The South African Labour Market - Theory and Practice

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The South African
Labour Market
THEORY & PRACTICE
Fifth revised edition
F RA NS B A R K ER
Van Schaik
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PREFACE
Since the 1980s there have been some very exciting and intellectually stimulating
developments in the field of labour. Sociopolitical occurrences in recent years have,
if anything, brought to the fore the close relationship between developments in the
labour market and progress on the socio-econo-political terrain. The ideological div-
ides in South Africa are especially apparent in the labour market, and these com-
pound the basic conflict between the objectives of protecting basic worker rights on
the one hand, and increasing economic growth on the other. There is obviously less
conflict between these objectives over the long term than in the short term.
During the 1980s and the 1990s the writings of academics and practitioners, and
also the legislature, often concentrated on the first aspect, i.e. protecting basic work-
er rights. However, increasingly people involved in the labour arena have come to
realise that the interaction between economic issues and the labour market is of
critical importance to ensure the success of a “new” South Africa. High unemploy-
ment, skilled labour shortages, a high wage-low productivity economy, the effects of
globalisation, and programmes to address labour market inequalities are all exam-
ples of issues that have the potential to build upon, or to destroy, the new deal
agreed on by politicians.
This book aims to contribute to the current and ongoing critical debate on these
issues. Established subjects such as labour law, union structures and collective bar-
gaining form a lesser but still important part of the subject matter. They are dis-
cussed in the context of their impact on the functioning of the labour market.
The purpose of the book is to provide the general reader with an overview of the
South African labour market, its characteristics and problems, and above all, its
functioning. With the possible exception of a few sections that deal with more com-
plex labour economics theories (referred to as “Deeper insight”), the contents should
be quite easily understood by any person interested in this topic.
In order to make the information accessible, it has not been possible to deal with
the subject matter in great depth. There are inevitable omissions, but the reference
list provides further reading matter on the various issues. To this end, care has been
taken to concentrate on South African source material, though not exclusively.
In some instances the arguments for and against a particular approach are pre-
sented briefly. A specific standpoint has purposely not always been assumed to avoid
a trend prevalent in many quarters these days – taking a superficial view on a very
involved topic, without giving enough opportunity for thorough analysis, debate and
even negotiation.
Non-economists. Non-economists may be disheartened to see some complicated
graphs in parts of this book. Even for economics students not yet completely com-
fortable with graphs, the task of understanding these may seem daunting. But fear
v
not! Non-economics readers can skip the more complicated labour economics sec-
tions (or “Deeper insight”) without it seriously affecting their understanding of the
book.
Nevertheless, understanding the theoretical working of the labour market will
help the reader gain a better understanding of how the labour market as a whole
operates in practice. Therefore, inexperienced economics students should make the
effort to work through the graphs. Students will encounter similar analyses in many
other economics courses and may as well learn of these with regard to the labour
market where basic concepts such as the trade-off between leisure time and work
may very well assume personal application!
Questions and study suggestions for students. At the end of each chapter the book
contains a number of questions and study suggestions for students. These cover the
most important parts of the chapter. No answers are given or even proposed for these
questions as this would simply encourage rote learning rather than a true under-
standing of the nature of the labour market. Only by understanding the dynamics
of the labour market can further developments be anticipated and their implications
grasped. In addition, each lecturer’s approach differs so significantly from the next in
terms of emphasis, detail and theoretical versus practical application that suggested
answers may confuse rather than assist.
Quotations. The sometimes inspiring, sometimes light-hearted and sometimes
tongue-in-the-cheek quotations in the text have been drawn from various sources,
but mainly from Prochnow and Prochnow (1983), James (1983), Braude (1957),
Peter (1977), Rawson and Miner (1986) and Auden and Kronenberger (1962).
Preface to the fifth edition

The labour market and labour policies are in constant flux. As a result it has been
necessary to make fairly substantial changes to ensure that this book is positioned
squarely in the middle of labour debates currently raging in South Africa.
A special chapter is, for instance, dedicated to collective bargaining and the impact
of unions on the labour market. It also covers strike action in South Africa and looks
at the controversy surrounding bargaining councils in the country.
Labour market flexibility has become an important public focal point. The ANC,
South Africa’s ruling political party, has published some important position papers
on this matter and notable international organisations have referred to the flexibility
(or lack thereof) of South Africa’s labour markets. This is part of the broader debate
on ways of increasing productivity. A new chapter has been added to cover these
topics more extensively.
Formal employment is reported to have increased substantially since the advent
of democracy. This book considers the evidence in this regard, among others with
regard to the extent to which employment has increased as a result of higher eco-
nomic growth rates.
The book also deals in more detail with the impact of globalisation on the
labour market and the ways in which other countries have managed the challenges
of globalisation. With regard to South Africa’s embarking on a process of trade
i
A
liberalisation, international and local research on the impact thereof on poverty,
inequalities and unemployment is considered.
Furthermore, affirmative action has become increasingly important in South Afri-
ca, not only because of the Employment Equity Act, but also the Broad-based Black
Economic Empowerment Codes. The experience of Malaysia is most informative.
The final chapter in the book, on social dialogue, has also been expanded to
include a full discussion on corporatism, the debate about Nedlac, and the debate
about codetermination, with Germany being the prime example of a country that
has embarked on this route.
Acknowledgements
Professor Luther Backer, formerly from the Department of Human Resource
Management at the University of Johannesburg, provided the inspiration for the first
edition of the book. I am particularly grateful to him.
In previous editions I expressed my thanks to a number of people for their many
useful comments, their guidance and suggestions for the first edition, without which
this fifth edition would not have been possible. I want to express my appreciation to
the various organisations that have assisted me with data and information, specific-
ally the Bureau of Market Research at Unisa (Prof. Carel van Aardt), the National
Productivity Institute (Dr Jan de Jager) and the Department of Labour. A special
word of gratitude to the personnel of Van Schaik Publishers, who provided a very
professional and enthusiastic service.
To my soulmate, Hanneli, a very warm word of thanks not only for her support,
but also for her active interest and suggestions. In the past she suggested that a full
chapter be devoted to globalisation, and this time round it was her suggestion to add
the “Deeper insight” sections.
Finally, my gratitude to Our Father, who assists with most things.
As always, comments and suggestions will be valued and carefully considered.
Frans Barker
Pretoria
October 2006
vii
In memory of Frans Barker 1953–2012
The National Planning Commission is liberal around their view that employment and edu-
cation drive high levels of poverty and inequality, which is in turn our biggest challenge in
South Africa and ultimately inhibits the economic growth that is so needed. They are also
implicitly realistic about the challenges created because of a highly segmented labour market.
We will not be able to alter South Africa’s growth trajectory if we don’t appreciate and aim
to understand the complexities involved in our country, and the labour market is just one
example. This book seeks to address some of these complexities and be but one voice in an
ongoing debate around these issues. We need more voices and more calls to action. The life
lived by Frans Barker has inspired those around him to raise their voices with gravitas, and
we trust that the legacy of his work will do that as well.
Paul Barker
The late Dr Frans Barker was Chief Operating Officer of the Chamber of Mines. Dr Barker
was initially appointed at the Chamber of Mines as Deputy Labour Relations Adviser in
1995. Prior to that, he was president of the Industrial Relations Association of South Afri-
ca and chairperson of the National Manpower Commission, which preceded the National
Economic Development and Labour Council. During his career, he was a deputy president
of Business Unity South Africa, vice-president of the Economic Society of South Africa, a
commissioner for the Commission for Employment Equity and was also involved in Nedlac
in various roles.
An economist by profession, Dr Barker lectured at a number of universities and was the
author of several publications related to labour issues.
Susan Shabangu, Minister of Mineral Resources at the time of his death in August 2012,
described Dr Barker as
a dedicated colleague, eager to get to a solution yet very calm during hard times. His
contribution to the mining industry will forever continue to guide us as the sector again
faces challenges. His expertise contributed immensely in moving us forward and for that
we will sorely miss him.
viii
CONTENTS
List of abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii

Useful websites. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xix
Glossary of important terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xx
Chapter 1 Introduction
1.1 Why study the labour market?........................................................................ 1
1.2 Unique characteristics of the labour market.................................................... 2
1.3 Why theory with unrealistic assumptions?...................................................... 3
1.4 Important characteristics of the labour market in South Africa ..................... 5
1.5 Structure of the book...................................................................................... 6
Key concepts........................................................................................................... 7
Suggested reading.................................................................................................... 7
Chapter 2 The supply of labour

2.1 Introduction.................................................................................................. 9
2.2 The labour force as the supply of labour....................................................... 10
2.2.1 The South African labour force............................................................ 11
2.3 Labour force participation rate...................................................................... 13
2.3.1 Female LFPR ...................................................................................... 14
2.3.2 Male LFPR.......................................................................................... 16
2.4 Population and population growth................................................................ 16
2.5 Total fertility rate.......................................................................................... 19
2.6 The impact of HIV and Aids.......................................................................... 21
2.6.1 Incidence and causes of HIV and AIDS................................................ 21
2.6.2 Consequences of AIDS......................................................................... 22
2.7 Immigration, emigration and migrant labour................................................. 25
2.7.1 Immigration and emigration of skilled people...................................... 25
2.7.2 Migrant labour within South and southern Africa............................... 28
2.8 Deeper insight: from the individual decision to work to the market supply
of labour....................................................................................................... 30
2.8.1 Worker preferences: indifference curves............................................... 30
2.8.2 Budget constraint................................................................................. 32
2.8.3 Utility maximisation............................................................................ 32
2.8.4 The individual labour supply curve...................................................... 33
.............. 34
ix
Key concepts.......................................................................................................... 35
For students........................................................................................................... 35
Suggested reading................................................................................................... 36
Chapter 3 The demand for labour

3.1 Introduction.................................................................................................. 37
3.1.1 The measurement of employment........................................................ 38
3.2 Employment in South Africa.......................................................................... 40
3.2.1 Total employment ............................................................................... 40
3.2.2 Employment in the formal and informal sectors.................................. 41
3.2.3 Changes in employment over time....................................................... 41
3.2.4 Labour absorption capacity................................................................. 42
3.2.5 Employment by sector ........................................................................ 43
3.2.6 Demand for skills................................................................................ 44
3.2.7 Employment by population group and gender..................................... 44
3.2.8 Atypical employment........................................................................... 45
3.3 Jobs created per unit of production............................................................... 45
3.4 Capital and labour intensity.......................................................................... 48
3.5 Some factors that influence the demand for labour in South Africa............... 49
3.6 The informal sector....................................................................................... 51
3.6.1 Definition and measurement of the informal sector............................. 51
3.6.2 Importance and size of the informal sector.......................................... 52
3.7 Deeper insight: deriving the demand for labour............................................. 54
3.7.1 Law of diminishing marginal product.................................................. 54
3.7.2 The short-run demand for labour........................................................ 56
3.7.3 The long-run demand for labour......................................................... 57
3.7.4 Profit maximisation over the long run................................................. 58
3.7.5 The market demand for labour............................................................ 59
3.7.6 Imperfectly competitive markets: the monopolist................................. 60
Key concepts.......................................................................................................... 61
For students........................................................................................................... 61
Chapter 4 Wages and the cost of labour

4.1 Introduction.................................................................................................. 63
4.2 The determination of wages........................................................................... 63
4.2.1 The determination of wages in a perfectly competitive labour market. 64
4.2.2 The determination of wages in a monopsony labour market................ 64
4.2.3 The determination of wages in a segmented labour market.................. 64
4.2.4 Determination of wages through collective bargaining......................... 66
4.2.5 Government involvement and influence............................................... 67
4.2.6 Communes and communism................................................................ 67
4.2.7 Other methods of wage determination................................................. 68
4.3 Earnings in South Africa................................................................................ 68
4.3.1 Average salaries and wages in South Africa......................................... 68
4.3.2 Non-wage labour costs........................................................................ 70
4.3.3 The income of graduates according to the HSRC................................. 71
4.3.4 Share of employee remuneration in national income ........................... 71
4.4 Wages and inflation....................................................................................... 72
4.5 Wage differentials.......................................................................................... 74
4.6 The trade-off between wages and employment.............................................. 77
4.6.1 The impact of wage increases on employment..................................... 77
4.6.2 The impact of high unemployment on wages....................................... 79
4.6.3 Will high wages increase economic growth?........................................ 80
4.7 The impact of labour laws on the cost of labour............................................ 80
4.7.1 The Basic Conditions of Employment Act............................................ 80
4.7.2 Labour Relations Act........................................................................... 83
4.7.3 Other laws........................................................................................... 84
4.8 Deeper insight I: determination of wages in a perfectly competitive
labour market................................................................................................ 84
4.9 Deeper insight II: determination of wages in a monopsony market................ 85
Key concepts.......................................................................................................... 87
For students........................................................................................................... 87
Chapter 5 Unions, collective bargaining and minimum wages

5.1 Introduction.................................................................................................. 89
5.2 Collective bargaining and the labour market................................................. 90
5.3 The union movement..................................................................................... 92
5.3.1 Factors that have an impact on the strength and influence of unions... 93
5.3.2 The union movement internationally and in South Africa.................... 95
5.4 The impact of unions..................................................................................... 98
5.4.1 The impact of unions on wages and the cost of labour........................ 98
5.4.2 The impact of unions on flexibility and productivity......................... 103
5.4.3 The impact of unions on equality objectives...................................... 104
5.5 The influence of strike action....................................................................... 105
5.5.1 The influence of industrial action in South Africa.............................. 106
5.6 Bargaining councils..................................................................................... 107
5.6.1 Background to bargaining councils.................................................... 107
5.6.2 Importance of bargaining councils..................................................... 108
5.6.3 Economic analysis of the impact of bargaining councils..................... 109
5.6.4 Extension of agreements.................................................................... 111
5.6.5 Making provision for special circumstances of employers.................. 113
5.6.6 The link between wages and productivity.......................................... 114
xi
5.7 Minimum wages.......................................................................................... 114
5.7.1 Arguments in favour of minimum wages........................................... 115
5.7.2 Arguments against minimum wages................................................... 115
5.7.3 Minimum wage-setting mechanisms in South Africa.......................... 118
5.8 Minimum subsistence levels......................................................................... 119
Key concepts........................................................................................................ 121
For students......................................................................................................... 121
Suggested reading................................................................................................. 121
Chapter 6 Productivity and labour market flexibility

6.1 Introduction................................................................................................ 123
6.2 The importance and measurement of productivity....................................... 124
6.2.1 General remarks regarding productivity............................................. 124
6.3 Productivity in South Africa........................................................................ 127
6.4 Considering productivity and wages together: unit labour cost.................... 129
6.4.1 The concept of unit labour cost......................................................... 129
6.4.2 Unit labour cost in various sectors..................................................... 131
6.4.3 Impact of wage increases on productivity: efficiency wages............... 131
6.5 Some factors influencing productivity.......................................................... 133
6.6 The importance and types of labour market flexibility................................ 135
6.6.1 Flexibility in contracts of employment: job security and hiring
decisions............................................................................................ 137
6.6.2 Flexibility in contracts of employment: atypical employment............. 140
6.6.3 Wage flexibility................................................................................. 144
6.6.4 Working time flexibility..................................................................... 145
6.6.5 Work organisation flexibility............................................................. 146
6.6.6 A skilled workforce........................................................................... 146
6.7 General considerations regarding flexibility................................................. 147
6.7.1 Achieving flexibility through collective bargaining............................. 147
6.7.2 Labour market flexibility compared internationally........................... 148
6.7.3 Balancing the social costs and economic benefits of labour market
flexibility........................................................................................... 150
Key concepts........................................................................................................ 151
For students......................................................................................................... 151
Chapter 7 Globalisation and the labour market

7.1 Introduction................................................................................................ 153
7.2 South Africa’s links with the world............................................................. 154
7.3 South Africa’s competitive position............................................................. 155
7.3.1 World competitiveness: benchmarking South Africa against other
countries............................................................................................ 155
xii
7.3.2 Unit labour cost compared internationally......................................... 156
7.4 The impact of international trade on the labour market.............................. 159
7.4.1 Introductory remarks......................................................................... 159
7.4.2 Methodological problems and issues.................................................. 159
7.4.3 Impact on economic growth and income per capita........................... 160
7.4.4 Impact on inequalities........................................................................ 161
7.4.5 Employment and wages..................................................................... 163
7.4.6 Reduction in poverty......................................................................... 163
7.4.7 Conclusion........................................................................................ 164
7.5 The impact of trade liberalisation on the South African labour market....... 165
7.6 Addressing the challenges of globalisation................................................... 167
7.6.1 General principles.............................................................................. 167
7.6.2 Some case studies of how countries have succeeded in a globalised
world................................................................................................. 167
7.6.3 Economic growth and development: Nepad....................................... 172
7.6.4 The social clause: linking international trade and labour rights......... 173
7.6.5 Other measures to address the challenges of globalisation................. 175
7.7 Deeper insight: why do countries trade?...................................................... 175
7.7.1 Theory of comparative advantage...................................................... 176
7.7.2 The Heckscher-Ohlin theory of international trade............................ 177
7.7.3 Other reasons to trade....................................................................... 178
Key concepts........................................................................................................ 178
For students......................................................................................................... 178
Chapter 8 Unemployment in South Africa

8.1 Introduction................................................................................................ 181
8.2 Definition and types of unemployment........................................................ 183
8.2.1 Definition of unemployment.............................................................. 183
8.2.2 Types of unemployment..................................................................... 186
8.3 Measurement of unemployment.................................................................. 188
8.3.1 Sample survey method....................................................................... 188
8.3.2 Population census.............................................................................. 188
8.3.3 Registered unemployment.................................................................. 188
8.4 Unemployment in South Africa.................................................................... 189
8.4.1 Sharp increase in unemployment........................................................ 189
8.4.2 Reasons for the sharp increase in unemployment............................... 191
8.4.3 Characteristics of the unemployed..................................................... 192
8.5 Reasons for high unemployment ................................................................. 195
8.6 A strategy to create jobs.............................................................................. 196
8.6.1 Economic growth and exports .......................................................... 197
xiii
8.6.2 Allowing higher inflation
in order to create jobs: the Phillips curve........................................... 197
8.6.3 Improving the labour absorption capacity of the economy................ 198
8.6.4 The cost of labour............................................................................. 199
8.6.5 Labour market flexibility and productivity........................................ 201
8.6.6 Active labour market policies............................................................. 201
8.6.7 A strong skills base............................................................................ 203
8.6.8 Formal and informal small enterprise sector...................................... 203
8.7 Special employment and income maintenance programmes......................... 204
8.7.1 Public works and special employment programmes........................... 204
8.7.2 Programmes focused on young people............................................... 207
8.7.3 Wage subsidies.................................................................................. 208
8.7.4 The social plan.................................................................................. 211
8.7.5 Unemployment insurance................................................................... 212
8.7.6 Basic income grant............................................................................. 213
Key concepts........................................................................................................ 215
For students......................................................................................................... 215
Chapter 9 Human capital and the demand for skilled workers

9.1 Introduction................................................................................................ 217
9.2 Human capital theory.................................................................................. 218
9.3 Some criticisms of human capital theory...................................................... 221
9.3.1 Measurement..................................................................................... 221
9.3.2 Ability or educational level?............................................................... 221
9.3.3 The screening hypothesis................................................................... 222
9.3.4 Family background and financial status............................................. 222
9.3.5 Dual labour market theory................................................................ 222
9.3.6 The radical approach......................................................................... 222
9.4 Human capital in South Africa.................................................................... 223
9.4.1 Educational level of the labour force.................................................. 223
9.4.2 The occupational structure of the labour force.................................. 224
9.4.3 Skills levels of workers in formal employment................................... 225
9.5 Education in South Africa........................................................................... 226
9.5.1 Educational shortcomings in South Africa......................................... 226
9.5.2 Starting to address the educational shortcomings............................... 230
9.6 Skills development in South Africa.............................................................. 231
9.6.1 Skills development system and structures........................................... 231
9.6.2 Joint Initiative on Priority Skills Acquisition...................................... 234
9.6.3 The extent of in-service training activities in South Africa................. 234
9.7 Skilled labour shortages............................................................................... 236
xiv
9.7.1 Skills shortages in South Africa.......................................................... 237
9.7.2 Projection of the future demand for, and supply of, labour by
skills category.................................................................................... 238
Key concepts........................................................................................................ 240
For students......................................................................................................... 240
Chapter 10 Labour market inequalities and discrimination

10.1 Introduction................................................................................................ 243
10.2 Definitions and types of discrimination....................................................... 244
10.3 Theories of discrimination........................................................................... 244
10.3.1 Taste-for-discrimination model........................................................ 245
10.3.2 Statistical discrimination.................................................................. 246
10.3.3 Market imperfections....................................................................... 246
10.3.4 The crowding model........................................................................ 247
10.3.5 Transaction costs model.................................................................. 247
10.3.6 Legislation and government policy................................................... 247
10.4 Inequalities in the South African labour market .......................................... 248
10.4.1 Educational level............................................................................. 248
10.4.2 Employment and unemployment inequalities................................... 249
10.4.3 Occupational inequalities................................................................ 250
10.4.4 Income and wage inequalities.......................................................... 252
10.5 Addressing inequalities................................................................................ 255
10.5.1 Higher economic growth and employment opportunities................. 255
10.5.2 Education and training.................................................................... 258
10.5.3 Entrepreneurship............................................................................. 258
10.5.4 Government employment and tender practices................................ 258
10.5.5 Legal remedies................................................................................. 258
10.6 Equal pay for work of equal value............................................................... 260
10.7 Affirmative action........................................................................................ 261
10.7.1 The case for affirmative action......................................................... 262
10.7.2 The case against affirmative action.................................................. 263
10.7.3 Affirmative action in the Employment Equity Act............................ 264
10.7.4 Quotas versus Employment Equity targets: the BBBEE Codes......... 265
Key concepts........................................................................................................ 267
For students......................................................................................................... 267
Chapter 11 Social dialogue and codetermination

11.1 Introduction................................................................................................ 269
11.2 Corporatism as a form of social dialogue.................................................... 270
11.3 National Economic Development and Labour Council................................ 272
xv
11.4 Other national consensus-seeking bodies..................................................... 276
11.4.1 Millennium Labour Council............................................................ 276
11.4.2 Other bodies with a more focused role............................................ 277
11.5 Codetermination in the workplace............................................................... 278
11.5.1 Codetermination in Germany.......................................................... 279
11.5.2 Workplace forums in South Africa................................................... 280
11.6 International consensus seeking in the labour arena: the International
Labour Organisation................................................................................... 282
Key concepts........................................................................................................ 282
For students......................................................................................................... 282
Index.................................................................................................................... 284
xvi
LIST OF ABBREVIATIONS
ABET Adult basic education and training

AIDS Acquired immunodeficiency syndrome
BCEA Basic Conditions of Employment Act
BUSA Business Unity South Africa
CCMA Commission for Conciliation, Mediation and Arbitration
CDE Centre for Development and Enterprise
CEE Commission for Employment Equity
COSATU Congress of South African Trade Unions
EAP Economically active population
ECC Employment Conditions Commission
ERP Effective rate of protection
ETQA Education and Training Quality Assurer
FEDUSA Federation of Unions of South Africa
GDP Gross domestic product
GEAR Growth, Employment and Redistribution Programme
GHS General Household Survey
HIV Human immunodeficiency virus
HSRC Human Sciences Research Council
ILO International Labour Organisation
IMF International Monetary Fund
JIPSA Joint Initiative on Priority Skills Acquisition
LFPR Labour Force Participation Rate
LFS Labour Force Survey
LRA Labour Relations Act
MLC Millennium Labour Council
MLL Minimum living level
MRP Marginal revenue product
NACTU National Council of Trade Unions
NALEDI National Labour and Economic Development Institute
NEDLAC National Economic Development and Labour Council
NEPAD New Partnership for African Development
NMC National Manpower Commission
NPI National Productivity Institute
NQF National Qualifications Framework
NSA National Skills Authority
NSB National Standards Body
NSDS National Skills Development Strategy
NSF National Skills Fund
xvii
OECD Organisation for Economic Cooperation and Development
OHS October Household Survey
QES Quarterly Employment Statistics
QLFS Quarterly Labour Force Survey
RDP Reconstruction and Development Programme
SALDRU Southern Africa Labour and Development Research Unit
SALC South African Labour Commission
SAQA South African Qualifications Authority
SARB South African Reserve Bank
SEE Survey of Employment and Earnings
SETA Sector Education and Training Authority
SGB Standards Generating Body
SLL Supplemented living level
SMME Small, micro and medium enterprise
STD Sexually transmitted disease
TFR Total fertility rate
UIF Unemployment Insurance Fund
xviii
USEFUL WEBSITES
Business Unity South Africa www.busa.org.za

