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Only product, labour market reforms will boost SA jobs - Kganyago

Aug 24 2016 19:12
Lameez Omarjee

Johannesburg - Solutions for South Africa’s abnormally high unemployment rate will not come from rising commodity prices, a rebound in global growth or fiscal policies. Instead, product and labour market reforms are needed, said South African Reserve Bank (Sarb) governor Lesetja Kganyago.

Kganyago was speaking at the Annual Labour Law conference at Emperor’s Palace on Wednesday. He explained South Africa is suffering from stagnant economic growth and rising inflation, both of which impact employment rates.

The economy is characterised by high inflation, low growth and unemployment. South Africa can expect to lose jobs going forward, he said. “We need change and constitutional reforms for more space for the monetary policy to work,” he said.

“Policy options are needed to address the problem… price and wage demands are to abide by the inflation target,” he said. High inflation rates lead to high interest rates. Low inflation rates reduce interest rates and enhance competitiveness. It attracts investments and stimulates job creation, which reduces poverty, explained Kganyago.

SA unemployment among world's highest

South Africa’s unemployment rates average at 20%. The only other countries to have such high rates, according to data by the International Monetary Fund, are Spain and Greece. “They suffered intense and prolonged economic crises. Unemployment is expected to decline in the next few years. In South Africa, there is no such improvement.”

Unemployment rates are expected to deteriorate from 25% to 27% in three years’ time. Brazil’s unemployment rate is currently at 10%. “If we could get unemployment in South Africa to 10%, it would be viewed as a tremendous success. There is not much to envy of Brazil’s economy, but I would gladly take their unemployment rate,” he added.

The National Development Plan aims to achieve a 14% unemployment rate by 2030. According to world standards, this is possible, said Kganyago. “To get there, we need to create 11 million jobs.”

In South Africa, the private sector is the main employer, providing 75% of jobs in the workforce. Most of these are in the services sector. With the mining and manufacturing industries both continuing to shed jobs, employment in the private sector must be prioritised.

The public sector employs fewer people, but it has been the main source of job creation over the years, explained Kganyago. “The government wage bill is among the highest in the world. The state pays its few employees comparatively well.” With government freezing jobs, there is a bleak outlook for labour markets.

Introducing reforms

South Africa needs to follow through with implementing reforms, said Kganyago. Product markets pose the most attractive reform opportunities. “South Africa has the highest barriers to entry for new businesses. Reducing barriers will encourage new business creation,” he said. Among other things, the mark-up of products should be reduced to world benchmarks, to make exports attractive.

Also, bringing down utility costs will ensure wide distribution of the benefits of strong growth and employment. “Bringing down the price of electricity will be good for all the millions of people using it, but it will be hard for the producer.” Producers will resort to cost-cutting, which could lead to unemployment to improve efficiencies of operations.

“The beneficiaries of reform programmes are often outsiders, with no bargaining power. They are excluded from the policy discourse.” Government has a special duty to prioritise the interest of people locked out of the economy.

Labour reform requires a three-tiered approach. One market is informal and pays low wages. The other is formal and pays within an intermediate range, while the third tier pays highly skilled employees high wages, explained Kganyago. “Each has challenges.”

The third market has low unemployment rates, but is not healthy and has a high inequality level. More and better education opportunities are needed to open the highly skilled market in South Africa, as well as a better match between what students study and the skills required. Introducing programmes to recruit skilled immigrants will make South Africa more competitive through investing in the domestic knowledge base.

Wage demands create even more unemployment

The other two labour markets do not absorb enough people, said Kganyago. “Excessive wage demands produce higher unemployment.” The agricultural industry shed jobs after the introduction of a minimum wage.

The argument for higher wages is higher dependency ratios, as workers need to support family members. But the real solution to reduce dependency is to create more employment, explained Kganyago.

“We must reconsider the institutions used to negotiate wage prices,” he said. Deals that push up inflation and interest rates, reducing growth and resulting in job losses, must be avoided.

“Labour market discussions in South Africa are emotive and difficult.” Discussions go beyond economics, rather than finding appropriate trade-offs. “It is about fear of the future and the shortage of trust, the exchange stops too soon and at (a) point where insults fly,” he explained. If conversations end there, nothing is solved.

Policy conversations should balance the interests of outsiders and insiders, he said. By improving education and healthcare investment, among other solutions, labour market productivity will improve.

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