Knowledge. The final frontier

by Mar 22, 2013Africa

Some suggest that unemployment rates are high because of laziness or a dependency effect created by social grants, but numerous studies have failed to find empirical support for these claims. The one drum of this kind that continues to be beaten is the claim that unemployment is high because wages are too high. On the surface this seems an eminently sensible theory and at extremes it must be true. But unfortunately, that is about as far as ‘Economics 101’ gets you.

Along with our education system and ingrained violence, there is little disagreement that unemployment and its many consequences are arguably the greatest societal problem in South Africa today. Many experts, mostly economists, have been consulted on how to remedy the problem with little in the way of convincing proposals or success in implementing those which have been adopted. Does anyone remember how Thabo Mbeki was assured foreign direct investment would reduce unemployment, through rapid economic growth, once tariffs were reduced and capital outflow regulations lifted? So much for that idea.

While we should be careful of constantly resorting to ‘South African exceptionalism’ there is a sense in which our unemployment problem is really unique. One regularly neglected reason for this is the powerful effect of colonialism and Apartheid in destroying sustainable livelihoods. You cannot just remove people from agricultural livelihoods and dump them in new locations far from the necessary resources, including arable land, and expect that eventually they will somehow recreate what they once had. Similarly, residential urban areas – if one can call them that – for black South Africans were designed myopically to merely be sources of unskilled labour for industries of the time and the education system was designed to prevent the achievement of a standard of education that is required for what we now know is the crucial flexibility required from workers in rapidly evolving modern economies. The sources of structural unemployment are entirely traceable to our history.

Some have nevertheless suggested that unemployment rates are high because of laziness or a dependency effect created by social grants, but numerous studies have failed to find empirical support for these claims. The one drum of this kind that continues to be beaten is the claim that unemployment is high because wages are too high. On the surface this seems an eminently sensible theory and we know that at extremes it must be true: set (and enforce) the minimum wage for farm labourers at R50,000 per month and you can be sure that there will be no jobs left. Unfortunately, that is about as far as ‘Economics 101’ gets you. For smaller increases in the minimum wage, there are various competing models of the likely effect on employment; some predict decreases, some no change and some even increases in employment depending on various parameters. The argument, regularly repeated by business-sponsored libertarians, that a minimum wage inherently benefits the employed at the expense of the unemployed is therefore not necessarily true either in theory or based on empirical evidence.

In the light of the Free Market Foundation(FMF)’s recently launched Constitutional Court challenge to the extension of collective bargaining agreements there is, however, more that needs to be said. Even if it were true that a higher wage caused some increase in unemployment, potential workers may still be better off on average under a minimum wage regime if the benefits of higher wages exceed the reduced probability of employment. Naturally, it may be possible to find some who, on finding themselves unemployed, want to change their support for the policy after the fact but that does not in itself show that the policy is bad for these individuals in the aggregate. I am also unaware of any mass support for removing the minimum wage even among the unemployed.

This directs us to a critical flaw in the rhetoric of the Free Market Foundation (FMF) and its supporters: freedom of choice can sometimes involve choosing to place restrictions on your own behaviour and opportunities. While this point has been neglected at various times in academic economics, it is now widely recognised and the subject of a good deal of research in the area of behavioural economics. This kind of role is played not only by unions but also by democratically elected governments. We vote for a state that enforces the law even though, such as when jumping a red traffic light, we personally might benefit sometimes from the absence of such enforcement.

The extreme libertarian view of liberty that would remove minimum wages would therefore in fact deprive workers and potential workers of the liberty to constrain their choices in their own long-term (wage bargaining) interests.

A minimum wage can act as a legislated commitment device in wage bargaining, thereby securing a greater proportion of the surplus for workers and less profit for business owners. No wonder many businesses oppose the minimum wage. It is also revealing that the FMF has failed to state and substantiate what is an adequate wage for workers to have a decent standard of living. Even Friedrich Hayek recognised, in his work The Road to Serfdom – not long before the kind of discussion the FMF would quote on how unemployment can be caused by policies in favour of insiders – that a certain minimum standard of living should be guaranteed to all and seems to imply that this should be a prerequisite for competition in the labour market. For some reason this caveat appears to have been conveniently ignored by some of his modern disciples who oppose labour protection, taxation and social safety nets, thereby appearing to want to take our low-skilled workers down a different road to serfdom.

How does the minimum wage example extend to the FMF’s claims relating to collective bargaining? First, let me say that having now read both the court documents and the press releases I am disturbed by how little the grand press statements relate to the legal substance of the court case; this already suggests disingenuous behaviour. Second, and since the FMF has itself has not refrained from making accusatory statements about other social actors (unions and government), let me be blunt and say that I believe the FMF to be a fundamentally dishonest broker in what should be a sincere process of trying to find what actions can help to reduce unemployment. While ostensibly concerned with the pursuit of free market principles, I have not seen the FMF refuse or return funding from corporations engaged in anti-competitive behaviour, or even release press statements congratulating the Competition Commission on its successes. It rabidly pursues competition at the low-skilled end of the labour market but seemingly nowhere else. It is hard to believe that this is coincidental given who its funders and members are: most of the FMF’s funding appears to come from big business.