Bureau of Market Research, Unisa www.unisa.ac.za/bmr
Chamber of Mines of South Africa www.bullion.org.za
Commission for Conciliation, Mediation and www.ccma.org.za
Arbitration (CCMA)
Cosatu (trade union federation) www.cosatu.org.za
Department of Basic Education www.education.gov.za
Department of Labour www.labour.gov.za
Economic Society of South Africa www.essa.org.za
Fedusa (trade union federation) www.fedusa.org.za
Human Sciences Research Council www.hsrc.ac.za
Industrial Relations Association of South Africa www.irasa.org.za
International Labour Organisation www.ilo.org
National Productivity Institute www.npi.co.za
Nedlac www.nedlac.org.za
New Partnership for African Development www.nepad.org
Seifsa (employer organisation) www.seifsa.co.za
South African Government www.gov.za
South African Qualifications Authority www.saqa.org.za
South African Reserve Bank www.resbank.co.za
Statistics South Africa www.statssa.gov.za
Website that gives access to most official documents www.polity.org.za
World Bank www.worldbank.org
World Economic Forum www.weforum.org
xix
GLOSSARY OF IMPORTANT TERMS
active labour market policies

Policies which aim to improve the operation and results of the labour market so as to
maximise quality employment and minimise unemployment and underemployment, and
while so doing improve efficiency, equity, growth and social justice (section 8.6.6).
affirmative action
Legislation, policies and programmes aimed at redressing social, economic or educational
imbalances arising out of past discriminatory laws or practices (section 10.7).
atypical or “non-standard” employment
Employment that is not full-time (part-time work) or is of limited duration (temporary). It
is often employment at a workplace other than that of the employer (section 6.6.2).
bargaining council
A collective bargaining institution established in terms of the Labour Relations Act on a
voluntary basis by registered employer and union organisations in a specific industry to
negotiate conditions of employment and resolve disputes (section 5.6).
capital intensive
Any production process requiring a higher proportion of capital relative to other produc-
tion factors (such as labour) per unit of output (section 3.4).
capital productivity
The number of units of output that are produced per unit of capital input (section 6.2).
corporatism
An institutional framework that incorporates to varying degrees the pinnacles of employer
and employee organisations in the economic and social decision making of society (section
11.2)
discrimination
The inferior treatment of some workers with respect to hiring, promotion, wages, etc.
owing to factors not related to ability, seniority, skills level, experience or other labour mar-
ket factors (section 10.2).
dual labour market
A labour market divided into two non-competing markets, i.e. a primary and secondary
labour market, with the primary market characterised by the choice jobs, high earnings and
security of tenure. The secondary market is characterised by low-wage, unstable, dead-end
jobs; workers in this market have little hope of acquiring a job in the primary market (sec-
tion 4.2.3).
economically active population
All persons over the age of 15 years who furnish their labour for the production of econom-
ic goods and services, whether employed or not; this includes workers formally or informal-
ly employed, the self-employed, employers, and the unemployed wishing to work (section
2.2). See also labour force.
xx
efficiency wage
A wage increase that results in a productivity increase at least equivalent to the increase
in wages, which makes it advantageous for the employer to pay higher rather than lower
wages (section 6.4.3).
elasticity
A measure of the degree to which one variable changes in response to changes in another
variable. The wage elasticity of the demand for labour, for instance, is the degree of respon-
siveness of the quantity of labour demanded to changes in the wage rate (sections 2.8 and
3.7).
employment
All persons 15 years and older who during a specified brief period (for example 7 days)
have worked for five or more hours for a wage or salary or for profit or family gain, in
cash or in kind. The self-employed are included, as are persons who have been temporarily
absent from work but still have a formal job attachment (Chapter 3).
employment coefficient
The extent to which employment will change as a result of changes in economic growth
(section 3.3).
human capital
The skills, knowledge and other acquired characteristics (usually through education and
training) of workers that make them more productive (section 9.2).
income policies
Income policies are policies by which the government tries directly or indirectly to control
or influence wage and price levels by specifying standards which should apply when wages
or prices are changed.
index number; index
An index number is a single number which gives the value of that variable as a percentage
of the value of that variable at some base period. For example, if 1980 is the base period
(i.e. 1980 = 100) and the index number of 1985 is 150, it means that the value of the vari-
able concerned is 150% of the value in 1980, i.e. an increase of 50% over the period. An
index is a time series of index numbers.
informal sector
Unorganised, unregulated and mostly legal but unregistered economic activities that are
individually or family owned and use simple, labour-intensive technology (section 3.6).
internal labour market
An organisational unit where the pricing and allocation of labour are governed by a set of
administrative rules rather than by market forces. Jobs within the internal market are usual-
ly filled by the promotion of workers who are already within the internal labour market
and these jobs are thus shielded from normal competitive forces. Entry is normally from the
bottom only (section 4.2.3).
labour absorption capacity
The percentage of new entrants to the labour market who find a job in the formal sector of
the economy (section 3.2.4).
labour force
Synonymous with the economically active population (EAP – section 2.2), although the ILO
states (1982: 3) that the EAP can be divided into the “usually” active and the “currently”
xxi
active population, and that the labour force is in fact equal to the currently active popula-
tion. The difference is important when there are a significant number of seasonal workers.
labour force participation rate
The percentage of the population of working age furnishing their labour for the production
of economic goods and services, whether employed or not (section 2.3).
labour intensity
See capital intensity.
labour market flexibility
The extent to which an employer can alter various aspects of the enterprise’s work and
workforce to meet the demands of the enterprise, for example the size of the workforce, the
content of jobs, working time, etc. (section 6.6).
labour productivity
The number of units of output that are produced per unit of labour input (section 6.2).
law of diminishing marginal product
As successive units of one input (e.g. labour) are added to a fixed amount of another input
(capital), a level of total production is reached beyond which the marginal product of that
variable input declines.
marginal revenue product
The change in total revenue resulting from the employment of an additional worker.
minimum living level
The minimum financial requirements of members of a family or household if they are to
maintain their health, have acceptable standards of hygiene and sufficient clothing for their
needs (section 5.8).
money wages
See nominal wages.
monopoly
A situation where a single seller controls the entire output of a particular product or service.
The enterprise can thus set its own price and production level, subject to demand conditions
(section 3.7.6).
monopsony
A situation where there is only one buyer in a market, for example when only one enter-
prise is the buyer of labour in a particular labour market (section 4.9).
multifactor productivity
The number of units of output that are produced by the combined input of both labour and
capital (section 6.2).
nominal wages
Wages measured in current prices. An increase in nominal wages will not lead to any
increase in purchasing power if prices increase at the same rate as nominal wages.
output effect
The change in employment and output resulting from the effect of the wage change on the
employer’s costs of production.
xxii
productivity
The relationship between the quantity of output (e.g. the quantity of goods and services
produced) and the quantity of input (e.g. capital and labour) used to produce that output.
It is therefore a measure of input efficiency (section 6.2). More recent definitions also take
account of quality and customer satisfaction.
real wages
Wages after having removed the effect of price increases (inflation). An increase in real
wages over time would therefore indicate an actual improvement in purchasing power.
segmented labour market

A labour market divided into a number of segments, each with its own characteristics and
mode of operation. There is often little or limited mobility or competition between the seg-
ments (section 4.2.3).
social wage
The social wage is the total sum of all social benefits received free or partially free, such as
state transfers, subsidies and services (unemployment insurance, state old-age pensions, free
public health services, etc.) and kinship and community transfers.
substitution effect
The change in employment when both labour and capital are variable, and a change in the
relative price of labour results in a substitution of one resource (e.g. labour) for the other
(e.g. capital) without a change in production.
total fertility rate

The average number of children born alive to a woman in her reproductive years (15–49
years of age) (section 2.5).
unemployment
All persons who, being 15 years and older, are without work (not in employment, as
defined above), are currently available for work, and are seeking work or wanting to work
(sections 8.2).
unemployment rate
The number of unemployed persons as a percentage of the total economically active popu-
lation (sections 8.2).
unit labour cost

The cost of labour to produce one unit of output, which is obtained by dividing the average
remuneration per employee by labour productivity (section 6.4).
workforce
See economically active population.
xxiii
OUTLINE OF THIS CHAPTER
1.1 Why study the labour market?
1.2 Unique characteristics of the labour
market
1.3 Why theory with unrealistic
Introduction
assumptions?
1.4 Important characteristics of the labour
market in South Africa
1.5 Structure of the book
The worker sells his work, but he himself remains

his own property.
A L F R E D M A R S HA L L
1.1 WHY STUDY THE LABOUR MARKET?

Any reasonably serious observer of South Afri- Broad-based Black Economic Empowerment
can society is constantly bombarded by policy (BBBEE) Codes for comment. These codes will
questions that have their origin in the labour measure the extent to which companies are
market. These policy questions may, for “transformed” for the purposes of being award-
example, be raised in the newspapers, and dised state contracts or obtaining licences. To be
cussed in union meetings or at company board awarded top points for employment equity,
level. Or companies may have to decide about for instance, the codes require that between 60
their reaction to some of these issues, and to and 80% of the skilled positions in a company
what extent the company needs to adjust to face should be occupied by black people. But does
the possible long-term consequences of some the country have sufficient skilled black people
labour policy issues. As is apparent from the to appoint? What about the white people cur-
examples mentioned below, such questions may rently in these positions? Has affirmative action
assume various guises, but they are nevertheless worked in other countries?
often essentially rooted in the labour market. The Congress of South African Trade Unions
Most businesses and individuals are in some (Cosatu) has previously protested about the
way affected by the high crime levels being impact of the strong currency on employment.
experienced in the country. Some people say It argues that trade liberalisation has had a nega-
unemployment is the root cause of the crime, tive impact on employment in South Africa and
others point to the large numbers of foreign that the currency should be weakened so that
workers in the country. But is unemployment exporters will not lose markets and will thus not
actually that serious, and what can be done need to retrench workers. This raises the ques-
about this problem? Should the country refuse tions of whether South Africa is internationally
to accept immigrants because they appear to competitive; what the impact of trade liberalisa-
be taking the jobs of local workers, or worse, tion on the labour market is, and how South
engaging in criminal activities? Africa can compete more successfully. However,
In pursuit of its policy to correct past imbal- despite a dramatic weakening of our currency in
ances, the government has published draft recent years, unemployment keeps increasing.
µ BACK TO CONTENTS 1
C H A P T E R 1 I N T R O D U C T I O N
There have been a number of strikes about much information about the facts as possible in
wages, and employers complain that increased order to make an informed decision. Addressing
wages have a negative impact on employment such normative questions often involves trade-
and their competitiveness. To what extent do offs, and the facts help to crystallise the various
unions affect wage levels? Do sharply increased trade-offs.
wages actually have a significant impact on A study of the issues in this book will thus
employment? greatly assist the reader to acquire an informed
Minimum wages have been introduced for opinion about these issues. It matters not
farm and domestic workers. Is this not interfer- whether the reader is a policy maker, a cur-
ence in the operation of the market? Will it not rent or future leader of business or labour, or
lead to a sharp increase in unemployment? simply a citizen of the country. South Africa is
A number of small businesses have taken the a democratic country, with a custom of wide
Minister of Labour to court, arguing that the involvement and interest in policy decisions.
imposition of bargaining council agreements Citizens need to be involved in the formulation
unfairly impacts on their right to conduct busi- of policies and to be responsible voters with a
ness. What is the impact of bargaining councils? knowledge of what the long-term effects of
Do they fairly protect workers against exploita- policy decisions are likely to be.
tion or do they unfairly damage small business Too often policy makers are inclined to say
interests? that they did not foresee the “unintended conse-
Many of these questions do not relate to facts quences” of some or other policy decision, and
only (e.g. what is the impact of higher wages on that the decision thus needs to be revised (after
employment?), but also to normative questions the damage has already been done). When it
(e.g. what should the government do about the comes to labour matters, there is very little reason
very low wages in the agricultural sector?). This why the possible consequences could not have
requires value judgements from those involved, been foreseen or intended. A proper study of the
and many such questions cannot simply be operation of labour markets will help to eliminate
answered by looking at “the facts”. However, the need for such revisions of policies only a few
to make a good value judgement, one needs as years after the policies have been introduced.
1.2 UNIQUE CHARACTERISTICS OF THE LABOUR MARKET

The labour market is an imaginary marketplace the services of the worker, but the employer
where labour is bought and sold. Although the does not buy the worker. However, the services
labour market is characterised by the same prin- and the worker cannot be physically separated.
ciples of supply and demand as the markets for A contractual relationship, which differs from
other goods, it is quite different from such mar- what occurs in the product market, therefore
kets. comes into being between the buyer and the
The first difference is that the worker is not a seller of labour. Such a relationship is usually
product but a person, a human being. The prin- an enduring (but not always an endearing) one,
ciples of fairness or equity and humaneness are and continues until the relationship is ended by
therefore intrinsic elements of the labour market. either the buyer or the seller. Legislation usually
Fairness is not always ensured in the common encourages a long-term relationship, for example
law freedom to contract between an employ- through measures that prevent unfair dismissals
er and a worker, because of unequal bargaining or discourage hasty retrenchments.
power. The employer is usually in a much strong- Most products are standardised to a greater or
er bargaining position than the individual worker lesser extent. However, the “products” (work-
(especially with high unemployment rates such ers) in the labour market are not at all standar-
as in South Africa) and for this reason legislation dised and the market is characterised by great
acknowledges the right of workers to form unions diversity or multiplicity. Different skills make up
in order to bargain on a fairer level with employ- only one element that causes diversity.
ers. This is discussed in section 5.2. Personality characteristics are also import-
The purchaser of labour (the employer) buys ant elements of the product that the employer
µ BACK TO CONTENTS
INTRODUCTION 1
“buys”. These cannot always be determined • They allocate human resources among alterna-
fully before employment starts, and the employ- tive users, i.e. among sectors, enterprises, loca-
er thus does not necessarily get what he or she tions and occupations.
intended to buy. Relations with the employer or • They distribute incomes, either wages or sal-
emotional disposition may have an impact on aries, as incentives and as rewards to work-
the output (the productivity) of the worker. ers (International Labour Organisation (ILO)
There are usually also changes over time in 1993: 7).
respect of any individual worker: his or her skills
level may improve with training and experience, Labour markets should, by their functioning,
or may deteriorate if the worker is demotivated
contribute to the following objectives:
or when he or she grows older.
There is also not one single market or clear- • Efficiency. This means maximum output and
ing house for labour as there is in some prod- maximum income.
uct markets (e.g. the stock exchange). There is • Equity. This implies equality of opportunity
a multiplicity of markets in terms of different for all in access to jobs, training, treatment at
occupations, geographical areas and types of work and payment.
economic activity.
• Growth. Labour market operations should
A further characteristic is the complexity of the
price of labour. This is not usually the case in the increase employment in the future and con-
product market. In the labour market the price is tribute to – not impede – higher productivity
determined not only by the employment package and incomes.
(which includes various fringe benefits), but also • Social justice. This refers to the extent to
by the influence of inflation, personal taxation, which society acts to minimise any negative
the standard of living of the worker, the provision effects the labour markets may have on work-
for health and safety, and other factors. ers’ welfare, and to redress any harm that
Labour markets have important functions: might have been done.
1.3 WHY THEORY WITH UNREALISTIC ASSUMPTIONS?

Throughout this book, various assumptions ket is a perfectly competitive market. A perfectly
will be made about the labour market to illus- competitive labour market is a theoretical norm
trate a particular point. For instance, we may against which the performance of the actual
assume that there are no unions and no govern- labour market can be measured. It falls within
ment determination of minimum wages to deter- the school of neoclassical theory. The perfectly
mine the impact of an increase in the number of competitive labour market is characterised by
women entering the labour market. Although the following assumptions (Marshall, King &
at times these assumptions may appear to be Briggs 1980: 177; McConnell, Brue & Macpher-
rather unrealistic, they help us to understand son 2006: 169):
the key issue under discussion better. Although
a very complex analysis may more realistically • There is full and perfect knowledge of the
mirror the labour market, it would then not market. Workers have full information on
isolate what really matters (see Borjas 2002: 9). jobs available and wage rates, while employers
Furthermore, it is also better to start relative- have full information on wage rates paid by
ly simply, and then gradually to become more other employers.
realistic, to determine the theoretical impact of a • Workers and employers are entirely rational.
specific policy measure or decision. A decision to work or not to work is taken
only on the basis of wage rates, while employ-
P E R F ECTLY COMPETITIVE LABOUR ers always attempt to maximise their profits.
M A R KET
• Neither workers nor enterprises exercise any
One set of basic assumptions that will often be influence over the market wage. An individual
referred to in this book is that the labour mar- employer represents a very small proportion
of the demand for labour and does not act in explained in this book, but can also be under-
concert with other employers in determining stood intuitively, the higher the wage rate (for
wage levels. Similarly, labour is not organised instance in a particular occupation or region) the
and each worker makes his or her own deci- higher the quantity supplied of labour (or num-
sions on employment or wages. ber of workers supplied). This means that the
• There is perfect competition. Many enterprises supply curve is upward sloping to the right.
compete against one another to hire workers The market demand for labour is indicated by
and workers have identical and comparable the curve D. This curve is downward sloping,
skills. because as the wage rate increases, employers
will try to reduce their cost by employing less
• Workers are perfectly mobile. They can move labour in various ways, for instance by using
easily between positions within or between machinery instead of workers. In a perfectly
organisations or regions. competitive labour market, there would be equi-
librium where the quantity supplied of labour
I don’t meet competition,
is equal to the quantity demanded for labour,
I crush it. and this would also be the number of workers
Charles Revson employed. This is at point E in the graph. The
number of workers employed (L) and the wage
G R A PHIC ANALYSIS OF THE LABOUR rate (W) can be read off the axes.
M A R KET
Throughout the book, graphs are used to illus- S
trate various concepts. Although different graphs
are used, many have their basis in the basic sup- W1
ply and demand graph, or may explain how this
Wage rate
supply and demand graph is deduced from dif-

E
ferent decisions in the labour market.
W
The supply and demand graph simply indi-
cates the basic decisions regarding the labour
market of the major actors in the market, i.e.
workers and employers. Workers present their D
labour (the supply of labour) and employ-
ers employ workers (the demand for labour). L2 L L1
Although there are many factors determining the
Number of workers
supply and demand of labour, the most import-
ant is the wage rate. Figure 1.1 Equilibrium between supply and
A basic graph of the labour market plots the demand
number of workers “supplied” and “demanded”
against wages, as in Figure 1.1. There can be the following changes in respect
of these curves:
You can make even a parrot into (a) Movement along the curves. If there is a
a learned political economist change in the wage rate, there will be a move-
– all he must learn are the two ment along the curves. An increase in wages
words “supply” and “demand”. from W to W1 along the curve S will generate
an increase in the quantity supplied of work-
Anonymous
ers from L to L1. In the case of the demand
The horizontal axis is called the x-axis. This for labour, such an increase in wages will
denotes the quantity of labour, i.e. the number decrease the quantity demanded from L to L2
of workers. The vertical axis is called the y-axis along curve D.
and in this case denotes the price (the wage rate). There will thus be an oversupply (or excess
A line or curve, in this case S, which represents supply) of workers who want to work – the
the market supply of labour, indicates the rela- quantity supplied is L1, whereas the quan-
tionship between quantity and price. As will be tity demanded is only L2. Workers will then
4 µ BACK TO CONTENTS
INTRODUCTION 1
compete for the available jobs and accept increase, the demand for labour will increase
lower wages in order to get work. Wages and the demand curve will shift to the right.
will then start declining, but when this hap- (c) Change in gradient. The gradient of the
pens, employers will employ more workers, curves can also change, depending on how
until equilibrium is achieved at point E. responsive labour supply or demand is to
b) Shift in the curves. The supply curve as a a wage rate change (this responsiveness is
whole can shift to the right or left if influ- called elasticity). If demand for labour is
enced by external (exogenous) factors, for very responsive to wage rate changes, a wage
example more women wanting to work or increase will result in a sharp drop in the
large immigration gains. An increase in the quantity demanded for workers. In this case,
supply of labour will shift curve S as a whole the demand curve will be relatively flat. If the
to the right, which means that more workers demand is less responsive to wage rate chan-
will be available for work at the wage level ges, the quantity demanded for labour will
W. There can be similar shifts in the demand change less, and the curve will be relatively
curve, for example if exports suddenly steep. This will be illustrated in Chapter 3.
.4 IMPORTANT CHARACTERISTICS OF THE LABOUR MARKET IN

SOUTH AFRICA
he following important characteristics have been been better-educated, skilled workers who
dentified in the South African labour market: in turn have been disproportionately white
and Asian. The impact of international trade
A sharp increase in the supply of labour, on employment has been relatively benign,
which can be ascribed to a sharp increase in with only (semi-skilled) production workers
the labour force participation rates of women experiencing actual job losses between 1995
in all population groups. and 2005 (Bhorat, Van der Westhuizen &
Low increases in the demand for unskilled and Goga 2010).
semi-skilled workers, with restricted growth
• Unemployment, particularly among the black
in sectors that traditionally employed large population and among females. Unemployed
numbers of unskilled and semi-skilled workers persons also tend to be poorly educated and
(such as agriculture and mining), and across young, and those living in rural areas are the
all sectors, an inclination among employers to worst affected. However, there has also been a
employ higher skilled workers at the cost of disconcerting increase in unemployment among
semi-skilled or unskilled workers. In addition, better educated individuals, whether with mat-
the informal sector in South Africa seems rela- ric or having a tertiary education, and particu-
tively small when compared to the informal larly Africans. By far the majority of the unem-
sector in other developing countries. ployed persons have either never had a job at
– The demand for labour has been most affect- all, or might have been unemployed for longer
ed by within-sector developments (such as than three years. Such individuals would thus
the increasing preference of employers for not qualify for unemployment benefits, and
higher skilled employees). Between-sector they are likely to have lost any skills that they
developments have also played a significant might have picked up during their education.
role, in particular the relatively higher growth Apart from unemployment being a major prob-
of the tertiary sectors that has resulted in a lem for the country and the individual con-
higher demand for skilled labour, whereas cerned, it is also a major contributing factor to
two of the country’s other major labour market
the primary sectors, which employ most of
problems: inequality and poverty.
the production workers, experienced a rela-
tive decline. The losers have been unskilled • High labour costs and low productivity, com-
labourers, specifically unskilled African bined with the general absence of inherent
workers. The winners, invariably, have pressures to increase the level and quality of
output. The declining labour intensity of eco- • Income inequality is extensive and continues
nomic growth is particularly disconcerting, to increase. Whereas some researchers have in
because far fewer job opportunities than in the past found that interracial inequality has
the past are now being created for every per- diminished (particularly between blacks and
centage point of economic growth. Where whites) over the past two decades, more recent
labour productivity has increased, it has studies show that it is in fact not the case.
often been at the expense of jobs. Collective Even though high unemployment among the
bargaining institutions (especially bargaining black population in particular and the high
councils) and unions have generally resulted upward mobility of many Africans into senior
in a wage premium for the relevant workers positions in the public and private sectors have
when compared to workers not falling under resulted in a high level of intra-racial inequal-
a bargaining council or belonging to a union. ity, the high demand for highly skilled labour
Government policy also seems to have con- (consisting of predominantly white workers)
tributed to the increased cost of labour and to has resulted in interracial inequality remaining
a reluctance among employers to employ more the most important contributing factor to the
labour. high level of inequality in South Africa.
1.5 STRUCTURE OF THE BOOK

