA Reserve Bank should broaden its mandate to include employment creation, how important is that and how practical is it?
There is no question that the reserve bank has been hostile to the economy over the last decade. I think there were valid political reasons for that. We hope the ongoing commissions of inquiry and other investigations will be able to uncover what went wrong and suggest appropriate remedial measures. But at the same time, I think our interest rates in South Africa are appropriate for a booming economy where the demand for capital is high, where interest rates rise because of the demand for capital. But, what’s happening instead, is that the reserve bank has this ‘tighten your belts’ mentality. I would say interest rates are probably two percentage points higher than they should be. I don’t know… but the rest of the world seems to understand that when the economy weakens, you reduce interest rates. When the economy strengthens, you increase interest rates, but not here. In South Africa, we have got our own philosophy at the reserve bank. We don’t learn anything from the rest of the world.

I think the best that the reserve bank has been doing lately is to keep the rates unchanged, have you tried to understand the philosophy behind this, or could it be worried that there will be too much money available on the market?
I think in the reserve bank and probably in the treasury as well, there is an accepted idea that what is causing the economy to grow slowly, is not in their control. And there is some merit to that… the poor state of public infrastructure, the poor state of public education… and all the other things that cause the private sector to be reluctant to invest. I think the reserve bank has an accepted idea that they cannot just cause growth by dropping the interest rates, but I think that’s wrong. A supportive monetary policy is needed, not only economically to stimulate growth, but also politically to stimulate job creation. The country needs to tackle the root issues of unemployment. The economy needs to grow so that more people can be employed commensurate to that. We need real and productive jobs. Government alone, cannot do that. At Eskom, for example, since 2007, the wage bill has increased by 250 percent and the workforce has increased by 50 percent. The average wage at Eskom now is well over R600 000 per year. We have a sprawling bureaucracy and if it were delivering positive outcomes, we could at least accept some of that but we are paying more and more wages to civil servant and they really are doing less and less. Many of Eskom’s shifts were recently reduced. Eskom used to operate on a shift and standby system overnight, almost like an emergency service. Then the shifts would stop at 10pm and eventually 8pm. So, Eskom is doing less and less yet they are getting paid more and more. Unfortunately, I can’t see our growth prospects picking up.

But isn’t it only logical for the reserve bank to reduce interest rates so that there’s more appetite from the market to borrow, and by doing so, businesses expand and employ more people, thereby allowing treasury to collect more revenue from both businesses and individuals, allowing it to implement more infrastructure projects?
You know small businesses are an enormous part of the economy and most importantly, they are a big part of employment. Over 60 percent of employment happens through companies employing less than 50 people. We get mesmerised by JSE listed companies but combined, they only employ about 1.2 million people out of a formal sector workforce of well over 12 million people. So, we do have this problem… the number of small businesses has dropped since 2007 by 440 000. You can just imagine the difficulties that those businesses have faced, and with it, the employment of many millions of people. So, I think the reserve bank has got stuck in a rut where they are more concerned about the banking system. The banks have played it beautifully. They have essentially captured the reserve bank and reserve bank policy. We don’t really have any new players in the banking system except for Capitec. At one point we had the African Bank, and I know a lot was made about their difficulties, but a lot of that had to do with the weakness in mining. They lent a lot of money to mining employees and when mining weakened, that business collapsed. But we don’t have a vibrant banking system and the reserve bank is not interested in issuing serious new licences. I like to see a lot more competition in the banking system. The reserve bank has been captured by the banks and the reserve bank policies are dictated by what is favourable to the financial system and not what’s favourable to the economy.

But why the particular focus on the financial sector, why not look at other sectors, like agriculture?
You know, this is where it’s difficult to argue with the reserve bank because their instrument is money creation and determining very short-term interest rates. For the most part, they can’t really effect anything else. Interest rates in the bond market are affected by confidence and the level of government borrowing. Conditions in agriculture and mining are much more dependent on international prices of commodities like wheat, beef prices as well as gold and platinum prices. So, I suppose the reserve bank has a point… what can they do to influence those things? But I suppose they have become too cute with that argument. But ideally, when the economy weakens, you reduce the interest rates. But here we are in a situation where the economy has been flat on its back, at least since 2014, employment has been a problem for at least a decade and we find ourselves in a situation of begging the reserve bank not to raise interest rates. It’s unheard of. It’s not the best practice.

The transport sector gained about 59 000 jobs in the last quarter, how significant is this in terms of that sector’s contribution to the national economy?
The transport industry is extraordinarily important. You know, one of the very positive feature about the South African private sector in general is that as various public sector institutions fail, private sector bodies take up the opportunity to provide an efficient service at a reasonable cost. For example, private security emerged in response to the weakening of the police service. There are now 900 000 private security guards on the beat while there are just over 300 000 policemen and women on the beat. Private alternatives have also emerged with the collapse of public hospitals and clinics as well as schools. These are low fee charging private institutions. So, in all these cases, the private sector has turned to be very vibrant and having a positive effect on the failing services. Transport is the same. More and more commuters take private transport as opposed to government bus services. We have a very vibrant mini-bus taxi industry and I know a lot of people complain about the quality of driving and all that, but that’s irrelevant. They transport at least four million workers and consumers to their places of work and shopping and every day. That’s a wonderful service. Transport is very important. If you think about it… the economy manufactures goods and services. It also imports the goods and services not produced locally and those goods have to be distributed to people. Transport is highly connected to the retail sector and many other industries.

What do you think needs to be done for the country to start seeing growth and unemployment figures coming down?
I would like to see the reserve bank reducing interest rates by at least 25 basis points every three months over the next two years. I also think that we need to get a grip on the public sector because its wage bill is exploding. Civil servants are doing less and less… I think the quality of management in the civil service needs urgent attention. Corruption should be checked and stopped. The civil service is consuming a vast proportion of the government’s budget. A lot of government services are bought from outside companies, so if you strip out what government buys from outside, much of which is wages anyway, nearly 90 percent of government’s contribution to the economy is consumed by civil servants’ wages, 88.9 percent. We also need to have a reprioritisation programmer for the country so that different sectors get requisite support.