While in principle we should be able to focus on the substance of arguments not the organisations that make them, that only holds true if the organisations in question are honest about their motives. As an example of the double standard, the FMF takes money from Discovery Health, who secure a good portion of their business by getting entire organisations – such as my own – to force all employees to be on one of their medical schemes. Intellectually honest libertarians would be at least as aggressive in confronting such seemingly anti-competitive producer behaviour, but the FMF does not seem to care about such ‘liberty infringing’ activities by its funders. FMF Executive Director Leon Louw has said recently (in a piece that is at once self-pitying and self-aggrandising, entitled ‘Vilified for trying to give the jobless a choice’) that “the FMF… has no self-interest in the outcome of the case”. That is not true, however, since he and others are using the case to argue that “the best thing government can do is to adopt free-market policies that maximise competition for labour”.

To the extent that such policies would put workers in a wage race to the bottom, all businesses, including those run by FMF members or that sponsor the FMF, will benefit (in the short-term at least until the dire social consequences become apparent) from lower labour costs and higher profits. Indeed, that is the only thing we can be sure of from a policy perspective: lower labour costs will lead to higher short-run profits. Whether those lower costs would lead to higher employment is not at all assured by some ‘economic law’, but is subject to speculation even among economists. Since some of the FMF’s academic advisors work for a consultancy that promises to reduce its clients labour costs through various services including ‘thought leadership’ – a potential conflict of interest I cannot find declared anywhere in the court documents – this is not a trivial point. One of those thought leader pieces calls for trade unions – organisations formed through workers’ right to association – to be ‘crushed’ and ‘smashed’; so much for impartial experts.

The FMF’s duplicity is even more angering because – unable to argue in court their true opposition to labour protections in general – they are jumping on the bandwagon of other non-ideologically compromised researchers who have been producing research on the issue of collective bargaining extensions for over a decade. It was therefore somewhat ironic that the South African Clothing and Textiles Workers Union chose to protest at the University of Cape Town because of public statements by these academics, rather than protest the disingenuous claims of the FMF. The subtleties of that research on collective bargaining arguments have already been dissected in a series of articles and letter exchanges in Business Day and summarised in a good Daily Maverick article by Greg Nicolson, but some points bear repeating. As a society our basic concern with the wage extension process is if smaller firms are competing with bigger ones for the same market, creating more jobs by relying on lower-, but still adequately-, paid workers and are being forced-out by wage agreements. If small firms are literally using slave labour – some evidence of this is reported in the Newcastle textiles case – we should not weep if they close down. If larger businesses can employ the same number of workers at higher wages for a given level of output – perhaps because of economies of scale – we should also not be concerned. This, then, is a much more subtle point than just arguing that wage agreements always destroy jobs and small firms, or that extension of wage agreements somehow violates civil liberties. While I am not a lawyer, and the court case will be decided on technicalities rather than any of the grand, unrelated public claims of the FMF, it seems to me that these kinds of concerns are an issue for how the legislation is implemented, not its constitutionality per se.

There is one last point I want to make, which was lucidly presented in a Business Day article in 2011 by US-based academic Gillian Hart and remains critically important. Hart noted that in Newcastle: “measured in terms of market exchange rates, wages of female workers in the Newcastle clothing industry were 90% higher than for equivalent work in Taiwanese factories in China. But if one used purchasing-power parity to get a measure of what workers can actually buy with their earnings, Newcastle wages were 30%-40% below those in China”. I have not heard this claim disputed. It matters to the issues above because in a society where price fixing and anticompetitive behaviour is rampant the cost of living will be inflated thereby making the effective, purchasing power value of workers’ wages significantly lower. In that instance, lack of competition in industry – along with government inefficiency no doubt – could be a bigger problem than any rigidities in the labour market. Interestingly, in South Africa there is ample evidence of this, with demonstrated price fixing of bread, milk and other basic goods that make-up a large proportion of the consumption basket of low-paid workers, persistent concerns about excessive banking charges (affecting every aspect of the economy) and recent investigations into the construction sector. And yet, the Free Market Foundation –with sponsorship also from the likes of the FirstRand Foundation (banking), Microsoft (recently fined by the EU for anticompetitive behaviour) and Group Five (implicated in recent investigations) – would appear to have a very limited notion of free competition. Unsurprisingly, to the extent to which the FMF addresses anti-competitive behaviour they actually have the gall to argue that existing efforts are excessive. Indeed, on their website the FMF carry an article arguing that competition law is unconstitutional. Clearly we cannot rely on even an honest ideological position from this institution, never mind a balanced and impartial policy analysis.

If the weakness and duplicity of their economic, moral and political arguments is anything to go by, then I would agree with Pierre De Vos’s recent conclusion that the current court challenge is a quixotic venture. Whatever minimal prospects of success the case might have will be in proportion to the extent that it manages to distance itself from rhetorical statements trying to advance the freedom of workers to be treated like serfs. DM

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