The structure of the book is presented in Figure impact of such minimum wages is discussed in
1.2. this chapter.
Chapter 2 discusses the supply of labour, Chapter 6 discusses very important related
i.e. why people enter the labour market, the concepts. Wages cannot be discussed without
increased participation of women, the impact discussing productivity. Chapter 6 thus discuss-
of immigration and emigration and related con- es productivity and a closely related concept,
cepts. the flexibility of the labour market. Part of this
We then turn to a discussion of the demand chapter is also dedicated to a discussion of the
for labour (Chapter 3). The demand for labour is mechanism for considering wages and produc-
simply the employment of labour, but over time tivity together.
the characteristics of the demand for labour have The outcome of all of these factors deter-
changed somewhat. This is having an impact on, mines to what extent the country is internation-
for instance, unemployment. ally competitive, which is the subject of Chap-
The interaction of supply and demand is dis- ter 7. Also discussed in this chapter are some
cussed in Chapter 4, where an indication is given case studies of countries that have successfully
of how wages are determined, as well as the addressed the challenges of globalisation.
impact of wages on employment, and the effect Various specific features of the labour mar-
of government policies on the cost of labour. ket are discussed in the next three chapters, i.e.
Unions have a significant impact on wage lev- unemployment (Chapter 8), human capital, the
els. However, unions can only do so in a col- quality of the supply of labour (Chapter 9) and
lective bargaining set-up. These concepts are dis- inequalities and discrimination (Chapter 10).
cussed in Chapter 5. Minimum wages are often The book ends (in Chapter 11) with a discus-
determined by unions, but where there is insuffi- sion of social dialogue in South Africa, which
cient collective bargaining, the government has has characterised the labour market for the last
a responsibility to set minimum wages. The 20-odd years.
µ BACK TO CONTENTS
INTRODUCTION 1
Chapter 1: INTRODUCTION
Chapter 2: Chapter 3:
Supply of Demand for
labour labour
Wages and Unions and
the cost of collective
labour bargaining
Chapter 6:
Productivity and
exibility
Chapter 9:
Globalisation and the Inadequate
Quality of the
labour market demand for
supply of
labour
labour
(unemployment)
Chapter 10:
Discrimination
Chapter 11: Social dialogue
Figure 1.2 Structure of the book
Key concepts
fairness and equity demand for labour
contractual relationship elasticity
perfectly competitive labour market equilibrium
supply of labour
Suggested reading*
department of labour. Annual. National economic development and labour
Annual Report. Pretoria: Government Printer. council (nedlac). Annual.
Report submitted to the Nedlac summit.
Department of labour. 2006a.
Johannesburg: Nedlac.
Annual Labour Market Bulletin, 1 April 2004–31
March 2005. Pretoria: Department of Labour. * The bibliography contains the full list of references.
2.1 Introduction
2.2 The labour force as the supply of labour
2.3 Labour force participation rate
2.4 Population and population growth
2.5
2.6
Total fertility rate
The impact of HIV and AIDS
The supply
2.7 Immigration, emigration and migrant
labour
of labour
2.8 Deeper insight: from the individual
decision to work to the market supply of
labour
The power of population is infinitely greater than the power in the earth
to produce subsistence for man. Population, when unchecked, increases
in a geometrical ratio. Subsistence only increases in an arithmetical ratio.
A slight acquaintance with numbers will show the immensity of the first
power in comparison with the second.
T HO M A S R O B E R T M A L T HU S
2.1 INTRODUCTION
An individual can decide to work or not to Changes in the economic environment – espe-
work, or can decide to work more hours or cially wage rates and incomes – can account for
enjoy more leisure hours. This is the basis of the a significant part of the labour supply. This is an
supply of labour. Various factors influence these aspect that is discussed in this chapter – to indi-
decisions, for instance the personal preferences cate how the labour supply of the individual and
of the individual, the amount of money he or of all individuals together (the market supply) is
she needs, the wage rate, and so forth. If all the affected by the decision to work or not to work.
decisions of individuals are added up, it gives the However, these concepts are discussed only at
market supply of labour. the end of the chapter (see section 2.8) because
It does not matter whether the persons are they are relatively inaccessible to non-econo-
working or simply want to work, they are all mists. Economists should thus preferably read
part of the supply of labour. Furthermore, the the last section of the chapter first, as it lays a
type of work they do is irrelevant, for instance good foundation for the rest of the chapter. It is,
whether they work in the informal sector or are however, not essential for the reader to under-
an employer of other people. All these people stand the theoretical section of the chapter (sec-
form part of the labour force, or the supply of tion 2.8) in order to comprehend the issues dis-
labour. cussed in the rest of the chapter. Nevertheless,
The labour force is thus simply the population this section does help the reader understand bet-
of working age people that is working or that ter how the labour market as a whole operates.
wants to work (the unemployed). It is influenced An interesting fact about the South African
by factors such as the proportion of the popula- labour force is that the participation of women
tion that wants to work, the size of the popula- has increased sharply over the last few years.
tion (as determined by, among other things, fer- This may be both the cause and the result of
tility and mortality rates) and net immigration. the rapidly declining fertility rates among all
C H A P T E R 2 T H E S U P P LY O F L A B O U R
population groups. On the other hand, the par- the supply of labour and what factors influence
ticipation of men has gradually declined over the supply of labour. The information gained
time, probably because of people retiring earlier. in this chapter will form the basis of analyses in
There is also a significant increase in emigration, other chapters, for instance to find out how the
which means the country is losing skills. market determines the wage rate, unemployment
These are thus the type of topics that will be in the country, and so forth.
discussed in this chapter – what has happened to
2.2 THE LABOUR FORCE AS THE SUPPLY OF LABOUR

The total supply of labour is all those people The wage rate is the most important determin-
who are working, whether for themselves or for ant of this decision. The model of the individ-
someone else, as well as those who want to work ual or family labour supply is discussed in sec-
and are looking for work, i.e. the unemployed tion 2.8.4.
people.
• These various decisions by individuals to work
The total labour force, or the economically
or not to work are measured by the labour
active population (EAP) as it is also known, is
force participation rate (the percentage of the
thus defined as the total number of people over
working age population that is working or
the age of 15 years who present their labour for
wanting to work) (see accompanying box).
the production of economic goods and services,
whether employed or not. This can be illustrated • The size of the population also has a bearing
by the following: on the size of the labour force.
• The size of the population is, in turn, deter-
Workers in Self-employed
Labour = PLUS mined by factors such as fertility rates, mortal-
the formal persons and
force ity rates and net migration flows.
sector employers
• Labour supply is not only a matter of quantity
Informal but also quality. The skills level of the labour
PLUS PLUS Unemployed
sector
persons force is thus also significant.
workers
Figure 2.1 graphically illustrates the various fac-

The supply of labour is determined by a num-
tors that determine the total labour force. Many
ber of factors:
of these are discussed in this chapter. The quality
• The individual person’s decision to work or of the labour force is discussed in Chapter 9 (see
not to work, and how many hours to work. also McConnell et al. 2006: 52).
Labour force Births

participation rates (fertility rates)
(section 2.3) (section 2.5)
Deaths (e.g. due

Quantity of labour Total population
Labour force to HIV and AIDS)
(section 2.1) (section 2.4)
(section 2.6)
Quality of labour Hours of work Net migration

(Chapter 9) (section 2.7)
Figure 2.1 Determinants of the labour force

McConnell et al. 2006: 52
Source:
T H E S U P P LY O F L A B O U R 2
There are three kinds of The discussion below starts with the size of the
lies: lies, damned lies, South African labour force, and considers some
and statistics. of its most important characteristics. Thereafter
the labour force participation rate, i.e. the per-
Benjamin Disraeli
centage of the working age population that par-
ticipates in the labour market, is discussed.
Finally, the total population is discussed, as
The labour force: some grey areas well as its various determinants, such as the fer-
One factor that affects the dependability tility rate, mortality due to HIV and AIDS in
of the data on the labour force is where particular, and immigration and emigration.
to draw the line between those within and
those outside the labour market. This relates 2.2.1 The South African labour force
especially to women, particularly in rural Bearing in mind the shortcomings of the data
areas. As explained in section 8.2.1, persons on the labour force, the total labour force of
who are unemployed and want to work, South Africa according to the Labour Force Sur-
but are not actively seeking employment vey (LFS) was estimated at 16.8 million persons
would, in terms of the official definition of in 2005. As explained, this included the unem-
unemployment, not be counted as unemployed who were looking for work.
ployed. They are the so-called “discouraged The LFS found that there were about 3.3
work-seekers”. They would, according to million discouraged work-seekers in 2005. If
a broader definition of unemployment is used,
Statistics South Africa, not even form part
these people should be regarded as unemployed
of the labour force, in spite of the fact that
and therefore part of the labour force. Their
they might dearly want to work, but are
inclusion would increase the labour force to 20.1
simply not actively looking for work owing million.
to the unavailability of work in rural areas. The available data on the labour force of
South Africa are presented in Table 2.1. About
three-quarters of the labour force is African and
about 45 per cent women.
Table 2.1 The labour force of South Africa by population group (‘000)
Black Indians/ Proportion

Coloureds Whites Total
Africans Asians of total
19601
Total 3 585 534 121 1 079 5 319 100.0
Proportion of total 67.4 10.0 2.3 20.3 100.0
2001 2
Total 10 953 1 642 593 2 144 15 358 100.0

20122
Total 13 350 1 955 551 2 092 17 948 100.0
2013 3
Total 14 960 2 071 579 2 139 19 749 100.0

1) Statistics South Africa, Population census; 2) Statistics South Africa, Labour Force Survey (September) 3) Statistics South Africa, Quarterly
Sources:
Labour Force Survey (March) 4) Quarterly Labour Force Survey, quarter 4, 2013: 4–7
There was a sharp drop in the proportion of South Africa, there have for instance been the
whites, from 20% in 1960 to about 12% in October Household Survey, the Labour Force
2012. Survey (LFS) and the Quarterly Labour Force
Between 300 000 and 400 000 persons enter Survey. These surveys differ in various respects
the labour market annually, i.e. people who are and are not strictly speaking fully comparable.
looking for work. The actual number entering Accordingly, by considering only the trends in
the labour market is greatly influenced by labour the LFS between 2000 and 2006, Yu concludes
market conditions – whether work is available, that there is no evidence of a further “feminisa-
whether there are opportunities to continue with tion” of the labour force during this period.
studies, emigration, and so forth. As will become
apparent in later chapters, many of the persons 1960 2012
entering the labour market for the first time do Women Women
not find work. 23% 45%
HIV and AIDS will have a significant impact
on the supply of labour in the future, and might
reduce the number of new entrants quite sharp-
ly towards the second part of the 21st century.
This is discussed in section 2.6 below.
F E M ALE LABOUR FORCE Men Men

Table 2.2 The labour force of South Africa by 77% 55%
gender (‘000)
Figure 2.2 Economically active population by
1960 2001 2012 2013 gender
Sources: 1960: Statistics South Africa, Population census;
Male 2 791 5 730 9 781 10 832 2012: Statistics South Africa, Labour Force Survey (September)
Female 794 5 223 8 167 8 920
In contrast to an average annual growth rate of
Total 3 585 10 953 17 948 19 752
about 2% for males over the last three decades,
Female the female component increased by nearly 5% a
labour force year. The participation of women in the labour
22.1 47.7 45.5 45.2
as proportion force is relatively high in South Africa compared
of total
to its peer countries.
1) Statistics South Africa, Population census; 2) Statistics
Sources:
South Africa, Quarterly Labour Force Survey (March) 3)
Quarterly Labour Force Survey, quarter 4, 2013: 2–3 L A BO U R F O RC E BY A G E
Although South Africa’s total population is very
With some exceptions, researchers agree that the young (more than half is under the age of 25),
participation of women in the labour market has persons in the 15 to 25 age category make up
increased quite sharply, as illustrated in Table only about 20% of the labour force. This implies
2.2 and Figure 2.2. In 1960, women constituted a high dependency ratio (i.e. the ratio of young
only 23% of the EAP and this increased to about people depending on other age groups for a
45% in 2012. The increased labour force par- living). In addition, as indicated in Chapter 8,
ticipation rate of women, as described in section a high proportion of the economically active
2.3.1, is primarily responsible for this phenom- young people are unemployed, which implies a
enon. The reasons for this development are also further increase in the dependency on other age
discussed in that section. They relate to changing groups and a heavy burden on the taxpayer in
norms with regard to the role of women in the terms of educational, health, policing and sim-
labour market, increased wage levels and lower ilar expenditures, and ultimately, employment
fertility rates. opportunities.
However, Yu (2008) makes the point that dif- Compared to 30% of the population in South
ferent surveys cannot simply be compared and Africa being younger than 15 years, most other
conclusions drawn from such comparisons. In African countries have a much higher proportion
of young people (some as high as
nearly 50%). The proportion of ~ The labour force (also called the economically
young people in the populations active population – EAP) is the total number of
of industrialised countries is much people presenting their labour for remuneration
lower, and the main problem in on the labour market, whether employed, unem-
these countries is a high proportion
SUMMARY
ployed or self-employed.
of elderly people (Population Ref-
~ The participation of women in the labour market
erence Bureau 2011).
increased quite substantially, and they now form
HIV and AIDS will also have
about 45% of the labour force.
a significant impact on young
people. Many breadwinners are ~ Young people make up a high proportion of South
likely to die of HIV and AIDS, Africa’s total population, but a relatively small
leaving young children to fend for proportion of the labour force. This implies a high
themselves. Such children will most dependency ratio (i.e. the ratio of young people
likely be unable to attend school, depending on other age groups for a living).
making them “unemployable”.
2.3 LABOUR FORCE PARTICIPATION RATE

Only a proportion of the total working age relatively low level of labour force participa-
population (in the 15–65 age group) works or tion is that South Africa’s social welfare net dis-
wants to work. The rest are housewives, stu- courages people from seeking work. However,
dents, too sick to work, and so forth. The pro- there is also contradictory evidence, for instance
portion that works or wants to work is called that, for women, the expansion of social grants
the labour force participation rate (LFPR). LFPR might have increased participation rates. This, it
is thus the percentage of the population of work- is suggested, was because access to cash income
ing age that furnishes its labour for the produc- in the household allowed women to leave their
tion of economic goods and services, whether children with relatives more easily, freeing
employed or not. It is thus the percentage of the them up to look for work. Furthermore, the
total working age population that is economic- LFPR is significantly higher today than it was
ally active: in the mid-1990s, when it was in the mid-40%
range (Banerjee, Galiani, Levinsohn & Woolard
LFPR = 2006: 12). This period has also seen an increase
actual economically actual labour in access to, and in the value of, social grants
which has coincided with rising participation
active population force
× 100 = × 100 rates. Social welfare thus does not seem to have
total population of potential kept people out of the labour force.
working age labour force The CDE states that a more likely explanation
for low participation rates is that, after 1994,
The Centre for Development and Enterprise expectations rose and more people set out to
(CDE) (2010a) states that one of the most look for work. This led to an initial rapid rise in
important features of South Africa’s labour mar- participation in the labour market. However, the
ket is the very low rates at which adults partici- new entrants were unable to find work, and this
pate in it. By international standards, the LFPR discouraged people from actively seeking work.
in South Africa – at about 55% – is significantly They also remained behind in the old bantu-
lower than most other countries, with the only stans (where participation rates can be as low as
exceptions being countries in which social, cul- 30%). The fact that they didn’t seek work, and
tural and religious norms keep large numbers of are today overwhelmingly measured as ‘not eco-
women out of the labour market. nomically active’, is a reflection, by this account,
One explanation frequently offered for the not of their dependence on welfare, but on their
(realistic) appreciation of the very low probabil- too discouraged to seek work, they are no longer
r
ity that they will find work if they look for it. part of the economically active population, but
Cyclical nature of the LFPR: This explanation if they had also been counted as economically
is also confirmed by the decrease in the LFPR active, the labour force would have been larger
after the 2008 crisis, which is found primarily and the LFPR consequently higher.
but not solely among the youth (ILO, 2011: 20). Casale and Posel (2002: 164) calculated that
Those who lost their jobs as a consequence of the LFPR for women would have increased from
the crisis chose to exit the labour market rath- 48% in 1995 to 61% in 1999 had the expanded
er than actively search for employment. Many definition been used (the comparable figures
of those who leave or delay entering the labour for 2005 would have been an LFPR of 50% for
market might use the opportunity to upgrade the strict definition and 64% for the expanded
their human capital, for instance by remaining definition). This can be compared to an inter-
longer in schooling. national average LFPR for women of just over
50% (ILO 2005c).
2.3.1 Female LFPR These authors (Casale & Posel 2002: 171)
also found that a significantly larger propor-
The LFPR of women has increased quite sharp-
ly over time. This much can be gathered from tion of women was available for work in 1999
Table 2.2. The increase in the participation rate than in 1995, but that many more women were
among women is probably the most important looking for work than were finding work. The
change in the labour supply in South Africa that biggest change was thus the number of unem-
has taken in recent years. ployed women and self-employed women in the
informal sector, where they were likely to be
Table 2.3 Labour force participation rates of involved in low-paying activities.
males and females* This indicates that there is little evidence of
women being “pulled” into the labour force by
Male Female an increase in the demand for female labour. It
is thus far more likely that it was supply-side
1960 1 80.7 26.5
factors that may have “pushed” women into the
1980 1 75.5 36.1 labour market.
19962 64.1 48.8 Before considering the reasons for the increase
in the female LFPR, attention should again be
20013 65.1 54.0 drawn to the caution expressed by Yu (2008)
2012 3 61.4 48.5 about drawing conclusions based on a simple
2013 4 63.4 50.4
comparison of the different surveys. By consid-
ering only the trends in one survey over time
*EAP as a percentage of the total population of working age, (the Labour Force Survey between 2000 and
i.e. in the 15–65 age group, calculated separately for male and
2006), he found no evidence of an increase in
female.
the participation rate of females. He did find an
Sources: 1) Development Bank; 2) Statistics South Africa, Population
census; 3) Statistics South Africa, Quarterly Labour Force
increase in the LFPR of females in the OHS, but
Survey (strict definition of unemployment) (March); 4) says that this might be ascribed to a better cap-
Quarterly Labour Force Survey, quarter 4, 2013: 2–3 turing of participation rather than an increase in
participation rates.
The actual EAP in the formula above includes But if there is an increase, as found by most
workers and unemployed persons, but unem- other analysts, the following factors are likely
ployed only according to the strict definition of to be some of the reasons for that increase. The
unemployment, i.e. only those actively looking analysis at the end of this chapter about the fac-
for work (see section 8.2.1). If the expanded tors determining the theoretical supply of labour
definition of unemployment had been used, i.e. by the household is also relevant in this regard.
including the discouraged work-seekers, the
increase in the LFPR of women would have been • It is possible that the increasing coverage of
even sharper. This is because there has been an various social grants, especially child grants,
increase in recent years in the number of dis- could have contributed to more women par-
couraged female work-seekers. Because they are ticipating or wanting to participate in the
µ BACK TO CONTENTS
A
labour market. This is because the payment of • Rising divorce rates may have also contributed
social grants might mean that some money is to more women having to spend more years in
available for transport, or allow the woman the labour market.
to take some risk in small-scale business, or
to afford a person to take care of the children To conclude this section, a word of caution is
while the mother works. required with regard to the LFPR of women.
Besides the difficulties associated with the strict
• The rising relative wages for women as a
and expanded definitions of unemployment
result of reduced discrimination and a great-
referred to above, measurements relating to
er demand for female workers have brought
household work, subsistence agriculture and the
about their increased participation in the
informal sector are problematic (see accompany-
labour force. This is related to the expansion ing box).
of the services sectors, in which women have
traditionally been active.
• The rising levels of education among women
have increased employment opportunities How many women in the labour force?
and earnings, and would thus theoretically
The data on the female LFPR hide certain
have increased the supply of female workers.
important measurement problems. The
However, Casale and Posel (2002: 174) did
main difficulty is to distinguish between
not find that increasing education levels could
in fact be associated with rising labour force people who are in the labour force and
participation rates, and thus rejected this as a those who are not. Usually the distinction is
possible reason for higher participation rates. made on the basis of persons who work for
remuneration or who actively seek a pay-
• Even though they may not be related to educa-
ing job – these persons are then considered
tion, declining birth rates have enabled more
women (of all educational levels) to partici- to be part of the labour force. However,
pate actively in the labour market for longer as already discussed, the categorisation of
periods of time. people who want to work but are not act-
ively looking for work (the expanded defin-
• There have been changes within the house-
ition of unemployment) will have an import-
hold: firstly, a decreasing proportion of
ant impact on the LFPR. In addition, the
women live with employed men. This is relat-
ed to the increase in the number of unem- categorising of homemakers and women in
ployed men in the economy, which under- subsistence agriculture is problematic. These
mines the resource base of the household, women seldom work for remuneration (in
thereby increasing the pressure on women to the direct sense of the word), although one
generate an income. Secondly, at the same cannot deny that their services are econom-
time there has also been a decline in the num- ically productive.
ber of women living with any man, which When a homemaker, for instance, enters
shows that there has been a decrease in the the labour market and employs a domestic
proportion of women who have married worker in her home and in addition pays
(Casale & Posel 2002: 175–178). a fellow homemaker to look after her chil-
• Social conventions about a woman’s role in dren, then all three women who might not
society (e.g. that a woman’s place is in the have been “economically active” before,
home) have changed. Preferences and attitudes now suddenly become so, and their services
among women themselves have also changed, are counted as part of the national product
with more and more women embarking on of the country. Thus, there would seem to
professional careers for self-fulfilment. be an underestimation of production and
• Rising productivity in the household because the EAP with regard to homemakers.
of advancing technology has made it possible There have also been problems in meas-
for women to participate more actively in the uring women in subsistence agriculture
labour market.
Í
and the informal sector. Censuses have in increasing the labour force and thus the
approached women in subsistence agricul- LFPR of female workers in particular.
ture in different ways. The census of 1970,
for instance, treated women in subsistence
agriculture mostly as economically active 2.3.2 Male LFPR
and working. In 1980 these women were
Changes in the participation rates of males over
treated as not being economically active.
time are also provided in Table 2.2. Declining
The latter approach has been followed in
male participation rates among all races since
subsequent censuses. Knight (1978) has 2001 are apparent. The participation rates are
estimated that this change of definition also quite low, which is confirmed by the Project
led to roughly 500 000 African workers for Statistics on Living Standards and Develop-
being reclassified from economically active ment (1994: 141). As discussed above, it could
and working to not economically active. be an indication of large numbers of discour-
This resulted in lower measured female aged work-seekers who have given up looking
employment, hence it has raised the female for work or even wanting to work, and would
unemployment rate (ILO Review 1996: 59, therefore not be counted as economically active.
121–122, 246–249). Men in subsistence Other reasons could include longer years spent
in educational institutions and earlier retirement
agriculture are classified as economically
(especially among white male workers).
active.
The measurement of the informal sector
in surveys such as the October Household
Survey and the LFS has also not been con- ~ The most important change in the
sistent, as indicated in section 3.2.1. Since labour supply in recent years has
SUMMARY
2000 surveys have, for instance, been much probably been the rising LFPR among
more explicit in identifying informal sector women. This can be ascribed to a
work as employment, and enumerators have number of social and economic fac-
asked much more probing questions regard- tors.
ing the informal sector and subsistence ~ There has been a gradual decline in
farming. This would also have been a factor the participation rates of males.
2.4 POPULATION AND POPULATION GROWTH

P O P ULATION S IZE As has already been stated, an important char-
acteristic of the population is the high propor-
In 2013, South Africa had a total population of
tion of young people, and the burden on soci-
about 53 million people (see Table 2.4). South
ety and the working population that this causes.
Africa’s population is about the same as that of
This problem is likely to be exacerbated as a
Spain, the Democratic Republic of Congo and result of HIV and AIDS, because the disease will
South Korea. It is larger than that of Australia mainly affect income earners, thereby leaving
(more than double), Canada and many of the many households without a breadwinner and, in
smaller European countries, but less than that many cases, even leaving orphans.
of the United Kingdom or France. South Afri- Black people formed about 80% of the total
ca’s population is only 3% of that of China, the population (compared to 74% of the labour
world’s most populous country (Population Ref- force) and women about half (compared to 45%
erence Bureau 1998). of the labour force).
Table 2.4 Total population of South Africa, 2013 (’000)
% breakdown by
Male Female Total
population group
Africans 20 608 21 676 42 284 79.8
Coloureds 2 307 2 459 4 766 9.0
Indians/Asians 669 660 1 329 2.5
White 2 240 2 363 4 602 8.7
Total 25 823 27 159 52 982 100
% breakdown by
48.7 51.3 100
gender
[Due to rounding, figures do not always add up.]
Statistics South Africa, Mid-year population estimates 2013, pg. 3
Source:
Those who warn of a population elderly people (over 60 years of age), are show-
explosion picture a world of ing noticeable growth. The proportion of people
too many people and not enough between the ages of 15 and 34 years of age is
food – sort of like the expected to grow significantly in future. There
average cocktail party.
is therefore likely to be an upsurge in the pro-
Bill Vaughan portion of people of working age relative to the
proportion of dependents such as children and
P O P U L ATION GROWTH RATES the elderly, which might provide a demographic
impetus for development. However, the demo-
South Africa’s population and therefore also its
graphic potential might be offset by the poor
labour force grew quite rapidly in the past – by
educational and skills levels of the population.
as much as 2.9% in the 1960s. However, the
There are notable differences between espe-
growth rate declined rapidly and the Population
cially the African and the white population by
Reference Bureau (2011) recently estimated the
age, which are likely to have a significant impact
rate of natural increase of the population at only
on the labour force in the future. The African
0.6%. This is related to factors such as sharply
population shows the typical pattern found in a
declining fertility rates, the impact of HIV and
developing country, which is that the population
AIDS and the net loss of skilled workers owing
is relatively young. In contrast, the white popu-
to emigration, factors that are discussed in this
lation is typical of that found in many developed
chapter.
countries, which is an ageing population.
The population growth rate can be compared
Figure 2.3(a) and (b) shows the so-called
to that of some other countries, for example
“population pyramid”. These graphs indicate
Germany (–0.2%), USA (0.5%), Brazil (0.9%),
the percentage of the male and female popu-
India (1.5%) and Mexico (1.4%) (Population
lation in the various age groups. Figure 2.3(a)
Reference Bureau 2011). It is important to note,
clearly shows the impact of the high fertility
however, that the data for all countries relate to
rates on the African population until recently,
the natural increase in population, i.e. disregard-
with the population pyramid having quite a large
ing migration.
basis (a high proportion of people in the young-
er age groups). However, even this graph shows
P O P U LATION BY AGE
the declining birth rates in recent years, with the
The South African population is slowly matur- proportion of people in the 0–4, 5–9 and 10–14
ing. The proportion of the population under the year age groups not being dissimilar – high birth
age of 15 years is steadily declining while other rates would have shown up as increasingly high-
age categories, particularly the proportion of er proportions in the lower age groups.
(a) African age groups
MALE 80+ FEMALE

75–79
70–74
65–69
60–64
55–59
50–54
45–49
40–44
35–39
30–34
25–29
20–24
15–19
10–14
5–9
0–4
6.0 4.0 2.0 2.0 4.0 6.0
Percentage of total African population
(b) White age groups

MALE 80+ FEMALE
75–79
70–74
65–69
60–64
55–59
50–54
45–49
40–44
35–39
30–34
25–29
20–24
15–19
10–14
5–9
0–4
5.0 3.0 1.0 1.0 3.0 5.0
Percentage of total white population
Figure 2.3 Population pyramid of the African and white population, 2006

Statistics South Africa 2006
Source:
The ageing white population is also clearly tively small proportion of the population in the
discernable in Figure 2.3(b) – with higher pro- age groups 25–39. This is a clear indication of
portions in the older age categories. However, the impact of the emigration of young workers,
what is also significant in this graph is the rela- usually with skills, from the country.
F A C T ORS DETERMINING POPULATION increase. The fertility rate is discussed in more
G R O WTH RATES detail in the next section. The mortality rate is
Population growth is a function of three demo- greatly affected by HIV and AIDS; this is dealt
graphic factors: fertility, mortality and migra- with in section 2.6. Immigration, emigration and
tion. This can be illustrated as follows: migrant labour are discussed in section 2.7.
Population
= Total fertility rate The rate of population increase in South
SUMMARY
growth rate
Africa is relatively high by international
Mortality standards, but has dropped sharply
minus plus Net migration
rate owing to a substantial decline in fertil-
ity rates and a high level of emigration
The difference between the fertility and mor- among skilled people.
tality rates is called the natural rate of population
2.5 TOTAL FERTILITY RATE

Of the three demographic factors, the total fer- To estimate TFRs in developing countries is
tility rate (TFR) of the population is the most particularly difficult. This is because there is not
important. The TFR is the average number of complete reporting of births. As a result, esti-
children born alive to a woman in her reproduct- mates of the level of fertility are derived from
ive years (15 to 49). census/survey data by employing indirect demo-
The very pessimistic quote at the beginning of graphic estimation techniques. Statistics South
this chapter relates to the fertility of a nation. Africa (2010) has reported that although there
It was made by Reverend Thomas Malthus in are differences between the existing studies, there
1798. According to him, as incomes rise above is an agreement among authors that fertility has
the subsistence level, men and women become been following a downward trend in South Afri-
“unrestrained”, and the resultant increase in ca since the 1960s. Also, there is agreement that
fertility inevitably leads to an increase in the fertility patterns in the country differ by popula-
population. The available natural resources will tion, as well as some other factors such as prov-
not be sufficient to support a larger popula- ince of residence, rural/urban place of residence,
tion, and the consequent competition for these and level of education.
scarce resources causes incomes to fall again, The TFR in South Africa has declined from an
which will “restrain” the population. So, accord- estimated 6.7 children per woman in the 1960s,
ing to his theory, income will always be pushed to an estimated 2.84 according to the 2001 Cen-
back to its subsistence level. The theory thus sus. Since then, there has been a further slight
in effect argues that there is a positive correla- decline to 2.8 in 2006 (Statistics South Africa
tion between income and fertility – as income 2010: 17). However, the mid-year population
increases, fertility also increases. estimates of Statistics South Africa estimate a
TFR of only 2.64 in 2006, and 2.35 in 2011.
Misery, up to the extreme In 2006 Africans (2.9) and coloureds (2.5) had
point of famine and pestilence, comparatively higher fertility levels than their
instead of checking, tends to white (1.8) and Indian/Asian (2.0) counterparts.
increase population. In fact, the TFRs for Africans and coloureds are
Samuel Laing still above the replacement level of 2.1. This
so-called “replacement level” or “breakeven
However, real-world experience does not sup- point” is the point where the fertility rate and
port this theory; as per capita income and living the mortality rate are equal so that there is no
standards increase, fertility rates decline rath- increase or decrease in the population.
er than increase. This is also borne out by the The reduction in the fertility rates since the
South African experience. 1960s, and the consequent reduction in the
Account: s7393698
rate of population growth that this could bring

about, is important for a number of reasons: The transition can be explained by way of a
curve as in Figure 2.4.
• A population growth rate that is too high
places great demands on social services, such Population
as education, health, transport and the provi- growth
sion of housing. rate
• Lower population growth will assist in
First
improving living standards. If econom- stage
Second Third
ic growth increases at a higher rate than the stage stage
population increases, the per capita income of
the country increases. Although the “haves”
will benefit more than the “have nots”, Time Fourth
incomes will rise and, as will be shown else- Zero stage
where (see, for instance, section 7.4.3), even growth
without state intervention, rising incomes
are likely eventually also to benefit the “have Figure 2.4 Theory of demographic
nots”. State intervention in the form of vari- transition
ous transfers will speed up this process.
The first stage is characterised by high
• Over the long term, a declining popula-
tion growth rate is one of the most import- birth rates and high mortality rates. Because
ant methods of addressing South Africa’s both are very high, the population may
unemployment problem. increase slowly or not at all. In some instan-
• High population growth rates place tremen- ces the birth rates could, because of strong
dous pressure on the environment and on nat- cultural traditions and strong family ties, be
ural resources. With its existing water resour- at relatively moderate levels.
ces, South Africa may not be able to support The second stage is characterised by a
a population of more than 70 to 80 million steep decline in mortality rates, particularly
people. among the very young, because of improved
• The successful implementation of development health services, improved water and sanita-
programmes depends greatly on the effective tion systems, and better medical care. Birth
curbing of the population growth rate. A rela- rates may increase because of a breakdown
tively high population growth rate exacerbates in cultural traditions and family life. The
the basic needs backlog South African society result is a sharp increase in the natural rate
faces (ANC 1994: 17). of population growth.
The third stage requires sharply declin-
The decline in the TFR and population growth
ing birth rates, making it difficult for some
rates as a whole can be explained by the
so-called “theory of demographic transition” less developed countries to move from the
(see accompanying box). second stage. Stage three is thus charac-
terised by low fertility and low mortality
rates. It has been found that birth (fertil-
ity) rates start declining only under certain
Theory of demographic transition circumstances, and these relate especially
The theory of demographic transition may to improved living standards. The whites
explain both the declining TFR in South in South Africa made the transition to this
Africa and the large differences in the popu- stage in the 1950s; the Indians/Asians in the
lation growth rates of the various races 1960s; the coloureds in the 1970s and the
(Marshall et al. 1980: 158). South Africa’s Africans in the 1990s (Simkins 2002).
population is currently progressing through At some stage birth rates decline to
various stages of the demographic cycle. below the replacement level, and the popu-
Í Í
abolition of influx control in 1986 seems to
lation declines. Some highly industrialised have contributed to the reduction in birth rates,
countries are at this fourth stage of demo- because increased urbanisation also reduces fer-
graphic transition, and white South Africans tility rates. Urbanisation reduces dependency on
seem to be entering this phase. children for their labour in agriculture and gen-
erally improves living standards.
Most of the time I don’t have

F A C T ORS INFLUENCING FERTILITY much fun. The rest of the time
RATES I don’t have any fun at all.
Goliber (1997: 17–18) describes the determin- Woody Allen
ants of high fertility as rural residency, poverty,
the low status of women (which leads to child-
bearing becoming an important way for them to ~ All indications are that fertility rates in
gain status), women needing children for their South Africa have declined quite sub-
labour and for the security they provide in the stantially in recent years.
women’s later life, a culture which frowns on
~ Improving the social and economic
women remaining childless, low life expectancy
SUMMARY
status of women, increasing living
and low educational standards.
standards and higher urbanisation
Increased employment opportunities, espe-
rates make a significant contribution
cially for women, the enhancement of the pos-
to the reduction in fertility rates.
ition and status of women in the community,
improved education and primary health care, the ~ Declining fertility rates reduce high
reduction of poverty and the provision of hous- population growth rates. This, in turn,
ing can all play an important role in reducing is important as it relieves the pres-
birth rates. Family planning and birth control sures on social services, the environ-
also play a role, but are less important than ment and employment rates.
improved living standards. In South Africa, the
2.6 THE IMPACT OF HIV AND AIDS

HIV and AIDS has an impact on a number of 2.6.1 Incidence and causes of HIV and
elements of the labour market, such as the size of AIDS
the population and of the labour force, inequal-
ities and productivity. It has probably become In the case of South Africa, the most important
the most devastating disease humankind has ever facts regarding the incidence of HIV and AIDS
experienced, and unfortunately the impact is are the following (Shisana et al. 2005; Statistics
particularly severe in South Africa. South Africa, 2011):
The incidence of the human immunodefi- • There were about 5.38 million people with
ciency virus (HIV) is much higher in Africa than HIV in 2011, which represents a prevalence
elsewhere, and is most virulent in southern and rate of 10.6% (the percentage of the total
eastern Africa. In these countries the highest population living with HIV).
incidence is among heterosexual persons. The
infection rates in South Africa are among the • Compared to the overall rate of 10.6%, the
highest in the world. In some African countries, infection rate among adults (age 15–49 years)
however, HIV incidence seems to be stabilising. was higher at 16.6%, and even higher among
This can be ascribed to the fact that many people adult women (19.4%)
with high-risk behaviour have already been • It was found that people living in informal
infected, and effective prevention programmes urban areas were significantly more likely to
enable people to reduce their risk of exposure. be HIV positive.
There were no discernable differences in mortality rates in the country. Such statistics are
HIV prevalence among the employed and the not available, because mortality data are col-
unemployed. The same was true with regard lected from death notification forms, which give
to disposable income – there was no dis- the direct cause of death, such as tuberculosis,
cernable difference between wealthy African influenza, pneumonia, and so forth. Many of
households and those that were poor. these diseases appear to be HIV and AIDS relat-
The prevalence rates were highest in the mined. Statistics South Africa nevertheless estimates
ing, transport, construction, government, the number of AIDS deaths in 2011 at 258 000.
accommodation and catering sectors. The The following possible consequences of HIV
lowest incidences were in the financial, insur- and AIDS can be identified:
ance, business and communication services. • Demographic impact. HIV and AIDS have
The prevalence of HIV increased with increas- already resulted in life expectancy dropping
ing levels of schooling, with the highest inci- from 63 in 1990 to 51.8 in 2005. More recent-
dence occurring among those with matric. ly, however, life expectancy has increased to
Thereafter the rate dropped quite sharply for 57.1 (Statistics South Africa 2011)
persons with tertiary qualifications. • Dependency ratio. Because HIV and AIDS
Demographic projections estimate the life span mostly affects sexually active adults, it results
between infection and death at 8 to 10 years in an increase in mortality in the 25 to 40-year
(in the absence of antiretroviral treatment age group. The likely sharp increase in the
(ART)). During the first part of this period, number of orphans is perhaps the most tragic
the HIV-positive individual may experience and enduring legacy of AIDS, and it has been
relatively few direct symptoms, and employ- estimated that there are already 2.01 million
ment and productivity may be only marginal- AIDS orphans (Statistics South Africa 2011).
ly affected. However, with the gradual onset It will also negatively affect the dependency
of the acquired immunodeficiency syndrome ratio in another way, i.e. many elderly persons
(AIDS) (usually during the last two years), will lose their adult children and thus their
the medical symptoms become progressively support structure.
worse and eventually lead to death.
• Supply of labour. HIV and AIDS will result
in the labour force being smaller than would
actors that contribute to the high levels of HIV
otherwise have been the case, seeing that the
nclude the high prevalence of untreated sexually
overwhelming majority of persons affected
ransmitted diseases (STDs), which significant-
by HIV and AIDS will be between the key
y increases the risk of acquiring HIV; multiple
productive ages of 20 and 40 years. They
oncurrent sexual partners; relatively high lev-
will affect both employed and unemployed
ls of unregulated commercial sex; low rates of
persons, although the expected impact on
ondom use (at least until recently); low rates
unemployment will depend on the mix of
f male circumcision; rapid rates of urbanisa- skills demanded by employers. Van Aardt
ion (resulting in multiple sexual relationships (2001) has projected that the labour force will
nd STDs); disrupted family and communal have four million fewer workers in 2016 in a
ife owing to apartheid and migration; massive medium HIV and AIDS scenario. The average
efugee movements driven by war, civil conflict annual increase in the labour force over the
nd economic distress in neighbouring coun- period 2001 to 2016 will drop from 2.6%
ries; good transport systems and high mobility, in a no HIV and AIDS scenario to 1.6% in a
hich allow for the rapid spread of the disease; medium HIV and AIDS scenario. A high HIV
ow status of women, resulting in situations that and AIDS scenario will reduce the growth rate
lace them at risk of HIV infection; and poor of the labour force even further.
ealth, hence low resistance levels.
• Employment. Unemployment might not
increase, but it is unlikely to decline because
.6.2 Consequences of AIDS
economic growth rates will not be high
t is important to note that it is not possible to enough to significantly reduce unemployment
etermine the direct impact of HIV/AIDS on (Arndt & Lewis 2000). Van Aardt (2001)
projects that fewer jobs will be created as a • Other consequences for government. Apart
result of investor caution, lower consumer from the impact of high health costs on gov-
demand due to a smaller population, higher ernment expenditure, there is increased pres-
capital intensity as employers try to avoid the sure from orphan care expenses and reduced
negative consequences of HIV and AIDS on revenues. The decline in growth and lower
their businesses, and higher levels of mortality profits also affect tax receipts negatively.
among employers because of AIDS. These, together with higher social support and
health care expenditure, increase government
• Depletion of human capital. The personal and fiscal difficulties. In addition, the government
economic returns from years of investment in loses valuable skilled employees as more civil
schooling and higher education are often cut servants and teachers fall prey to the epidemic.
off before any returns can accrue to the indi- The epidemic also overburdens social systems
vidual, family or society (Simkins 2002). Mor- and poses challenges for the welfare system.
tality among breadwinners and other parents
• Impact on the workplace. It has already
weakens families, and this damages the acqui-
been found that HIV and AIDS has a nega-
sition of human capital by children. Children,
tive impact on the profitability of companies
for instance, have to fend for themselves, and
in the sectors worst affected by the disease.
do not receive material or emotional support
The largest negative effect has been on labour
to attend school. productivity and absenteeism, followed by
• Poverty and inequality. Many households face the increased employer contributions to vari-
dire financial difficulties as their breadwin- ous benefit schemes (medical aid contribu-
ners fall ill and die, and household incomes tions, pension, life and disability insurance,
and funeral benefits) (SABCOHA/BER 2005).
are diverted for the care of HIV and AIDS-af-
Companies have also experienced higher
fected persons and funerals. This makes the
labour turnover, have lost experience and
achievement of overall development object-
skills, and have incurred higher recruitment
ives more difficult, and is likely to increase
and training costs. However, the loss in pro-
the generally high level of inequality already
duction will probably be less than the reduc-
found in the country. As employers attempt
tion in the labour force, because companies
to become more capital intensive by decreas-
will strive to maintain production, for instance
ing their reliance on unskilled workers and by by replacing labour losses from the ranks of
employing more skilled workers, inequalities the unemployed, by importing skills or by
also increase. implementing more productive labour-sav-
• Insurance industry and benefit schemes. ing technologies. Although AIDS will lead
to losses of labour, a high proportion will be
Employers face increased contributions to
semi-skilled or unskilled workers, who can
their employees’ life, disability and medical
be replaced. Production costs will, however,
benefit schemes. Insurers, and in particular life
increase because of several of the factors men-
insurers, are exposed to increased liabilities
tioned above. There will also be pressure on
on existing policies. Various methods are also
salaries because of increased skills shortages
being employed to limit future liabilities.
and union pressure for companies to make
• Direct health costs. The impact of AIDS on up for the increased health care spending of
medical costs and health services is quite sig- households.
nificant. Hospitals are overburdened with • Other macroeconomic effects. The macro-
AIDS patients, reducing effective health economic consequences of AIDS are not
care. As the provision of ART is expanded, seen to be devastating (Bureau for Econom-
the effect of HIV and AIDS on hospitals is ic Research (BER) 2001: 5). However, esti-
reduced, but other medical costs, especially mates of the impact on the economic growth
those of pharmaceuticals and associated med- rates (as measured by increases in GDP) vary
ical support services to administer the drugs, greatly, for example between the World Bank
are high. Households also redirect their spend- (Arndt & Lewis 2000), which estimates a sig-
ing to health care spending. nificant impact, and the BER (2001), which
estimates a smaller impact. The difference

might be due to the fact that the BER has (b) Mitigating the effect in the workplace
assumed that companies will take several steps Skills investment combined with effect-
to avoid the negative consequences of HIV ive HIV and AIDS prevention
and AIDS, for example by replacing labour
Prevent secondary infections, such as
from unemployed sources, by becoming more
tuberculosis and pneumonia
capital intensive to maintain production and
by restructuring benefit funds to reduce costs. Employers and unions to cooperate to
develop appropriate strategies
• There are those who argue that because the
economic growth rates will probably continue Minimise the risk of infection of
to increase at a higher rate than the popula- co-workers, e.g. provision of protective
tion, the per capita GDP (a very rough meas- equipment, training on safe procedures
ure of the economic well-being of the “aver- Anonymous, unlinked surveillance
age” South African citizen) might increase. through HIV testing
However, a World Bank working paper
disputes that GDP per capita will actual- (c) Care and support
ly increase – it projects that GDP per capita Information on support services and the
will decline over the next few years (Arndt & allocation of scarce resources
Lewis 2000). It should be borne in mind, how-
ever, that even if GDP per capita increases, Confidential voluntary counselling and
many survivors of the HIV epidemic are likely testing programmes
to be left with smaller discretionary incomes More cost-effective modes of therapy
because an increasing part of their income will for HIV and AIDS sufferers
go towards health expenditure. An efficient grant or other support sys-
tem, not only for the HIV disabled, but
also for the elderly, orphans and others
Policy issue: Addressing HIV and AIDS affected by the death of breadwinners
(ILO 2001a)
(d) Elimination of discrimination
(a) Prevention
Eliminate the stigma and discrimination
Promotion of healthier and safer sexual around HIV and AIDS
behaviour Greater opportunity for role models to
Programmes to diagnose and treat sex- relate how they deal with HIVand AIDS,
ually transmitted diseases (STDs) but even more importantly, to advocate
Targeted interventions to prevent new safe sexual behaviour
infections among teenagers Legislation to eliminate unfair dis-
Programmes to empower women and to crimination
eliminate discrimination Workers and job applicants should not
Encourage the use of condoms be required to disclose their HIV status
~ The HIV epidemic in South Africa is spreading rapidly and it is estimated that more than 10 per
SUMMARY
cent of the total population is HIV positive. Among adults, the rate could be significantly higher
at about 16%.
~ AIDS will not “solve” South Africa’s unemployment problem because the medical and econom-
ic costs of AIDS will be so high that they will seriously damage the economy long before the
demographic effects of AIDS are felt.
~ There are various reasons for the high incidence of HIV and AIDS, and therefore also various
elements to a strategy to deal with the epidemic. Probably the most important elements are
ensuring safe sexual behaviour and eliminating discrimination against women and HIV and
AIDS sufferers.
2.7 IMMIGRATION, EMIGRATION AND MIGRANT LABOUR

2.7.1 Immigration and emigration of United States provides the best example of the
skilled people value of skilled immigrants. In 1990 more than
a third of engineers and other IT professionals
A two-sentence message received working there had been born elsewhere. For-
by vice-president Lyndon Johnson eigners were responsible for more than 30% of
came from an American Indian on a biotechnology inventions; generated a quarter
reservation: “Be careful with your of all global patent applications originating in
immigration laws. We were careless the United States in 2006; founded more than
with ours.” a quarter of American companies, including
Intel, Sun Microsystems, Yahoo and Google;
Herbert Prochnow and received 33% of all doctorates awarded in
2008, including 48% of those earned in physic-
T H E BENEFITS AND COSTS OF al sciences and 60% in engineering. The CDE
M I G R ATION also refers to equally compelling proof of the
importance of skilled immigrants that can be
Migration inflows have been identified as a fac- found in the efforts made by the world’s most
tor that increases economic growth to the bene- developed countries to attract them. In recent
fit of the destination country and all its citizens years, the United States, Germany, the United
(United Nations 2004: xiii). This is more readily Kingdom, France, the Netherlands, Canada and
accepted in respect of skilled workers, because Australia have all taken steps to attract highly
when it comes to lower skilled workers there are skilled workers. The same is true of countries in
often concerns that an influx of immigrants will the Middle East (see also accompanying box).
result in job losses and reduced wages. How- What the destination countries gain, the coun-
ever, empirical studies show that migrants have tries of origin lose. The most serious loss is the
only a modest impact on wages and employment so-called “brain drain”, i.e. the loss of skilled
(United Nations 2004: xiii). The major reason workers. In effect, the country of origin loses
for migrants not having a significant impact on both its earlier investment in the education and
the labour market is that they increase not only training of the person who emigrates and the
the labour supply but also the demand for goods future contributions that person would have
and services. In addition, some use their entre- made to the economic development of the home
preneurial abilities to set up businesses. These country, including future tax payments by high
activities increase the demand for labour, off- income earners – all of which is extremely cost-
setting the initial increase in the labour supply ly. Recent research has also identified an indirect
that migrants represent. Migrants also tend to be effect – such a person’s knowledge not only pro-
net contributors to fiscal revenue: what they pay vides a direct benefit in terms of available skills
in taxes is greater than what they cost the state but also has positive effects on the productiv-
in welfare payments, education and additional ity of others (United Nations 2004: xi). These
infrastructure. people are furthermore often entrepreneurs, i.e.
As pointed out by the CDE (2010: 11), the the creators of employment.
Policy issue: A cost-benefit analysis of They point out that greater immigration of
immigration highly skilled workers will help limit salary
increases for such workers (and thus the
Steyn, Meintjies and Haasbroek (1986)
increase in wage inequality).
undertook a cost-benefit analysis of immi-
gration to South Africa. They concluded
that for the employer it is more cost-effect-
ive to make use of immigrants than to train SO U TH A F R I C A N I M M I G R A TI O N A N D
local people when graduates and technicians E M I G R A TI O N
are needed. With regard to artisans, oper- The country’s domestic skills production sys-
ators and other related occupations, the tem is grossly inefficient: children fare badly in
opposite applies and it is more cost-effective almost every international test of literacy and
to train locally. numeracy; the training of technicians and arti-
From a purely cost-effective point of sans has all but ground to a halt; and universi-
view, it is also better for the state to rely on ties produce far too few engineers, managers and
immigration rather than on training, espe- other skilled people. To make matters worse,
cially with regard to tertiary qualifications, skilled people have been leaving the country at
an alarming rate (CDM 2010: 10).
which are heavily subsidised by the fiscus.
Although it is critically important to transform
However, the criteria for the state cannot be the whole system of human resource develop-
based purely on cost considerations. Other ment in South Africa, this will take many years
objectives such as employment creation, to achieve. The only way in which South Africa
upliftment of the local population, ensuring can access the large number of skilled workers
a stable supply of skilled workers and black that it requires is to import skilled staff from
advancement should also play at least as outside the country by way of changes to its
important a role. immigration policy.
In addition to purely cost considerations, South Africa no longer keeps data on official
the Harvard Group appointed by the South immigration and emigration. This means that
African government to advise it on eco- one cannot determine whether the country is
gaining or losing skills on a net basis – this while
nomic growth and development (Hausman
the availability of skills is a critical element for
2008) pointed out that all empirical studies the long-term growth of the country.
of labour demand show that high skilled Official data on net immigration is thus avail-
and low skilled workers are strongly com- able only up to 2003. In the past, the immigra-
plementary, not substitutes. Coffee and tea tion of skilled people had a significant impact
are substitutes while coffee and sugar are on the supply of labour in South Africa and
complements. This means that the greater especially on the supply of high-level personnel.
the supply of skilled workers, the greater the From 1960 until the 1994 elections there was
demand for unskilled workers. The short- a substantial net gain of migrants as a result of
age of highly skilled workers causes a lower factors such as high economic growth and the
demand for low skilled workers: the lack of active recruitment of immigrants to South Africa
through financial assistance. During the period
engineers may cause the loss of hundreds of
1947 to 1993 South Africa experienced a total
blue collar jobs. They state that since the net gain of 688 000 people or an average of
shared growth strategy involves maximising 15 000 people per annum.
the job opportunities of the less skilled, it is These gains had a substantial influence on the
fundamental that the high skill constraint be increase in the supply of skilled labour in South
relaxed, especially in tradables. An obvious Africa. Between 1965 and 1985, for example,
policy by which to relax the constraint net immigration contributed about a quarter of
quickly is through the liberalisation and the increase in highly skilled and skilled person-
encouragement of high skilled immigration. nel (National Manpower Commission (NMC)
1987: 34). However, since the middle of the
Í
1990s, this no longer seems to be the case and
a net loss of migrants seems to have become the competitive global labour market, and
norm. we have lost many skilled citizens. We
The CDM (2010: 10) refers to studies that have also failed to manage the influx
estimated that more than 520 000 South Afri- of irregular migrants looking for jobs,
cans had emigrated between 1989 and 2003, many of whom lack the formal quali-
with the numbers growing by about 9% a year. fications that would enable them to
About 120 000 of those emigrants had profes- obtain residence permits, but who often
sional qualifications, amounting to about 7 per
have some skills and energy needed to
cent of the total stock of professionals employed
make an economic contribution. At the
in South Africa, and more than eight times the
number of professional immigrants in the same same time, a flood of asylum-seekers
period. has taken our asylum and refugee sys-
tems to the brink of collapse.
Immigration policy
In spite of the economic benefits of immi- FA C TO R S C A U S I N G I M M I G RA T I O N A N D
EM I G RA T I O N
gration gains, several countries have recent-
ly been experiencing disenchantment with There is much speculation about the causes of
the multicultural approach that migrants immigration and emigration, but relatively little
inevitably bring about. Feelings of resent- empirical research. The factors normally men-
tioned as causes are crime and violence, affirma-
ment among pockets of the population,
tive action and racism. However, in an empiric-
together with increased concerns about
al study, Myburgh (2004) found that the most
national security, the granting of asylum, important factors causing emigration from South
undocumented movements and the like have Africa are
led to a re-examination of immigration poli-
• real wage differentials between South Africa
cies in several countries (United Nations and the destination country
2004: xv). By 2003, for example, one-third • immigration restrictions in the destination
of all countries had policies to reduce immi- country
gration compared with only 7 per cent in • political uncertainty in South Africa.
1976.
This is quite a change from only a few With regard to political uncertainty, Myburgh
years back when countries such as Britain found that the mid-1980s seemed to be the only
introduced policies to attract innovative clear example of emigration induced, in part,
people with high-tech skills from abroad by political uncertainty in the last 20 years.
Increased emigration in the 1990s occurred in
(Absa 2001a: 13) and the USA considered
the context of rising real wage differentials in
tax cuts in part designed to attract more
Australia and the UK.
skilled immigrants into the country. Furthermore, Mattes and Richmond (as
The resistance to the immigration of quoted by Myburgh 2004) found that sur-
skilled workers seems to be much more vey evidence does not support the hypothesis
severe in South Africa. The CDM (2010: 13) that racism and affirmative action are import-
describes South Africa’s immigration policy ant drivers of emigration. This is in contrast to
as follows: violence, which was found to be an important
causal factor (see research quoted by Myburgh
South Africa’s responses to these pres- 2004: 145).
sures and opportunities have been If South Africa intends retaining the core of
poorly conceived and badly imple- its skills base, it needs to take careful note of the
mented. We have failed to attract factors causing an outflow of skills. As predicted
adequate numbers of skilled people in a by the ILO, the market for highly skilled work-
ers is likely to become more globally integrated
Í
and labour migration is expected to feature more developments in the mining industry (see accom-
prominently in the future (as quoted by Strydom panying box). Since then, the numbers have
2003: 5). remained fairly constant.
In recent years the problem of irregular
migrants from neighbouring countries has
~ The influence of immigration on the assumed serious proportions.
supply of labour in South Africa, and The CDM (2010: 19) refers to surveys that
especially on the supply of high-level demonstrate that irregular workers can and
personnel, was considerable before do make important contributions to the South
African economy. For instance, they are much
SUMMARY
1994. However, a net loss of skilled

workers seems to have become the less likely than the local population to be out of
norm since 1994, and this loss is work, and they also seem to compensate for the
aggravating skills shortages in the low level of entrepreneurial talent among South
country. Africans. Mpedi (2000: 402) refers to research that
found that migrants actually create jobs at the rate
~ The actual number of emigrants
of more than three jobs per migrant. They also often
seems to be about two or three times
occupy positions to which unemployed South Afri-
higher than that recorded by official
cans do not aspire, for example in agriculture or
statistics.
atypical employment.
Nevertheless, a large and uncontrolled influx
of irregular migration together with increasing num-
bers of asylum seekers inevitably impose costs on the
2.7.2 Migrant labour within South receiving country. These include greater competition
and southern Africa for jobs; uncertainties about, and increased pressures
on, the planning and provision of services, especially
The system of migrant workers from rural areas in poor communities; social tensions that feed xeno-
and from neighbouring countries, who work phobia; the erosion of public confidence in state agen-
on a temporary basis in South African cities cies that appear unable to cope; and increased oppor-
or mines, is an important characteristic of the tunities for corruption. The failure by government
South African labour market. In this respect a to effectively manage the influx of irregular immi-
distinction can be drawn between temporary grants has also given rise to a sharp increase in xeno-
migrant workers and commuters. phobia, i.e. the fear of foreigners. Foreigners are often
Temporary migrant workers are workers who accused of taking away jobs from citizens, engaging
live in rural areas and neighbouring countries in criminal activities and competing for scarce resour-
and who work and live in urban areas on a tem- ces and public services.
porary basis. They return to their area of origin
after completion of their service contract, or on
an annual basis for a period of leave. Commut- Migrant labour on the mines
ers, on the other hand, are workers who live
in rural areas and commute to work in urban South African mines have drastically
areas, but who return to their homes every even- reduced their use of foreign African labour
ing or every weekend. (i.e. from neighbouring countries) since the
1980s. In 1960, for instance, the foreign
N E I GHBOURING C OUNTRIES African labour component on the mines
amounted to 64% of all workers, and this
The term “neighbouring countries” refers to
had increased to 75% by 1974. However, in
Botswana, Lesotho, Malawi, Mozambique and
Swaziland. These countries are referred to as the the 1990s the percentage dropped to 45%,
Southern African Labour Commission (SALC) according to the Chamber of Mines.
countries. The total number of legal migrants The first reason for this development
from neighbouring countries fell sharply in the was the growing political hostility towards
1970s (Whiteside 1986: 25), with the greatest South Africa in the 1970s and 1980s,
reduction being in the number of Malawians, which encouraged the mining industry to
followed by Mozambicans. This was related to
Í
Posel and Casale also found that there was
turn increasingly to the labour force within an increase in the number of female migrant
South Africa’s borders. The second reason workers. Females comprise about a third of all
was sharply increasing labour costs on the migrant workers. Some of the possible reasons
mines. More and more workers were thus for the increase in female migrant workers were
recruited “at the gate” of the mine, which that women were less likely to be living with
meant more local labour was hired (unless, men who had employment, which implied that
of course, migrants posed as locals). there was a greater burden on the women to pro-
Another important characteristic of the vide for the household. There were also fewer
mining migrant labour force is its stabilisa- women living with men in total, with the result
tion. This is due to the increasing average that they had to earn a living for themselves.
Regarding the remittances of internal
duration of employment contracts. For
migrants, Posel and Casale (2003: 472) found
instance, the average age of workers in gold
that the incentives for remitting income were
mines increased from 26 years in 1975 to 37
weaker than before, thus one might have
years in 1990 (ILO Review 1996: 299). expected remittances to have been reduced.
Penny (1986) estimates that migrants in The weaker incentives were, firstly, that family
the gold mining industry remit more than members could join the migrant worker in the
half their contract wage to their home area urban areas, and secondly, that there were
in cash or in kind, of which the biggest part fewer income-earning opportunities for migrant
is remittances sent home informally by the workers and increased pension receipts by rural
miners. The remittances constitute more households. However, the limited available
than 80% of the rural household’s total data do not show any reduction in remittances.
annual income. Rural economic production Remittance income on average represents about
forms only about 10% of annual income. one-third of total household expenditure.
Although there may be some arguments in
favour of South Africa’s migrant labour system,
One country that is particularly dependent on for example that it reduces the rapid growth of
migrant labour is Lesotho. Whiteside (1986) urban slums and provides a significant income
calculated that migrant labour could comprise for the rural areas of origin, there are powerful
about a quarter of the country’s labour force, arguments against the system. Because migrant
and migrant labour remittances could earn up workers are often atypical workers (see section
to 50% of the gross national product and about 6.6.2), the system discourages training initiatives
75% of foreign earnings. by the employer, which limits the earning cap-
acity of migrant workers.
I N T E RNAL LABOUR MIGRATION Furthermore, labour migration has negative
economic effects on the production potential of
With the lifting of influx control in South Afri-
ca, one would expect that the pattern of tempor- rural areas and thus migrant labour essentially
ary migration would be replaced by permanent perpetuates its own continuance. There are three
migration, particularly to urban areas, and that main reasons for these negative effects:
the migrants’ ties to their households of origin • It could be argued that it is usually the better
would have weakened considerably. However, educated, more energetic and younger workers
Posel and Casale (2003: 460) did not find strong who migrate to the urban areas. The workers
empirical evidence to support this. In fact, the who stay behind are not as productive as those
number of households with at least one labour who leave and they cannot maintain agricul-
migrant as a household member increased slight- tural production.
ly between 1993 and 1999. Posel and Casale
found that there were 1.8 million households • Agricultural development requires invest-
with at least one migrant worker in 1999. This ment, but the remittances from urban areas by
comprised 35% of rural African households. A migrant workers and the surplus agricultural
total of 20% of rural male adults were migrant production are so low that there is no possibil-
workers in that year. ity of investment.
• Rural communities have become used to

migrant labour as a way of life. Most activities
~ In recent years the problem of illegal
are therefore directed at preparing sons and migrants from neighbouring countries
daughters for city (migrant) life and not for has assumed serious proportions, and
productive activity in rural areas. could damage the economic pros-
pects of both South Africa and the
SUMMARY
The result is a breakdown of social values countries of origin.
and family life, and social ills and diseases are
exacerbated. ~ There does not seem to be a reduc-
tion in internal migration, and migra-
tion by female workers has in fact
increased.
~ Remittances continue to form an
important part – about a third – of the
expenditure of rural households.
2.8 DEEPER INSIGHT: FROM THE INDIVIDUAL DECISION TO WORK TO

THE MARKET SUPPLY OF LABOUR 1
The world is full of willing and leisure time. Figure 2.5 is an example of
people; some willing to work, the such an indifference curve. The horizontal axis
rest willing to let them. indicates the amount of leisure time, which adds
up to 24 hours per day. The vertical axis indi-
Robert Lee Frost
cates the income per day that the individual
An individual in the labour market is confronted might earn.
with a decision as to how much time he or she Each point along the curve indicates the same
wants to allocate to work (in the sense of paid level of satisfaction or utility for that individual.
work) and how much to leisure activities. This This can be explained by the following proper-
decision will be affected by two factors. The ties of an indifference curve.
first is the individual’s preferences with regard (a) Negative slope. The negative slope indicates
to work and leisure (one can, for instance, com- that as leisure time increases, income reduces
pare the preferences of a workaholic and a pleas- owing to fewer hours at work. For instance,
ure-seeker), which are embodied in an indiffer- at point A, the individual will enjoy a high
ence curve. This decision will be affected by the income but relatively little leisure time. The
income that the individual will earn by working. same individual might choose to give up
Secondly, there is the constraint imposed by the some income if he could increase his leisure
amount of money available to that individual. time sufficiently, which is point B on the
This is called the budget constraint. These are curve. Both of these points provide the same
discussed in turn. level of “satisfaction” to that individual.
(b) Convex to the origin. The curve is bowed
2.8.1 Worker preferences: indifference
inward, i.e. convex. This is because as the
curves individual moves from point A to point B,
An indifference curve shows the preferences of he becomes increasingly reluctant to give up
an individual to various combinations of income income to enjoy more leisure. For instance,
1 Non-economists are advised to read the comments in the preface before they become too intimidated by the graphs
that economists so love to use. It is not essential for the reader to understand the theoretical section of the chapter
in order to comprehend the issues discussed in the rest of the chapter. Nevertheless, section 2.8 will help the reader
understand better how the labour market as a whole operates.
A
1
A1
Income
B
1 B1
2 3
0 2 4 6 8 10 12 14 16 18 20 22 24
Hours of leisure
Figure 2.5 The indifference curve
the individual will need much more leisure at

point B to give up a given amount of income
than is the case at point A. To illustrate,
let us consider these two points. To move
from point A to A1, the individual gives
up income to the value of “1”. The same
income (“1”) is sacrificed to move from
Income
point B to B1. However, to obtain the same

satisfaction (or utility), the individual has to
get much more leisure time at point B (“3”)
than is the case if he is at point A (only “2”).
I2
(c) Indifference map. Any individual will have
a large number of indifference curves, I1
depending on how much money is avail-
able. As the hourly wage rate of the individ-
ual increases, the individual will move to a Hours of leisure
higher indifference curve, i.e. the individual
can enjoy more income and at the same time Figure 2.6 The indifference map
enjoy more leisure time. The individual thus
has a higher level of utility. This is indicated (d) Different work–leisure preferences. The
by the movement from curve I1 to I2 in Fig- trade-off between work and leisure will
ure 2.6. The collection of indifference curves not be the same for different individuals. A
is called the indifference map. workaholic will more easily give up leisure
time for a relatively small increase in wages
“Daddy,” said the bright child than a leisure lover. For instance, Figure 2.7
accompanying her father on a round shows indifference curves for the workahol-
of golf, “why mustn’t the ball go ic and for the leisure lover (see McConnell
into the little hole?”
Anonymous µ BACK TO CONTENTS 31
Workaholic
Workaholic Leisure
Leisurelover
lover
Income
Income
Income
Income
XX XX
Hours
Hoursofofleisure
leisure Hours
Hoursofofleisure
leisure
Figure 2.7 Preferences of the workaholic versus the leisure lover
et al. 2006: 18). The workaholic’s curve is various combinations in between. Higher wage
relatively flat, indicating that this individual rates will move the line upwards along the ver-
will readily give up an hour of leisure (X) for tical axis, as indicated. As the total number of
a relatively small increase in income. The lei- hours in a day is fixed, the other end of the line
sure lover, on the other hand, will require a is obviously fixed.
large increase in wages to give up an hour of The individual can be at any point below or
leisure. The workaholic’s curve is more elas- on the budget line, but cannot be above the line
tic. – the combination of income and leisure repre-
sented by points above the budget line is not
Another factor determining each individual’s available at the given wage rates.
preferences is the type of work undertaken – a
person who enjoys his work, such as a musi-
cian, will require only a very small increase in
the wage rate to sacrifice some leisure time. Con-
versely, a gold miner working underground may
require a much higher wage increase to decrease 480
Income
leisure time because of the unpleasant nature of

the work.
A
240
2.8.2 Budget constraint
B
Even though every individual has many indiffer-
ence curves, he is constrained by the amount of 0 2 4 6 8 10 12 14 16 18 20 22 24
money that is available and the number of hours
in a day. This is indicated by a budget constraint Hours of leisure
line, which indicates the various combinations of Figure 2.8 The budget constraint line
income and leisure hours that an individual can
enjoy, given a specific wage rate. For instance,
in Figure 2.8, it is assumed that the wage rate
2.8.3 Utility maximisation
is R10.00 per hour. At the extremes, the indi- By combining the subjective preferences embod-
vidual can either work for 24 hours (i.e. no lei- ied in the indifference curves and the objective
sure hours – as indicated by point A) and earn budget line, the individual’s utility maximising
R240 per day, or alternatively do no work (i.e. position can be determined. This is illustrated in
24 hours of leisure time – as indicated by point Figure 2.9. On indifference curve I1, maximum
B) and earn no income. The line indicates the utility is not achieved, but by moving to line
I2, both income and leisure time are increased. time. His hours of work will then start declining
Thus, maximum utility is achieved at the point owing to his higher income.
where the indifference curve just touches (i.e. This is illustrated diagrammatically in Figure
is tangent to) the budget line, at point C. This 2.10. Each higher wage rate results in a steep-
is called the utility-maximising point. As stated er budget line (W1, W2, etc.). The tangencies of
above, the individual cannot be at a point above these budget lines with the indifference curves
the budget line, only on or below. The number result in a series of utility-maximising points
of leisure hours (and by implication the number (U1, U2, etc.). Initially, the individual may pre-
of hours worked), as well as the wages, can be fer to have less leisure time as wages increase,
read off the horizontal and vertical axes. (e.g. moving from point U1 to U2). However,
at some point he chooses more leisure time as
wages increase, and moves from U4 to U5 – a
wage increase at this point reduces rather than
increases hours of work.
W5
Income
C
I2
I1 W4
Income
Hours of leisure
U5
Figure 2.9 Utility maximisation W3
U4
2.8.4 The individual labour supply

W2 U3
curve
It is now possible to derive the overall labour U2
supply curve for an individual, i.e. to determine W1
what happens to the labour supply (for instance U1
the number of hours worked) as wages increase
or decrease. (This of course assumes that an 0 24
Leisure time
individual can choose how many hours he or
she wants to work, but even with fixed working Figure 2.10 Derivation of the labour supply
hours, an individual can often choose to take a curve
second job, work overtime, etc.)
The answer to whether the individual wants If economists and statisticians
to work more or fewer hours as wages increase had deliberately set out to
depends on the preferences of the individual –
confuse and perplex our rulers
as wages rise, each hour is better paid and it
becomes more “expensive” to sacrifice working they could hardly have been
time to enjoy leisure time. The individual may more successful.
therefore be tempted to substitute more work for John Jewkes
some of the leisure hours. This is therefore called
the substitution effect – as wages increase, so the If leisure time can be plotted in a graph against
individual substitutes more work for leisure. wages (the line U1 to U5 in Figure 2.10), it
However, working against this substitution stands to reason that hours of work can similar-
effect is the income effect – as the individual ly be plotted against wages. It will, however, be
becomes more well-off because of the higher the mirror image of the leisure/wage curve. This
wages, he might eventually afford more leisure is done in Figure 2.11. Each of the points U1,
U2, etc. is plotted against the relevant wage rate

(W1, W2, etc.). If wages exceed the level W4, the Fewer hours – more jobs?
individual chooses to work fewer hours, i.e. the The passage of the Basic Conditions of
supply of labour declines.
Employment Act in 1997 resulted in an inten-
sive debate over whether a reduction in the
working week leads to more employment. It is
W5 U5 argued in sections 4.7.1 and 6.6.4 that this is
unlikely to be the case, and that it might even
cause an increase in unemployment because of
W4 U4 the resultant higher labour cost.
Income
W3 U3
2.8.5 The market supply of labour
When it comes to the market supply of labour,
W2 U2 all the individual (i.e. backward-bending) sup-
ply curves need to be added together. However,
other factors then also come into play: as wage
W1 U1 rates increase, individuals who have not worked
before might choose to enter the labour market
or people might be attracted away from other
0 24
Hours of work labour markets to a labour market that pays
higher wages. All these factors, together with the
Figure 2.11 The backward-bending labour fact that different persons enter the labour mar-
supply curve ket at different wage rates, result in the back-
ward-bending part of the labour supply curve
The same model applies to the household – disappearing. Therefore, for the labour market
initially a wife might not work (i.e. outside the overall, higher wages normally result in a higher
home), but might decide to work if the wages number of workers supplied.
she can earn increases. She thus gives up some For the labour market as a whole, the labour
“leisure time”. Alternatively, as wages increase, supply curve is therefore positively sloped as
the family might decide to engage in less time-in- indicated by the line S1 (for “supply”) in Figure
tensive leisure activities such as playing golf 2.12. Assume a wage rate of W1. Labour supply
and rather play squash (this would also be the will be L1. If wages increase from W1 to W2,
substitution effect, as it allows more time for the supply of labour will increase from L1 to L2
work). However, as wages increase and thus also (this represents a movement along the curve S1).
the financial ability to buy and consume goods
(including the ability to go on holidays, watch Wage
movies, etc.), more time is needed to enjoy the rate S1 S2
goods, and the hours of work of the household
might fall – higher wages at this point lead to
reduced working hours (the income effect). W2
It has been found that there is often a steady
decline in the hours of work over time for the W1
workforce as a whole. In the USA, for instance,
the hours of work among males declined
between 1900 and 1940 at a rate of roughly
9–10% per decade (Marshall et al. 1980: 217).
L1 L2 L3
Number of workers
Figure 2.12 The market supply of labour
The supply curve as a whole will shift to the
right or left if influenced by external (exogen- ~ The individual labour supply curve is
ous) factors, for example more women wanting the line connecting the various points
to work or large immigration gains. An increase where the individual’s indifference
in the supply of labour will shift curve S1 as a curves are tangential to the individ-
whole to S2, which means that more workers ual’s budget curves with increasing
(L3 instead of L1) are available for work at the levels of income.
wage level W1. Emigration of workers will shift
SUMMARY
~ The individual labour supply (or
the curve to the left. hours of work) will increase as wages
The magnitude of the changes in supply can increase, but only up to a point, at
also vary. This will depend on the responsive- which stage a person may prefer more
ness (elasticity) of the supply of labour to chan- leisure hours as wages increase. This is
ges in wages (the gradient of the curve). For called the backward-bending labour
the individual, this was explained above with supply curve.
regard to the workaholic and the leisure lover.
This responsiveness is called elasticity; the more ~ The market supply of labour will
elastic the supply of labour, the more the supply increase as wages increase, and the
of labour will increase with an increase in the supply curve is upward sloping with-
wage rate. The concept of elasticity is discussed out any backward-bending portion.
in greater depth in Chapter 3.
Key concepts
economically active population antiretroviral treatment (ART)
fertility rate immigration and emigration
labour force migrant labour
dependency ratio indifference curve
labour force participation rate (LFPR) budget constraint
natural rate of population increase income effect
population pyramid substitution effect
total fertility rate backward-bending labour supply curve
theory of demographic transition elasticity
HIV and AIDS
For students

1. “Something should be done to ensure 3. Would you say that the contribution of
that the labour force does not outpace female workers to the South African econ-
the available employment opportunities.” omy is properly measured? Discuss.
Critically discuss this statement, with
specific reference to the most important 4. What has happened to population growth
factors that determine the supply of labour rates in South Africa in recent years and
in South Africa. what are the possible reasons for this
development?
2. What has happened to the labour force
participation rate of women in South Afri- 5. What has happened to fertility rates in
ca in recent years and what are some pos- South Africa in recent years? Discuss the
sible reasons for this development? reasons for this development in an African
and, more specifically, South African, con- 12. Discuss the concept of an indifference
text. curve and indicate some of its most
important characteristics.
6. Discuss the various stages that a popula-
tion might be expected to pass through in 13. Use graphs to explain how the individual
terms of demographic developments. labour supply curve can be obtained from
indifference curves and budget constraint
7. Discuss the possible socioeconomic, demo-
lines.
graphic and labour market implications of
the HIV and AIDS epidemic. 14. Use a graphic illustration to describe brief-
ly what the influence of each of the fol-
8. Discuss the most important elements of a
lowing would be on the market supply of
strategy to deal with HIV and AIDS.
labour:
9. What factors influence immigration and 14.1 An increase in immigrants
emigration? 14.2 A reduction in wage rates
10. Critically discuss the government’s immi- 14.3
More women entering the labour
gration policy, with particular reference market
to a cost-benefit analysis of immigration 14.4 More students studying full-time
and current immigration and emigration 15. Discuss how different labour supply elas-
trends. ticities can have varying impacts on the
11. Discuss the advantages and disadvantages supply of labour.
of migrant labour from neighbouring
countries
11.1 for South Africa
11.2 for our neighbouring countries.
Suggested reading*
ARNDT, C. & LEWIS, J.D. 2000. STATISTICS SOUTH AFRICA. 2005.
The macro-economic implications of HIV/AIDS in Labour Force Survey, September 2005. Pretoria:
South Africa: a preliminary assessment. South Statistics South Africa.
African Journal of Economics. Vol. 68, No. 5,
VAN AARDT, C. 2001.
December.
The impact of HIV/AIDS on the South African
CASALE, D.M. & POSEL, D.R. 2002. labour market from a critical perspective.
The continued feminisation of the labour force in S A Journal of Demography. Vol. 8, No. 1.
South Africa: an analysis of recent data and
trends. South African Journal of Economics.
Vol 70: 1, March.
MCCONNELL, C.R., BRUE, S.L. &
MACPHERSON, D.A.
2006. Contemporary labor economics. New York: * The bibliography contains the full list of
McGraw-Hill. references.
3.1 Introduction
3.2 Employment in South Africa
3.3 Jobs created per unit of production
3.4 Capital and labour intensity
3.5 Some factors that influence the demand
for labour in South Africa
The demand
3.6
3.7
The informal sector
Deeper insight: deriving the demand for
for labour
labour
Lord Finchley tried to mend the ’lectric light himself; it struck him
dead and serve him right: it is the business of the wealthy man to
given employment to the artisan.
HI L A I R E B E L L O C
3.1 INTRODUCTION
The demand for labour is a derived demand, previously, economists are advised to start with
which means that it is dependent on the con- the last section of the chapter as it lays a good
sumer demand for the product produced by that foundation for the rest of the chapter.)
labour or for the service provided by that labour. The responsiveness of the demand for labour
The demand for labour will thus be influenced to economic growth appears to change over
by the price of labour (which impacts on the time. For instance, for the same given econom-
price of the product or service) and by increases ic growth rate, the demand for labour is cur-
or decreases in the demand for the product or rently lower than in earlier years. For each 1%
service produced by the labour. It will also be of economic growth, South Africa would thus
influenced by other factors such as the market have created more jobs in the 1960s to 1980s
value of the product and by how much of the than is currently the case. South Africa is there-
product is produced by the labour, i.e. how pro- fore experiencing a much less labour-intensive
ductive the specific worker is. growth pattern than before.
This theoretical relationship between the Some of the factors that might be the cause
demand for labour and the price of labour – the of the relatively slow increase in employment in
wage rate – is discussed in this chapter (sec- South Africa are discussed in section 3.5. The
tion 3.7). This relationship can change over discussion is relatively brief because the various
time because, if the wage rate increases sharp- factors are dealt with in more detail in other sec-
ly, an employer can start replacing labour with tions of this book.
machinery. The short-run and long-run demand
for labour therefore differ. (The more theoretical It is not the employer who pays
concepts are discussed at the end of the chap- wages; he only handles the money.
ter (see section 3.7) because they are relatively It is the product that pays wages.
difficult for non-economists to grasp. As stated
Henry Ford
C H A P T E R 3 T H E D E M A N D F O R L A B O U R
Most of the data on the demand for labour in census does not measure the number of people
this chapter refer to formal employment. How- involved in the informal sector properly, because
ever, there is also another source of work for it does not ask detailed enough questions to
persons in the labour market – the informal or determine informal sector activities.
unrecorded sector, often referred to as a sponge
of the economy. This is because persons who are SA M P L E S U R V EYS A M O N G BU S I N E S S E S
unable to find a job in the formal sense of the
word, more often than not turn to the informal Statistics South Africa uses the Quarterly Employ-
sector to earn a living. ment Statistics (QES) to measure employment
These are the aspects discussed in this chapter. among businesses in the formal sector in South
The chapter starts with an overview of employ- Africa. Prior to June 2005, there was the Survey
ment in South Africa (in effect the employment of Employment and Earnings (SEE) and before
position in the formal and informal sectors) that the Survey of Total Employment and Earn-
and by outlining some of the characteristics of ings. The main difference between the QES and
employment in South Africa. First, however, it the SEE is that the QES covers more employers,
is necessary to discuss how employment is meas- and in particular provides better coverage of small
ured. firms (all firms registered for income tax are sup-
posed to be covered). However, the QES excludes
working proprietors and own-account workers
3.1.1 The measurement of and all other employees who are not remunerat-
employment ed through the firm’s payroll, such as commis-
Employment data are important for a number sion-only workers. The QES, therefore, can also
of reasons. First and foremost, it would not be not be compared with the Labour Force Survey
possible to determine what factors influence the (LFS), which is discussed in the next section.
demand for labour without reliable statistics on However, the SEE before 2003 is also sub-
employment. Employment data are also used to ject to significant limitations, and it underesti-
calculate productivity, per capita earnings and mated total employment owing to the exclusion
several other economic indicators. of agricultural and domestic workers; the high
However, employment data in South Afri- non-response rates, for example in the retail
ca are often poor and selective. In addition, trade; and incomplete coverage of, for example,
the data are not comparable over time, owing parts of construction, private transport and com-
to various definitional and other changes, such munication, social and personal services (ILO
as the exclusion of the former TBVC territories Review 1996: 97; Statistics South Africa Sta-
until 1994. In the following sections, various tistical Release P0210; Altman 2008). There is
sources of data will be discussed. thus a break in the employment series before and
after 2002, which has resulted in a number of
P O P ULATION CENSUS incorrect conclusions being made about a falling
wage share, falling manufacturing employment
The population census is not very reliable. For
and a weakening employment–growth relation-
instance, in a comparison of the 1996 manu-
ship (see Altman 2008).
facturing census and the population census of
Furthermore, it is difficult to measure atyp-
the same year, Wittenberg (2004: 1004) found
ical forms of employment in these surveys (see
that the population census had counted 300 000
section 6.6.2). Employment by small enterprises
fewer manufacturing workers. Based on a
and casual, subcontracted and other irregular
detailed analysis, he concluded that the manu-
forms of employment are often not recorded.
facturing census figure was probably the more
This is a serious shortcoming, because more and
correct one. He also found that too few mining
more enterprises are subcontracting or outsourc-
workers and possibly too few construction and
ing large sections of their work.
domestic workers were recorded in the popula-
tion census. The reasons for understating some Blessed is he who has found
sections of the population is related to difficul-
his work. Let him ask no
ties in counting homeless people, single-person
other blessedness.
households and other fairly mobile sections of
the population. Furthermore, the population Thomas Carlyle
THE DEMAND FOR LABOUR 3
H O U S EHOLD SURVEYS • The Labour Force Survey (LFS)
Another source of data on employment in both The first LFS was conducted in 2000 and since
the formal and informal sectors is the house- then it has been undertaken on a six-month-
hold surveys undertaken on a regular basis by ly basis in March and September each year.
Statistics South Africa. There have been a num- The LFS is more focused on labour issues
ber of changes to the surveys over time, the most than its predecessor (the OHS) since the bulk
important of which resulted in different nomen- of the non-labour questions were channelled
clature being used to indicate the use of different to the General Household Survey (GHS). The
survey methodologies. LFS also asked many more probing questions
regarding the informal sector and subsistence
• The October Household Survey (OHS) farming. This changeover from the OHS to the
The principal vehicle for collecting labour mar- LFS probably resulted in the jump in the num-
ket information for the whole country over the ber of self-employed workers in the informal
period 1993–1999 was the annual October sector.
Household Survey (OHS). However, the OHS
also collected information from respondents • The Quarterly Labour Force Survey (QLFS)
about a diverse range of issues relating to The decision to redesign all aspects of the LFS
births and deaths, health, crime, education and emanated from criticisms by data users and
training initiatives, as well as the services and these are documented in the report written by
amenities available to the dwelling(s) in which International Monetary Fund (IMF) consult-
households lived and so on. ants in June 2005. These criticisms related to
In regard to employment in particular, Altman the scope, coverage, timeliness and frequency
(2008) indicates that the OHS figures for the of the survey (Statistics South Africa 2008a).
period 1995–1996 need to be questioned. She In addressing these issues, Statistics South
maintains that the series for agriculture, min- Africa decided to embark on a quarterly cycle
ing and community, social and personal ser- for the collection of labour market informa-
vices needs to be approached with much cir- tion from 2008.
cumspection. Furthermore, in 1995–1996 the
informal sector only included the self-employed Non-market production activities in the QLFS:
and not employees in the informal sector (who The international guidelines require that
were probably added to formal employment). non-market production activities be included as
This led to an undercount of the informal sec- employment only if they make a substantial con-
tor in these years. Furthermore, unpaid family tribution to the total consumption of the house-
workers were not included as workers in the hold. Because of the difficulty of establishing
OHS (which led to an undercount of more than robust criteria for their inclusion as employment
100 000). The inclusion of subsistence agricul- in the QLFS, individuals who are engaged in
ture would also have resulted in serious varia- non-market production activities, such as sub-
tions in employment estimates (between 37 000 sistence farming, fetching wood and collecting
and 1 million in different years). Since 2008, water, making clay pots, etc., for the use or con-
the latest survey (the QLFS) has excluded sub- sumption of their own household are thus rout-
sistence agriculture. ed to questions that determine whether they are
either unemployed or economically inactive (Sta-
Other authors have also raised concerns over tistics South Africa 2008). The two components
whether the 1996 and 1998 OHS survey are then identified as follows:
results are consistent with those provided by
the other OHSs (Klasen & Woolard, as quot- • The unemployed (i.e. persons engaged only in
ed by Casale & Posel 2002: 161). In addition, non-market production activities, who actively
questions were changed or added over time sought work and were available for work in
as Statistics South Africa tried to improve the the reference period).
surveys, and there were also definitional chan- • The not economically active (i.e. persons
ges. The 1999 OHS was, for instance, more engaged in non-market production activities
explicit than the 1995 OHS survey in identify- who did not engage in any type of job-search
ing informal sector work as employment. activity during the reference period).
D I F F I CULTIES IN COMPARING SURVEYS er a clear distinction between the strict and

Yu (2009) refers to a number of studies that broad definitions of unemployment. Thus, it
discuss the comparability of the OHS and LFS. has become difficult to look at the long-term
These include, among others, the oversampling trends in LFPRs and unemployment rates under
of informal sector workers in 2000, the over- each definition (especially the broad definition).
estimation of the earnings of the self-employed Furthermore, a new approach was adopted in
in the OHSs, and the continuous improvement the QLFS to distinguish formal sector workers
of the questionnaire by Statistics South Afri- from informal sector workers, and under this
ca. In general, Yu’s (2008) conclusion is that new method, the enterprise registration ques-
the OHS and LFS are incomparable in many tion is no longer the only question that is con-
respects, given changes in the sampling frame, sidered to distinguish formal sector workers
inconsistencies in questionnaire design, cod- from informal sector workers. In terms of the
ing errors, changes in methodology to capture QLFS an employee is, for instance, classified
employment status and outliers in wage earnings as an informal sector worker if he or she is not
data. In addition to the possible oversampling registered for income tax and works in establish-
of the informal sector, the measurement of the ments that employ fewer than five employees.
informal sector also changed over time, which This means that the size of the informal sector is
has an impact on changes in employment and not comparable between the LFS and the QLFS.
unemployment rates over time, as outlined in The difference between the various surveys
section 3.2.1. In particular, if Casale and Posel leads Yu (2008) to a very important conclu-
(2002: 171) are correct in estimating that the sion. This is, namely, that if trends are to be
LFS may be measuring about 1.2 million more correctly interpreted from the available labour
people as working in subsistence agriculture and data, selected household surveys cannot simply
the informal sector than the OHS, as a result of be compared with each other and conclusions
the amended questionnaires. This could artifi- drawn about the “trends” in the labour mar-
cially lower the unemployment figure in the LFS ket for the entire period between surveys. It is
by about 2 percentage points. argued that such a methodology is imperfect and
With regard to the differences between the could give misleading results.
LFS and the QLFS, the historical information of
the LFS was revised to make the LFS estimates
from 2001 to 2007 comparable with the QLFS
data starting in 2008. However, there were some The level of employment in South Africa
SUMMARY
qualitative improvements to the QLFS question- is difficult to measure owing to problems

naire which would probably not be fully cap- in measuring informal activities, small
tured by the historical revision. enterprise employment, irregular forms
In addition, Yu (2009) points out that the of employment and employment in some
labour market status is defined very differently important service sectors.
in the QLFS from the LFS, as there is no long-
3.2 EMPLOYMENT IN SOUTH AFRICA

3.2.1 Total employment a minimum of 1 hour’s “work”, and includes
South Africa’s employment ratio is very low efforts expended for “household gain” through
by international standards: only 41% of work- a household business. This is very low by inter-
ing age population (aged between 15 and 64) national standards.
are working. In countries in Latin America, On the other hand, however, anyone engaged
Eastern Europe and East Asia at similar lev- fulltime in subsistence agriculture is deemed
els of development, the proportion is about either as unemployed (15%) or not economically
50% or higher, with China at more than 70% active (85%). The distinction between the two
(CDE 2010: 10). In South Africa, the definition is based purely on whether the person involved
is also rather wide – it includes people that did was looking for work (in which case the person
µ BACK TO CONTENTS
EBS
is classified as unemployed). If not, the person sectors is presented in Table 3.1. It shows that
is regarded as economically inactive because the formal sector is still the biggest job provider,
Statistics South Africa is unable to determine if with over two-thirds of all employment being in
their activities made a “significant contribution” this sector. The informal sector (including agri-
to total household consumption levels (Statistics culture) is responsible for about a fifth of the
South Africa 2008: 8) number of jobs.
It could on the one hand be argued that sur- The sharpest increases in employment took
vivalist activities such as subsistence agriculture place in the informal sector, but this is an issue
should be understood as a form of (informal) that will be discussed in more detail later.
unemployment insurance rather than as employ- Compared to the 9.4 million formal sector
ment, because this is what people fall back on employees (excluding agriculture and domestic
when real employment opportunities are not work), according to the September 2011 QLFS,
available. However, subsistence agriculture the QES (the formal sector business survey)
could also be classified as self-employment, recorded only 8.4 million employees. The lar-
which would make a lot of sense in the light of gest difference was in the trade sector, where it
agriculture being a basic economic activity since would have been difficult to determine the exact
the beginning of time. number of employees in small businesses that
Subsistence agriculture involves about 1.4 constantly start up or close down, or where there
million people. This is a strange anomaly: the might be some uncertainty in the QLFS about
earlier LFS explicitly counted subsistence agri- whether the business was formal or informal.
culture activities as employment (CDE 2010). Also, unpaid or commission-only workers are
This might also be one of the reasons for the not included in the QES.
relatively low employment rates. A simple calcu-
lation suggests that if these persons were indeed 3.2.3 Changes in employment over
regarded as being in employment, the measured time
employment rate would increase to 47%.
Total employment (including the informal sec-
tor, but excluding private households) increased
3.2.2 Employment in the formal and
at a modest rate over the 25 years between 1970
informal sectors
and 1995, namely, at an average annual rate of
According to the QLFS (the household survey), increase of 0.6%. However, there is some doubt
slightly more than 40% of the working popula- about the strict comparability of data in the
tion or about three-quarters of the total labour two years at the start and end of the period, for
force was employed in the formal and informal instance the 1970 data were based on the cen-
sectors in December 2011, i.e. about 12.3 mil- sus, whereas the 1995 data were based on the
lion people. The breakdown of the employed household survey (the October Household Sur-
and self-employed in the formal and informal vey). There are also other reasons for the data
Table 3.1 Employment in the formal and informal sector, September 2001–September 2011 (’000)
% change p.a. Proportion

Sector Sep 01 Sep 11 Sep ’01–Sep ’11 of 2011
1 000 % total
Formal sector (excluding agriculture) 7 404 9 436 2 032 2.5 71%

Informal sector (excluding agriculture) 2 129 2 160 31 0.1 16%
Domestic workers 1 267 1 118 (149) –1.2 8%
Agriculture 860 624 (236) –3.2 5%
Total employment 11 660 13 318 1 658 1.3 100%
Statistics South Africa, Labour Force Survey (Historical Revision) and Quarterly Labour Force Survey
Sources:
not being strictly comparable, for instance, the

shortcomings in measuring the employment in ~ It has been estimated that the number
both the formal and informal sectors as dis-
SUMMARY
of jobs increased by about 1.4 million
cussed above between 1995 and 2005.
After 1995, employment increased at a more
~ Many of these jobs (probably more
respectable rate – over the 16 years between
than half) were created in the informal
1995 and 2011 the average increase in employ-
sector, whereas it appears the formal
ment was 2.2%. However, these numbers are
sector created jobs only after 2001.
equally suspect. They are, for one thing, also
based on different surveys with different meth-
odologies. In particular, the 1995 employment
figures are based on the OHS and the 2011 on 3.2.4 Labour absorption capacity
the QLFS. Casale, Muller and Posel (2004: 981–
986) point out that there were significant dif- Employment in South Africa has not been
ferences in survey design between the OHS and increasing sufficiently to accommodate the high
the survey that followed the OHS, the LFS, with number of new entrants to the labour market,
the LFS providing a far more detailed explan- which manifests itself in the growing number
ation of what constitutes a job. The objective of unemployed persons in South Africa. In fact
was to ensure better coverage of irregular and there has been a decline in the percentage of new
informal work than was the case in the OHS. entrants to the labour force able to find work.
This changeover probably resulted in the 26% The percentage of new entrants to the labour
jump in the number of self-employed workers in force that finds a job in the formal sector of the
the informal sector when the LFS replaced the economy is called the labour absorption capacity
OHS. The QLFS, if anything, resulted in an even of the economy.
better measurement of the informal sector with Loots (1996) found that the labour absorption
the exception of subsistence agriculture. Owing capacity of the formal economy is declining dan-
to uncertainties with the definition of subsistence gerously and rapidly, as indicated by the follow-
agriculture, the QLFS excludes a large propor- ing data:
tion of subsistence agriculture.
1973–1977 80%
The growth in employment must also be con-
1978–1981 72%
sidered in the light of the sharp increase in the
1982–1985 30%
EAP. Compared with the increase of 3.8 million
1986–1989 27%
in the total number of jobs between 1995 and
1990–1995 minus 11%
2011, the labour force increased by 6.2 million.
Therefore, a little more than half of those that
This means that whereas the South African econ-
entered the labour market (i.e. who wanted to
omy provided jobs for nearly three out of every
work) actually found employment in either the
formal or informal sectors. four entrants to the labour market before the
1980s, this dropped to only one in every seven
in the 1980s. The situation has deteriorated even
I M P ACT OF THE 2 008 RECESSION
further since then. Not only were hardly any
According to the QLFS, about 870 000 work- new entrants to the labour market able to find
ers lost their jobs over the period of December formal employment in the 1990s, but many of
2008 to September 2010. Those who bore the those previously employed lost their jobs as well
brunt of the recession were young, African, male (Schlemmer & Levitz 1998: 13).
or female workers with incomplete schooling. Since 2001, the situation has changed some-
Slightly less than 500 000 jobs were lost in the what. Over the period 2001–2005, the labour
formal sector, with employment in the informal force increased by 1.4 million people (disre-
sector, agriculture and private households also garding the discouraged work-seekers, as dis-
being significantly affected by the recession. In cussed in section 8.2.1). The number of formal
terms of sectoral results, large job losses were employment opportunities increased by nearly
experienced in manufacturing (and to some 700 000, which gives a labour absorption cap-
extent construction), with semi-skilled workers acity of nearly 50%. This means that a little
in particular being negatively affected. less than half of all people who had entered the
labour market after 2000 in search of employ- ness services sector and the wholesale and retail
ment did in fact find employment. If jobs in trade sector, both of which increased their shares
the informal sector are added, then a high per- in GDP. The transport sector and community,
centage of the new entrants found some type of social and personal services sectors both experi-
work. Even though this makes little impression enced significant increases in their employment
on unemployment, it is a vast improvement on numbers.
the situation that existed in the 1980s, and espe- In manufacturing, employment increased by
cially in the 1990s. an average of 1.4% per annum in both the pre-
1995 and post-1995 periods (see Table 3.2). The
3.2.5 Employment by sector major uptake in employment was therefore in
the tertiary sector. Agriculture went from 33%
The two primary sectors, agriculture and mining,
of total employment to less than 5%, while
with decreasing shares in GDP, have suffered
huge employment losses since 1970. In 2011, wholesale and retail trade increased from 9 to
employment in agriculture constituted only a 23% and employment in the financial sector also
quarter of its 1970 levels and mining employ- increased substantially, namely, from 3 to 13%.
ment had halved. The rate of decline in employ- As far as the cyclical nature of employment
ment in these two sectors increased substantially is concerned, during the financial crisis employ-
in the post-1995 period when compared to the ment declined significantly in the wholesale
pre-1995 period. The total loss of employment and retail trade sector – the largest employing
in these two sectors since 1970 is more than 2 sector in the economy. This sectoral result also
million. “indirectly reflects on the impact of the crisis on
Employment in most other sectors increased. informal sector employment which was particu-
The largest percentage and absolute increases larly adversely affected by recession” (Bhorat
in employment were in the financial and busi- undated: 9).
Table 3.2 Employment in the formal and informal sectors by industry, 1970, 1995 and 2011 (‘000)
1970–1995 1995–2011
1970 1995 2011
% change % change
Agriculture 2 482 1 235 –2.8 624 –4.2
Mining 680 593 –0.5 324 –3.7
Manufacturing 1 026 1 431 1.3 1 737 1.2
Utilities 47 83 2.3 73 –0.8
Construction 476 444 –0.3 1 086 5.7
Trade 708 1 663 3.5 3 012 3.8
Transport 338 474 1.4 756 3.0
Finance 190 579 4.6 1 768 7.2
Community and social services 1 595 2 145 1.2 2 836 1.8
Private households (a) 799 1 098 2.0
Other 111 4 0.0
Total 7 542 9 557 0.6 (a) 13 318 2.1
Bhorat et al. 2011 (1970 and 1995), QLFS (2011)

Sources:
Notes:
a) Domestic workers in private households not reflected in 1970. Therefore, to calculate the percentage increase in total employ-
ment between 1970 and 1995, domestic workers were deducted from the 1995 total employment.
b) A large proportion of subsistence agriculture was not included in 2011.
43
3.2.6 Demand for skills manufacturing, utilities, finance and commun-

ity, social and personal services, there has been
The sectors where employment declined sharply
a sharp increase in the employment of skilled
are also the sectors that are the most intensive in
workers at the cost of both semi-skilled and
unskilled labour. Their relative decline has there-
unskilled workers.
fore impacted quite significantly on the oppor-
Even more important than the absence of
tunities available to those with lower education-
al attainment. Jobs have been lost in the sectors specific skills in the labour market is the absence
whose skills are more closely matched with those of work experience among prospective workers.
of the millions of working age South Africans About half of the unemployed persons are new
who are out of a job. The parts of the economy entrants to the labour market, which means they
that have grown the most, such as finance and have never worked before.
business services, tend to be the most skill-inten-
sive. Even in Grandpa’s time there
Bhorat et al. (2010: 47) show that the highest was something to make you sleep.
increase in the relative demand for labour was They called it work.
consistently for skilled workers. There is, how- Anonymous
ever, one major change. In the period 1970–
1995, there was a relatively large increase in
the relative demand for unskilled labour, while 3.2.7 Employment by population
in the period after 1995 the relative demand group and gender
for unskilled elementary workers experienced There has, overall, been a sharp increase in
a small decline. This result shows the increased the formal employment of African workers
preference for skilled and semi-skilled workers in since 2001 as opposed to a small decline in the
the 1995–2005 period. employment of white people (see Table 3.3 and
Bhorat et al. (2010: 47) also show that with- Figure 3.1).
in-sector forces were more dominant in explain-
ing changing labour patterns than between-sec-
tor forces for both the 1970–1995 and the Table 3.3 Employment in the formal and
1995–2005 periods. This implies that the sources informal sectors by race and gender
of within-sector shifts such as technology change (’000)
and outsourcing of non-core functions were
more important than the effect of demand %
Sep Sep
and, in particular, international trade flows in increase
2001 2011
p.a.
influencing the skills shift in the demand for
labour. In addition, when the changes in relative Male 6 438 7 511 1.6
demand for labour are decomposed to isolate the Female 5 222 5 807 1.1
specific impact of international trade, it is found
that only agricultural workers in 1970–1995 African 7 805 9 316 1.8
and production workers in 1995–2005 experi- Coloured 1 382 1 495 0.8
enced actual job losses. Indeed, it is not evident
whether the impact of trade has been statistically Total Indian 402 471 1.6
significant. In terms of the South African labour White 2 071 1 992 –0.4
market, however, given the various influencing
Total 11 660 1 3318 1.3
factors, the losers have been unskilled labour-
ers, specifically unskilled African workers. The Source: Statistics South Africa, Labour force survey 2000-2007, pg 14
winners, invariably, have been better educated,
skilled workers who in turn have been dispro- Between 2001 and 2005, African employment
portionately white and Asian. increased by 1.8% per annum, whereas the
Bhorat and Oosthuizen (2006: 185) have employment of white people decreased by 0.4%
found that in agriculture, mining and quarrying per annum. This becomes even more significant
and private households, employment has shift- if one takes into account that the increase in the
ed significantly in favour of semi-skilled occu- employment of African persons was off a much
pations at the cost of unskilled occupations. In higher base than that of whites. This develop-
µ BACK TO CONTENTS
125 tially among white workers. Bhorat finds the
loss of skills from South Africa extremely worry-
African ing, and describes it as one of the “most serious
120
people constraints” this country is facing.
Index of employment
115
3.2.8 Atypical employment
110
Atypical (or “non-standard”) employment is
defined as employment that is not full-time
105
(part-time work) or is of limited duration
(temporary). It could also be employment at a
100 workplace other than that of the employer, for
instance if labour brokers are used (Department
95 White people of Labour 2004: par 2.2). There has been a
sharp increase in the utilisation of such employ-
90 ees. This is discussed in more detail in section
1 2 3 4 5 6 7 8 9 10 11 6.6.2.
Year
Figure 3.1 Index of employment in the formal
economy by race 2001–2011
~ Most of the formal sector jobs created
Source: Statistics South Africa, Labour Force Surveys and Quarterly over the last number of years have
Labour Force Surveys (September)
been created in the trade, construc-
SUMMARY
tion, finance and services sectors.

ment probably indicates the impact of the
~ The demand for skilled workers has
employment equity legislation in the country, the
increased more rapidly than the
low birth rate among whites and the continued
demand for semi-skilled workers.
emigration of white skilled workers.
The employment of whites also declined in the ~ The employment of black people
1990s. Bhorat (2001b) describes the loss of close has increased sharply over the last
to 90 000 white workers over the period 1994– few years, whereas there has been a
1997 as an “extremely serious trend” because decline in the employment of whites.
the country’s key skills reservoir is located essen-
3.3 JOBS CREATED PER UNIT OF PRODUCTION

An increase in production normally leads to an more than 1% in the later period. It therefore
increase in the demand for labour. This means seems as if employment might have become less
that higher economic growth should also lead to responsive to economic growth, or less sensitive
an increase in the demand for labour. However, to economic growth.
the impact of economic growth on employment These changes can be measured by the
is not necessarily the same over time – more or employment elasticity of economic growth, or
fewer jobs might be created even though eco- as it is also called, the employment coefficient
nomic growth might be unchanged. or the employment-output ratio. The employ-
There is a decline in the number of jobs being ment elasticity of economic growth indicates
created in South Africa, even though there might the sensitivity of employment to changes in eco-
not have been a decline in the growth rate of the nomic growth. In other words, it is the extent
economy. This is evident if the period 1994– to which employment will change as a result
2001 is compared with the 1970s. The econom- of changes in economic growth, or the degree
ic growth rate in both periods was more or less of responsiveness of employment to changes in
the same. However, whereas the number of jobs economic growth. This is measured as follows:
increased by 2.2% in the 1970s, it declined by
Employment elasticity of economic growth = With the exception of the last few years, these
figures are cause for deep concern, because they
% change in employment
mean that even if the country were to achieve
% change in economic growth relatively high rates of economic growth, the
chances of jobs being created at a rapid rate are
If the coefficient (or elasticity) is relatively high slim.
(the sensitivity is high), it means that a 1% eco-
The employment elasticity of economic
nomic growth rate will result in a relatively high
growth also seems to be deteriorating, unless the
increase in employment. The lower the employ-
last few years are an indication of a new trend
ment elasticity, the fewer the jobs that are cre-
of improvement in this elasticity. In recent years,
ated for every 1% of economic growth, and the
South Africa has experienced what is called job-
higher the real economic growth rate needed to
less growth, with employment declining even
alleviate the country’s unemployment and under-
during periods of positive economic growth. In
employment problems.
the period 1994–2001, for instance, the coun-
Figure 3.2 indicates that the employment elas-
try’s economy grew by 2.7% per annum, but for-
ticity of economic growth has generally showed
mal employment continued to decline (by more
a declining trend since the 1970s, and that it
than 1%). The employment elasticity was there-
became negative during the 1990s. This means
fore negative. This can be compared with the
that instead of jobs being created, jobs have
period 1973–1978, when the economic growth
actually been lost for every 1% of economic
rate was similar to the former period (2.9% per
growth. This changed again towards the begin-
annum). However, during the 1973–1978 period
ning of the 2000s, when the economy started to
employment increased by 2.2% per annum. Pos-
create more jobs for every 1% increase in GDP.
sible reasons for this worrying phenomenon are
The following employment elasticities of eco-
discussed in section 3.5.
nomic growth have been recorded since 1969:
These findings are questioned by Bhorat and
1969–1985: 0.55 Oosthuizen (2006: 156). The conclusions about
1987–2000: 20.36 jobless growth are based on incomplete data,
2000–2005: 0.33 because the formal employment surveys exclude
Full period 1969–2005: 0.18 the agricultural sector, the informal sector, sev-
4.0
2.0
0.0
Coeﬃcient
–2.0
–4.0
–6.0
–8.0
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
Year
Figure 3.2 Employment coefficient,* 1969–2005
* % change in jobs for every 1% change in economic growth
Sources: 1969–2001: SA Reserve Bank, Data series 7009L and 6006Z; 2002–2005: Statistics South Africa, Labour Force Survey
eral subsectors and many small businesses. If the decline to poor employment performance fol-
household surveys are used rather than enter- lowing the global economic slowdown that
prise-based employment surveys, there is no began in 2001. The ILO also finds the global
evidence of jobless growth. However, they also employment elasticity to be low in the industrial
caution (p. 163) that some of the recorded rise sector (0.28 over the full period) and high in the
in employment might be ascribed to changes in services sector (0.57).
survey design and quality, rather than a real rise The Centre for Development and Enterprise
in employment. This is because of shortcomings (CDE) has also referred to the link between eco-
with the 1995 household survey, which probably nomic growth and job creation in South Africa
underestimated the informal sector. weakening over time. Reserve Bank figures show
This is confirmed in a later study (Bhorat et that, in the 1960s and 1970s, GDP growth of
al. 2010: 10) where the authors state that the 1% created a roughly similar increase in formal
notion of aggregate “jobless growth” in the sector jobs. This relationship has weakened dra-
South African economy is erroneous. The econ- matically in recent decades and, during the high
omy, in the aggregate, has been creating jobs growth periods after 1990, GDP growth of 4.4%
rather than shedding them, albeit not at a rate resulted in employment growth of only 1.8%.
sufficient to accommodate the new entrants to Employment elasticity varies from one sector
the labour market. However, they do point out to the next. Employment elasticities in agricul-
that there is some doubt whether the increase ture and construction have dropped quite con-
in employment could not simply be ascribed to siderably. There have also been declines in min-
the growth of the informal sector. Also, there ing and manufacturing, but at a much reduced
does seem to have been so-called jobless growth rate.
in mining and manufacturing, where employ- Declines in employment elasticity can also be
ment declined in spite of increases in produc- reflected in a different way, namely, by deter-
tion. Furthermore, it seems as if such increases
mining the GDP growth required for each job
in formal sector employment that might have
created. In 1990, each additional R100 000 of
occurred, might have benefited the higher skills
GDP would create one job; nowadays it requires
levels, with employment amongst lower skilled
nearly R150 000 of GDP growth, i.e. a near
workers (such as production workers) declining.
50% increase. There are, however, vast differ-
On the other hand, Yu (2008) has found
ences across sectors in the economy. The min-
“enormous” fluctuations in employment over
ing and manufacturing sectors top the list in
time, which can partly be ascribed to differ-
this regard. All sectors, however, show the same
ent survey methodologies (see Chapter 8). His
trend.
conclusion is that this means that contrasting
One possible reason for the declining employ-
conclusions can be drawn about whether or
not South Africa has been experiencing jobless ment intensity of growth is therefore that the
growth. employment elasticities of labour-intensive sec-
South Africa’s employment elasticity of 0.18 tors such as agriculture and construction have
over the full period 1969–2005 can be compared declined quite considerably. This can prob-
to that of other countries. The ILO (2005b) ably be partly ascribed to changes in labour
found the following global trends in employment legislation and other factors that have driven
elasticity between 1991 and 2003: employers towards methods of production that
rely more heavily on a reduced number of skilled
• 1991–1995 0.34 workers and automation (CDE 2010: 13). The
• 1995–1999 0.38 latter would of course have a positive impact
• 1999–2003 0.30 as well, namely, that production increases with
the same number of workers, which means that
Worldwide there has been a decline in the labour productivity has increased.
employment elasticity of economic growth as Another reason for the declining employment
from 1999. However, South Africa’s rate com- elasticity is that relatively highly skilled econom-
pares very badly with that of other countries, ic sectors such as financial services have grown
except that the rate for the last five years has more rapidly than sectors employing a large
improved. The ILO ascribes the worldwide number of unskilled workers.
3.4 CAPITAL AND LABOUR INTENSITY

As stated at the beginning of this chapter, primary sectors (agriculture and mining) experi-
employers are able to substitute capital for enced the most extensive capital deepening fol-
labour or labour for capital. The extent to which lowed by construction and manufacturing, while
an economy is becoming more or less labour the service sectors saw only a modest increase in
intensive can be measured in two ways, firstly their capital to labour ratios.
by considering how many jobs are being created One of the most important factors influencing
by every million rand of production. The other the capital to labour ratio, or the substitution of
method is to consider changes in the capital to labour by capital, is the relative cost of labour
labour ratio over time. and capital. The more expensive labour becomes
The capital to labour ratio is the ratio of the relative to the cost of capital (i.e. interest rates)
capital employed at any particular date to the the more labour will be substituted by capital.
number of workers at that date, as shown by the Behar’s research (2010: 148) has shown that a
following: reduction in wages relative to the cost of cap-
Fixed capital stock ital would expand employment as a result of
Capital/labour ratio = the substitution of labour for capital. Some cau-
Total employment
tion is thus called for by those advocating lower
Figure 3.3 shows that the capital intensity of the interest rates as a solution for unemployment,
South African economy increased sharply over because the lowering of interest rates would
the period 1996–2004 (owing to changes in probably lead to a fall in employment in favour
Statistics South Africa surveys the data are not of capital acquisition. However, the corollary is
always comparable over time). It was found that not necessarily valid either, namely, in order to
almost 2 million jobs were lost over the two dec- raise employment there should be a rise in inter-
ades as a result of investment being channelled est rates.
increasingly into capital-intensive sectors and The relative cost of capital versus that of
technologies. labour is not the only factor the influences the
capital–labour ratio. Any of the factors that
116.0 inhibit the demand for labour is to a greater or
lesser extent also likely to result in an increase in
114.0
the capital–labour ratio. However, there are also
112.0 technological factors. As machinery and infor-
*
mation technology are developed that are able to
110.0
perform functions previously reserved for human
Ratio
108.0 endeavours, employers are likely to employ more

capital-intensive production methods.
106.0
It should also be taken into account that cap-
104.0 ital-intensive production has another disadvan-
tage besides reducing the labour-absorption
102.0 capacity of the economy. This is that capital-in-
100.0 tensive techniques are often less flexible than
labour-intensive production. People are more
96
97
98
99
00
01
02
03
04
versatile than machines, and in industries where

19
19
19
19
20
20
20
20
20
Year the life of products is relatively short, labour-in-

*Series not comparable from 3rd quarter 2002 tensive production is sometimes more cost-effec-
tive than a capital-intensive system.
Figure 3.3 Capital/labour ratio in the private
non-agricultural economy Prostitution is a labour-
intensive activity involving
Source: National Productivity Institute 2005
little in the way of
Bhorat et al. (2010: 14) confirm the sharp intermediate consumption.
increase in the average capital–labour ratio. The OECD
One could argue that labour-intensive produc- eralisation might indirectly be responsible for
tion techniques should be encouraged. However, more job losses than might be apparent by sim-
there are two important caveats: ply considering the direct effect. However, even
local consumer tastes have changed, and con-
• Capital intensity is not necessarily inimical to sumers prefer products produced by high tech-
the economy. Modern production structures nology. In addition, the microelectronic revolu-
are largely technology driven, which means tion has also contributed to this trend towards
they are capital intensive. In order to compete more capital-intensive production. Furthermore,
successfully on overseas markets, South Africa the relative prices of capital and labour have also
must utilise the most modern production tech- had an impact on the replacement of labour by
niques, which often means high capital inten- capital.
sity.
• The sharp increase in capital intensity is not
necessarily spread over all industries. Specific Since the early 1980s the economy
projects were often responsible for the sharp has progressively produced fewer and
increase in manufacturing capital intensity, fewer new jobs for any given economic
SUMMARY
for example the Sasol synthetic fuel develop- growth rate than in earlier decades. This
ment from 1974–1981 and major new heavy is referred to as declining employment
investment in the pulp and paper industry in elasticity.
the period 1981–1989. South African manufacturing is far
more capital intensive than that of other
The adoption of new technologies is partly a middle-income countries, and there is a
result of trade liberalisation, more specifically long-term trend towards more capital-in-
to enable firms to compete more effectively and tensive production.
to satisfy consumer tastes. Therefore trade lib-
3.5 SOME FACTORS THAT INFLUENCE THE DEMAND FOR LABOUR IN

SOUTH AFRICA
The demand for labour in South Africa has not unemployment. Nevertheless, it should be noted
been sufficient to provide enough jobs for those that economic performance improved after
wanting to work and has, except for a few years, 1994 – the economic growth rate before the
not even been sufficient to create enough jobs democratic elections was dismal, so the transi-
for those entering the labour market for the tion to democracy has not been the cause of low
first time. Over time, therefore, unemployment economic growth rates. Furthermore, it seems
seems to have generally been increasing. Some as if the negative consequences of adjusting to
of the factors that influence economic growth in a globalised world might have dissipated, espe-
South Africa are briefly referred to in this sec- cially since 2000, and the country seems to have
tion. Other sections in this book will discuss sev- experienced much higher increases in formal and
eral of these aspects in greater depth and these informal employment. Economic growth is dis-
should be consulted for a proper grasp of the rel- cussed in more detail in section 7.6.3.
evant issues. An important caveat that should be mentioned
here is that the job creation ability of the econ-
T H E RATE AND NATURE OF ECONOMIC omy declined substantially during the 1980s
G R O WTH and 1990s, as indicated in section 3.3. This was
partly a result of higher capital intensity, as dis-
Had the country’s economic growth been high- cussed above.
er than the annual average of 2.7% experi-
enced since the transition to a full democracy,
TRA D E L I BERA L I S A T I O N
the country would probably have been able to
create many more jobs. However, the economic This is discussed in section 7.5 where it is indi-
growth rate has not been high enough to reduce cated that trade liberalisation might have con-
tributed to the loss of unskilled jobs (Nattrass L A BO U R L E G I S L A TI O N TH A T

1998a). However, it is unlikely to have been the I N C REA S E S TH E I N D I REC T C O S T O F
main cause of job losses overall. In fact, it is not L A BO U R O R H I N D E R S PRO D U C TI V I T Y
so much increased imports (and thus domes- I N C REA S E S
tic producers losing markets) that have caused There are also other reasons for the increase in
job losses, but that the export sector became labour cost, which has reduced the demand for
much more capital intensive and thus shed jobs. labour. The introduction of new labour laws has
This occurred probably to increase produc- significantly increased the indirect cost of labour.
tivity and enable exporters to compete better The most significant is the Basic Conditions of
against foreign competitors. Trade liberalisation Employment Act, which has increased the hourly
also increased the demand for skilled workers, cost of labour by, among other things, reducing
while simultaneously resulting in fewer jobs for hours of work, increasing overtime premiums
unskilled workers. and various other provisions. More details on
the increased cost of labour are discussed in sec-
T H E I MPACT OF UNIONS AND tion 4.7.
B A R GAINING COU NCILS ON LABOUR In several ways the labour laws have reduced
C O S TS flexibility, thus making it more difficult for
High wage increases have also contributed to employers to increase productivity. For instance,
the reduced demand for labour. As section 4.6.1 many rules increase job security with regard to
shows, most studies indicate that an increase individual dismissals and retrenchments. The
in wages will reduce employment, and this is fact that unions may strike about retrenchments
particularly true in South Africa. The high real limits the ability of employers to adjust rapidly
wage increases over the past number of years to changing circumstances.
can probably be ascribed to strong unions in the There are also laws that might increase pro-
country and to the system of bargaining coun- ductivity, for instance the Skills Development
cils, as discussed in sections 5.4.1 and 5.6. Chap- Act, but the development of the skills that are
ter 7 will also show that the countries that have needed in the country will take many years to
been most successful at creating jobs recently take effect. The Employment Equity Act might
have done so by introducing wage moderation also lead to a better utilisation of human resour-
as part of a package of policy measures. High ces. However, this is not supported by evidence.
wage increases in South Africa have especially However, certain assumptions about the
discouraged the use of unskilled or lower-skilled impact of labour legislation are not always
workers, i.e. those with the greatest need for job fully borne out in practice. For instance, Lewis
creation. (2002: 748) reports on a survey done in 1999 by
Even the ILO has criticised the system of bar- the World Bank in conjunction with the Greater
gaining councils in this country, as shown in Johannesburg Metropolitan Council among 325
section 5.6. Several studies have found that the large firms across eight manufacturing firms.
South African system of partially centralised Around 70% of all the firms initially reported
wage bargaining results in the poorest outcomes that individual regulations had had no effect
in terms of job creation and inflation compared on employment decisions. However, when they
to highly centralised systems, partially cen- looked at the combined impact of all regulations,
tralised but highly coordinated systems, or high- 40% indicated that they had hired fewer work-
ly decentralised bargaining systems. ers, had substituted labour with capital, and/
The relatively high strike incidence of unions or had hired more temporary workers. While
in South Africa will also have discouraged the 40% is a substantial percentage, the labour laws
use of unskilled labour in particular. As indicat- seemed to have had no impact on the employ-
ed in section 5.5, the incidence of strikes in this ment decisions of the rest of the employers, i.e.
country has declined recently, but is still relative- the majority.
ly high.
SUMMARY
~ One reason for the economy not creating sufficient jobs is the relatively low economic growth
rates over many years and the fact that economic growth has become less labour intensive
than before.
~ Other reasons that will be considered more fully in later chapters relate to trade liberalisation,
high wage increases and the introduction of new labour laws.
3.6 THE INFORMAL SECTOR

3.6.1 Definition and measurement of tinuum of activities – from full-time, perma-
the informal sector nent wage employment at the one extreme to
the informal gathering of wood for own use
Some economic activities would clearly be
at the other extreme, with a number of vari-
regarded as informal sector activities. For
ants in between. In this regard the informal
instance, street hawkers that are not registered
sector is increasingly being referred to as the
with any regulatory authority and who do not
informal economy so as to get away from the
pay any other tax than value-added tax could
idea that informality is confined to a specif-
be regarded as informal. However, the situa-
ic sector of economic activity but rather cuts
tion becomes more difficult if that same street
across many sectors.
hawker is licensed, and as part of the licensing
process is required to register as an individual • According to another approach, the informal
taxpayer. Then there might be some people in sector can be regarded as that part of the
the informal sector that have full-time, formal economic activity of the country that is not
jobs and may undertake their informal activities recorded in its national accounts, in other
only on a part-time basis to supplement other words the statistically unrecorded part.
income. Such activities might also be under-
taken on a temporary basis to bridge a period of The definition of the ILO has also changed
unemployment. Many children are also involved over the years (see Essop & Yu 2008: 5–6 for a
in the informal sector and some criminal activ- detailed discussion). When the informal sector
ities might or might not be seen as informal sec- was first defined in 1972, the ILO regarded it
tor activities. as the activities of the hard-working poor, who
Consequently, it is not surprising that the were not recognised, recorded, protected or regu-
way in which the informal sector has been lated by the public authorities. About 20 years
defined and measured has changed substantial- later, the definition for the informal sector was
ly over time, and this would impact on changes based on the so-called enterprise approach, in
in employment over time. Researchers have for other words the characteristics of the enterprise
instance referred to the following definitions of in which the activities took place. This meant
the informal sector: the informal employment only included those
working in informal employment. However, the
• According to the dualistic approach, the
definition suggested at the 17th International
informal sector is seen as being separate from
Conference of Labour Statisticians in 2003, was
the formal sector. It is distinguished on the
that informal employment should be defined in
basis of various characteristics, such as family
terms of the employment characteristics of the
ownership, skills that are acquired outside the
persons involved. This means that informal
formal school and training systems, and mar-
employment should include informal enterprises
kets that are unregulated (either not officially
but should also include people employed outside
recognised or encouraged, or illegal).
the informal sector whose employment displays
• Another method of defining the sector is by informal characteristics (Yu 2010: 3). According
the continuum approach, in terms of which to this definition, the informal economy “is seen
the economy as a whole must be seen as a con- as comprised of informal employment (without
secure contracts, worker benefits or social pro- 2. Employers, own-account workers and per-
er
tection) both inside and outside informal enter- sons helping unpaid in their household busi-
prises: ness who are not registered for either income
tax or value-added tax
(1) Informal employment in informal enterprises
(small unregistered or unincorporated enter- The second concept that was also introduced in
prises), including employers, employees, the QLFS was that of informal employment. This
own account operators and unpaid family included both those employed in the informal
workers in informal enterprises. sector as well as informal employment in the for-
(2) Informal employment outside informal mal sector. This is broadly in line with the 2003
enterprises (for formal enterprises, for house- approach of the ILO, as outlined above. Accord-
holds or with no fixed employer), including ing to the QLFS, formal sector employees were
domestic workers, casual or day labourers, defined as informally employed if they were not
temporary or part-time workers, industrial entitled to medical aid or pension funds, or did
outworkers (including home based workers) not have a written contract with the employer.
This meant that the job-related characteristics
and unregistered or undeclared workers”
instead of the characteristics of the enterprise
(ILO 2002: 12 in Essop & Yu 2008).
were considered in defining whether someone
was informally employed: in other words, was
In South Africa, the informal sector in the
the person employed in an “informal job”? This
1995 October Household Survey (OHS) was could be regarded as a measure of precarious
determined with reference only to those work- employment, but as stated by Yu (2010: 22), the
ing as self-employed in unregistered businesses. specific criteria might be too broad a measure to
However, in 1999, employees who worked for capture the informal employees.
unregistered businesses were included. Accord-
ing to this measurement about 10% of all
employees worked for the informal sector. 3.6.2 Importance and size of the
Further changes took place when the OHS informal sector
was replaced by the Labour Force Survey (LFS), The informal sector plays a very important role
where the latter introduced more probing ques- in any developing country, especially where
tions to determine the size of the informal sector there is no developed system of social security.
(see Casale & Posel 2002: 171). In 1999, some If unemployed persons cannot rely on unemploy-
131 000 women and 165 000 men were involved ment insurance or some form of state support
in subsistence farming according to the OHS. during spells of unemployment, they must find
In the LFS pilot survey in February 2000, these some other means of survival. This results in
numbers suddenly increased to 896 000 women many unemployed persons entering the informal
and 612 000 men. Employment and participa- sector. The income in the informal sector is
tion rates thus increased quite substantially, but usually very low and the employment conditions
simply as a result of the more efficient capture of very poor.
informal sector and subsistence farming. How- Although the informal sector does to some
ever, the general approach used in both the OHS extent alleviate the problem of economic inact-
and the LFS could be described as the enterprise ivity, it does not generally solve the problem
approach (Yu 2010: 3). of poverty and low standards of living. There-
In the QLFS, which was introduced in 2008, fore, it should not be seen as the solution to
a fundamentally different approach was added. the unemployment problem, even though it
The one approach remained the enterprise does contribute to an increase in income. For
approach. According to this definition, the instance, based on the 1989 survey by Statistics
informal sector has the following two compon- South Africa, Van der Berg (1990) has estimated
ents: that the per capita income of Africans is 50%
higher because of informal sector activities. The
1. Employees who are not registered for incomes of Africans as a percentage of those of
income tax and who work in establishments whites would therefore increase from 8.5% to
that employ fewer than five people. 12.7% as a result of the informal sector.
A
God gives every bird its food, multitude of the figure provided by the QLFS
but He does not throw it (see research quoted by Yu 2010: 21).
in the nest. Several studies have found that the level of the
informal sector remains quite low by the stan-
Anonymous
dards of developing countries (International
Because the informal sector provides some kind Monetary Fund 2005: 19). This is confirmed by
of income, and because it can serve as a stepping a doctoral thesis of Saunders (2005), where he
stone for future “formal sector” entrepreneurs, found that the informal sector in South Africa
the previous government, in the late 1980s constituted about 10% of GDP, compared to
and early 1990s, eased many conditions which 35 to 44% in other developing countries and
had severely hampered the development of the 21 to 30% in transitional economies. However,
informal sector. This was taken even further Yu (2010: 24–25) refers to studies that find that
by the new government after 1994. The result South Africa is in the mid-range size of informal
of this policy change can clearly be seen in the markets in developing countries and that it is a
development of, for instance, the minibus taxi regional outlier when compared to African coun-
industry, hawking activities and spaza shops. tries.
Nevertheless, the authors of the ILO Review However, this excludes the “broad” definition
(1996: 87) maintain that the relaxation of regu- adopted as one of the measures in the QLFS,
lations has had little effect on the incomes of since international comparisons are not avail-
those working in the informal sector. able.
The QLFS estimates the number of people in The researchers who have found that the size
the informal sector, excluding the agricultural of the informal sector in South Africa is in fact
sector, at slightly over 2 million. As indicated small ascribe this to, among other things, the fol-
above, the QLFS on the one hand uses a very lowing factors:
broad definition of informal employment, which • The legacies of the apartheid regime which
includes informal employment regardless of made it first illegal and then difficult for
whether it takes place in the formal or informal blacks to move to larger urban areas unless
sector. On the other hand, however, the QLFS they already had a certified job (Harvard
does not include subsistence agriculture, which 2006: 4). South Africa might still be sitting
would exclude a substantial number of persons with the legacies of this policy.
involved in informal sector activities.
According to several studies and surveys, the • Another possibility is the prevalence of high
number of self-employed persons involved in the levels of crime, which acts as a particularly
informal sector seems to range between 1.2 mil- onerous tax on small-scale enterprises.
lion and 1.6 million (see Yu 2010: 17–21). This • The fact that StatsSA surveys measure subsist-
is approximately 70% of all the self-employed. ence farming as unemployed or as economic-
Since 2008, the number seems to be in the region ally inactive also means that many employees
of 1.4 million. who in other countries might be regarded as
However, when it comes to employees, the being involved in informal economic activities
numbers are very divergent. This is primari- are not classified in this manner in South Afri-
ly because of the widely divergent definitions ca.
being used. The most conservative estimate is the
• The low population density in rural areas
manner in which the QLFS measures the num-
means that there is not an efficient demand,
ber of employees working in the informal sec-
which militates against businesses being estab-
tor, as outlined above. In terms of this criterion,
lished.
there could be between 600 000 and 800 000
employees in the informal sector. This is about • The low level of informal sector activity might
7 to 8% of all employees. However, there is also be due to the fact that many sectors are dom-
research showing that if the broader definition inated by a few very large companies, which
of “informal employment” is used, the number actively or otherwise might be discouraging
of people involved in any type of informal activ- competition by small business including the
ity, including informal employment, could be a informal sector.
• The existing system of social grants presum- grow in times of economic crisis where many
ably sets a higher “reservation wage” level formal sector jobs are lost.
in South Africa than in comparable coun-
tries, acting as a deterrent to low productivity
informal activities (e.g. street peddling) (Har-
vard 2006: 11) (see section 8.6.4 for a discus- Different studies have resulted in wide-
sion of reservation wages). ly divergent estimates of the informal
sector. Several studies have found that
The informal sector appears to be at the fore- the informal sector in South Africa is
SUMMARY
front of job losses in times of crisis, for instance relatively small relative to other devel-
after the 2008 crisis (with job losses at a rate oping countries, but this conclusion is
about double that of the rest of the economy). by no means shared by all analysts. The
However, this is not surprising, given that the informal sector nevertheless remains a
informal economy provides less security than the particularly important source of income
formal sector (Bhorat 2010). On the other hand, for those without a formal job as there is
one would have thought that the informal sector no developed system of social security in
might serve as a cushion for those losing their this country.
jobs in the formal sector, and that it would thus
3.7 DEEPER INSIGHT: DERIVING THE DEMAND FOR LABOUR 1

As already stated, the demand for labour is er. As will become apparent, this also influen-
a derived demand, i.e. it is derived from the ces the actions of trade unions when it comes to
demand for the product produced or the ser- wage demands.
vice provided by the employee. The demand
for labour will therefore be affected indirectly 3.7.1 Law of diminishing marginal
by economic conditions, such as expansionary
product
or restrictive fiscal and monetary policies, and
domestic and foreign competitive conditions The total production of an employer will nor-
that have an impact on the demand for goods mally increase if more employees are appointed.
and services. These macroeconomic factors that However, if other factors such as the physical
impact on the demand for labour fall outside the space, machinery and so forth are not increased,
scope of this book. the employment of additional workers will result
However, the demand for labour is also dir- in smaller and smaller additions to total produc-
ectly affected by the cost of labour (including tion as the workers start crowding each other.
the wage rate), factors that influence the cost of Eventually there will come a point where the
labour (such as unions and collective bargaining employment of further workers will not lead to
structures) and by the productivity of labour, increased production – the superfluous workers
as these factors influence the price at which will probably simply stand around with nothing
the final product can be sold, i.e. the employ- to do, because there will not be enough machines
er’s competitive position. These factors are dis- or even space.
cussed in more detail in Chapters 5 and 6, and This fairly obvious conclusion is the basis of
to some extent in Chapter 7. To determine what the law of diminishing marginal product.
the effect of these factors might be, however, it is However, the concept of marginal production
necessary first to determine how the theoretical needs to be explained first. In economic terms,
market demand for labour can be deduced from marginal product of labour refers to the change
the demand for labour by the individual employ- in production associated with employing one
1 Non-economists are advised to read the comments in the preface before they become intimidated by the analysis in
this section, and particularly the graphs that the economists love to use. It is not essential to comprehend this section
fully in order to understand the rest of the chapter, but will help to achieve a better grasp of how the labour market as
a whole operates.
additional employee. For the sake of simplicity, production is now tripled to 15 units, which
it is assumed that the labour provided by all means that the second worker’s marginal prod-
workers is equal, whereas in actual fact labour uct is ten units. A third worker also helps to
skills and productivity can greatly differ. increase production, but this time by only six
The law of diminishing marginal product is units, to a total of 21 units. The next worker
a well-known concept in economics. This law (worker 4) starts to crowd the other workers –
refers to the amount of extra (i.e. marginal) there simply is not enough space for everyone
production that can be produced when succes- – and that worker adds only another two units.
sive additional extra units of one input (such If more than four workers are added, they are
as labour) are added while keeping the other superfluous and total production is likely to start
inputs constant. For instance, let us assume that decreasing because there are simply too many
the product being produced is wheat, and that workers on the piece of land, they start crowd-
labour inputs are varied, whereas there is a fixed ing each other, interfere with normal production
piece of land and a fixed piece of equipment (e.g. processes, etc.
one tractor and a plough) to produce the wheat. The law of diminishing marginal product thus
The capital (i.e. the land and the tractor) is kept simply states that as successive units of one input
constant, and additional workers are added in (e.g. labour) are added to a fixed amount of
succession. The additional wheat that is pro- another input (capital), a level of total produc-
duced after the addition of every worker is then tion is reached beyond which the marginal prod-
calculated. This is called the marginal product. uct of that variable input declines.
This can be illustrated graphically. In Figure
Work expands so as to fill the 3.4(a), the increase in production by the addi-
time available for its completion. tion of each worker is clear – the first worker
Parkinson’s law produces five units, the first and second workers
jointly produce 15 units, and so on. In Figure
Let us assume that the first worker struggles to 3.4(b), the marginal product curve shows how
perform all the necessary tasks such as driving the marginal product increases with the addi-
the tractor, controlling the plough, etc., and tion of the second worker. The marginal prod-
produces only five units (e.g. tons) of wheat uct of the first worker is five units, of the second
(marginal product of 5 units). The addition of worker ten units, of the third six units, and so
another worker makes things much easier and forth. After the second worker, the increases in
a)
(a)Total
Totalproduction
production (b)
(b)Marginal
Marginaland
andaverage
averageproduction
production
2323
2121
Units of product
Units of product
Units of product
1515
xx
1010
Average
Average
66 product
product
55
55
Marginal
Marginal
product
product yy
00 11 22 33 44 00 11 22 33 44
Workers
Workers Workers
Workers
Figure 3.4 Total production and marginal production
total production start to diminish – the marginal the employer would be willing to employ more
product starts to decline (the third worker only workers, because the marginal cost would then
adds 6 more units of production, and total pro- be lower than the MRP, and the employer would
duction is 21 units). If another worker is added make additional profits by employing additional
after the fourth worker, the marginal product workers.
of that worker will be negative, i.e. that worker The MRP in Figure 3.5 therefore has a down-
will cause total production to decline to lower ward slope, indicating that as each next worker
than 23 units. The average production is also is employed, his or her additional contribution
shown, which is simply total production divided to total production will be smaller than that of
by the number of workers. the previous worker.
The segment x–y on Figure 3.4 is the basis for Let us assume that the wage rate is R100,
the short-term demand for labour, but only after which means that the employer will employ five
the addition of another factor – the price of the workers. The employer makes no more prof-
product, which is discussed next. it if he or she employs more than five workers
because the MRP of the fifth worker is exact-
ly equal to the wage rate, i.e. R100. In fact, by
3.7.2 The short-run demand for
employing more workers, the employer will
labour reduce his profits because the MRP of the next
Thus far only the physical quantity produced worker will be lower than the prevailing wage
has been considered. Prices are now added – of rate of R100.
the product as well as of labour (the wage). By However, if the wage rate declines to R50,
multiplying the price of the product with the workers six to ten will each produce more than
physical quantity produced, one can derive the R50, which means more profit for the employer.
revenue of the producer. When ten workers are employed, the employer
The marginal revenue product (MRP) will cannot make more profit by employing more
then be the change in total revenue resulting workers. At that point, the wage rate of R50 will
from the employment of an additional worker again be equal to the MRP. The MRP will there-
– in other words, the marginal product multi- fore also be the demand curve for labour.
plied by the price of the product (Marshall et al. The firm’s short-run demand for labour can
1980: 223). Because of the operation of the law therefore be indicated by the downward sloping
of diminishing marginal product, the increase in MRP curve.
revenue (the MRP) becomes smaller and smaller In the real world, employers will not base their
as more workers are employed, i.e. every addi- hiring decisions directly on the marginal prod-
tional worker benefits the employer less and less. uct of labour theory; in fact, very few have ever
It is important to add another assumption at heard of this theory. However, as already stated,
this stage – that in a fully competitive market,
the number of units supplied by any one employ-
er to the market will not change the price of the
units.
To maximise profitability, the employer will
employ additional workers for as long as their
Wage rate
contribution to the total income of the firm is 100

more than what they cost the firm (the firm
thus continues to make a profit). Intuitively,
this makes sense: the employer will not employ MRP
50
additional workers if they cost more than they
produce. To put it more technically, the firm
will employ an additional worker for as long
as that worker’s MRP is higher than his or her
marginal cost (i.e. the wage). The employer will 0 5 10
thus employ additional labour up to the point
Number of workers
where MRP is equal to marginal cost. How-
ever, should marginal cost (the wage) decline, Figure 3.5 The demand for labour
ployers intuitively realise that they will make
ximum profits if they employ labour for as
g as the wage rate of the worker is lower than
additional production that can be produced
Wage rate
employing that worker.
W2
.3 The long-run demand for labour W1 Dl
er the short term, the demand for labour is

Ds
ected only by a change in wages. This influ-
es the employer’s production costs, which in
n influence the price of the product and there-
e the demand for the product. The employer
not really replace (or substitute) labour with 0 L3 L2 L1
chinery at short notice to compensate for any Number of workers
rease in wages. However, over the long term,
employer might replace labour with capital Figure 3.6 The long-term and short-term
achinery). These two effects are called the demand for labour
put effect and the substitution effect.
utput effect. This is the change in employ- The line Ds represents the short-term (inelastic)
nt and output resulting from the effect of the demand for labour and Dl the long-term (elas-
ge change on the employer’s costs of produc- tic) demand. If wages increase from W1 to W2
n. This is present over the short term and, (e.g. because of the introduction of minimum
wages fall, the marginal cost falls below the wages), then employment over the short term
rginal revenue product. This creates a profit will move along the line Ds, i.e. will reduce from
entive for the employer to expand output by L1 to L2. In the long term, however, employers
ploying additional labour. might be able to switch to labour-saving technol-
ubstitution effect. This relates to the change ogy, which will reduce employment even further.
employment when both labour and capital Employment will move along the line Dl, i.e. the
variable, and a change in the relative price of demand for labour will reduce even further to
our results in a substitution of one resource L3.
. labour) for the other (e.g. capital) without a The higher elasticity of labour demand over
nge in production. This effect occurs over the the long term has important implications for
ger term because an employer cannot easily the labour market. To determine to what extent
stitute over the short term. wage increases (and other factors increasing the
his means that over the long term the cost of labour) affect employment, account must
and for labour will be more sensitive (or be taken not only of short-term influences, but
re elastic) to changes in wages than in the also of the longer-term effects of changes in the
rt term. If wages increase, the employer cost of labour and capital.
ght start replacing labour with machinery, It is not only the substitution of labour by cap-
ich means that the wage change has had a ital that makes the long-run demand for labour
ater effect on the demand for labour. more elastic. The following factors also deter-
he short-term demand for labour is thus mine the elasticity of the demand for labour, and
atively unresponsive to changes in wages: it many of them have a greater impact over the
inelastic. Because employers can respond to longer term than in the short term:
nges in wages in a more varied manner over • Substitutability of other inputs. As already
longer term, the demand curve for labour explained, the employer might replace high-
l be more responsive to wage changes in the er priced labour with capital. However, the
g term than in the short term. The long-term extent to which this is technically possible will
ve is thus described as being more elastic than also determine the elasticity of the demand
short-term curve. This is indicated in Figure for labour. The greater the substitutability of
by a change in the gradient of the demand other inputs for labour, the greater will be the
ve. elasticity of the demand for labour.
• Labour-saving technology. If the price of

labour increases, the employer might compen-
sate by using technology that reduces the need
for labour. However, to develop and/or imple-
ment such technology does take time, which
Wage rate
results in higher long-term elasticity of the
demand for labour.
• Higher productivity. Management might
introduce new production methods that W1
improve productivity, which might also reduce
the need for the higher priced resource. D2
• Product demand. The greater the consumer

response to price changes (which is the same D1
as saying the demand for the product is elas-
tic) the more elastic will be the demand for 0 L1 L2
the labour that produces that product. Long- Number of workers
term consumer demand is usually more elas-
tic, which again means higher elasticity in the Figure 3.7 Shifts in the demand for labour
demand for labour over the long term.
• The ratio of labour costs to total costs. If This can be illustrated by an analysis very sim-
labour costs form a greater proportion of total ilar to the indifference curves and budget lines
costs, they will have a bigger impact on the used in Chapter 2, which indicated the various
price of the product and thus on consumer combinations of income and leisure that gave the
demand. Therefore, the larger the proportion same utility or satisfaction to the individual, and
of labour costs in relation to total costs, the the comparison of these to the available income
greater will be the elasticity of demand. to determine optimum utilisation.
You must deodorise

S H I F TS IN THE DEMAND CURVE
profits and make people
External factors can result in the demand curve understand that profit
as a whole shifting to the right or left, in a sim- is not something offensive,
ilar way to movements of the supply curve as a
but as important to a
whole. For instance, a sharp increase in export
company as breathing.
orders will shift the demand curve D1 in Figure
3.7 to D2. This means that employment will Sir Peter Parker
increase at the same wage rate (if wages were at
level W1, the demand for labour would increase I S O Q U A N T C U RV E
from L1 to L2). Labour demand can similarly
also reduce if the demand for the product pro- Assuming that labour and capital can be sub-
duced by labour reduces. Labour-saving tech- stituted, a firm can use various combinations of
nology can also reduce the demand for labour, labour and capital to produce the same amount
as can a reduction in the price of substitutes for of output. This is indicated by an isoquant, as
labour. shown in Figure 3.8. Points A and B produce
the same levels of production by using different
combinations of capital and labour. To obtain a
3.7.4 Profit maximisation over the higher level of output, the firm can increase the
long run combinations of both capital and labour, and
will move from isoquant Q1 to Q2. This implies
Because a firm can choose to substitute labour a production increase from Q1 to Q2.
for capital, or the other way around, over the
Isoquants have the following properties:
long term, the decision regarding how much cap-
ital and how much labour to use will depend on • They are downward sloping, indicating that as
the price of both capital and labour. the input of employment increases, the input
Capital THE DEMAND FOR LABOUR 3
Capital
A
Q2 A
B
Q1 B C2
C1
Labour
Figure 3.8 An isoquant curve Labour
Figure 3.9 An isocost curve
of capital declines in order to produce the
same output.
• Higher isoquants are associated with higher C1 and an isoquant Q1, point A will be the best
levels of output. combination of capital and labour (i.e. with the
lowest cost) to produce Q1 units of production.
• They are convex to the origin, indicating that
Point B will not represent a profit maximising
capital and labour are not perfect substitutes.
position, because it lies on a higher isocost line
As the utilisation of labour declines to very
(and thus represents a more costly option).
low levels, proportionally more capital will be
required to produce the same output.
These properties correspond to those of the

indifference curves in Chapter 2.
I S O C OST CURVE
The firm’s costs of production consist of the cost
of capital and the cost of labour. This can also
Capital
be shown on a graph, as in Figure 3.9. The line

C1 shows all the combinations of capital and
A
labour that are equally costly, e.g. points A and
B. The line C2 implies higher cost combinations
of labour and capital.
B
Q1
P R O F IT MAXIMISATION C1
C2
As in the analysis of utility maximisation in
Chapter 2, profit will be maximised at the point
where a firm produces a specific level of output Labour
at the lowest cost. Figure 3.10 illustrates an iso- Figure 3.10 A firm’s profit maximising position
quant Q1, as well as an isocost curve C1 and C2.
Unless the price of labour or capital declines, the
employer cannot produce at a lower cost than C1.
3.7.5 The market demand for labour
The employer thus cannot be at any point below The market demand for labour cannot simply
the curve C1. Therefore, with an isocost curve of be an aggregation of the individual demand
59
curves, because as the output of the market as This has important implications for understand-
a whole changes, it will have an impact on the ing the impact of unions. Normally, if wages are
price of the product. For instance, let us assume increased, employment reduces. The flatter (i.e.
that the wage rate in an industry as a whole more elastic) the slope, the more jobs will be
declines for some reason. The industry increas- lost as wages increase. However, if the unions
es its output and thus its demand for labour control the whole industry, they face the market
(the MRP or demand for labour curve shifts to demand for labour, which is steeper (D_LM).
the right). However, the industry will have to The steeper curve means that the demand for
reduce the price of the product to sell the higher labour will not be affected as much by a wage
output. The lower price reduces the MRP and increase as when an individual employer is
thus shifts the labour demand of each firm to involved. This is discussed in greater depth in
the left again. Chapter 5.
Figure 3.11 can be used to illustrate this, Wage increases through sectoral bargaining
with the labour demand curve being D1. Let institutions, such as bargaining councils, thus
us assume the wage rate is now reduced from reduce employment to a lesser extent than if
W1 to W2. Individual employers increase their the same wage increases were achieved through
demand for labour. For the individual firm, bargaining at individual company level. How-
this will increase the overall demand for labour ever, this ignores the broader picture: precisely
from L1 to L2, and output will also increase. because employers are able to increase prices in
However, because the industry as a whole needs response to a wage increase across the sector,
to sell this higher output, the price of the prod- it has a negative impact on the non-participat-
uct is reduced to stimulate additional demand. ing consumer and work-seeker, and eventually
Because the price of the product declines, the probably the economy. This issue is discussed in
MRP curve (the demand curve) shifts left to greater depth in section 5.6.
D2. This means that the demand for labour
increases only from L1 to L3, and not to L2. 3.7.6 Imperfectly competitive
This is then the market demand curve for markets: the monopolist
labour, which is steeper at D_LM. The mar-
ket demand for labour is thus less responsive Basically the same thing happens if there is an
to both wage cuts or, more importantly from imperfectly competitive seller, such as a monop-
the point of unions, wage increases. The market olist. If the employer does not operate in a per-
demand for labour is thus less elastic than the fectly competitive market, there are other factors
individual firm’s demand for labour. that come into play. For instance, if the employ-
er is the only producer of a product (a monop-
olist), the firm might have to lower the price of
the product to sell more products. One of the
assumptions of a perfectly competitive market is
that the employer is so small that he or she has
no influence over the price of the product. This
W1 does not apply to the monopolist. The influence
Wage rate
of the monopolist is thus to some extent the

same as the market as a whole in respect of a
particular product.
W2 MRP is thus no longer affected only by chan-
ges in the production of the individual worker,
D1 but also by the declining price of the product,
as in the case of the market demand. In the case
D_LM D2 of a wage reduction, the monopolist will employ
more labour to produce more output, but will
L1 L3 L2 also reduce the price of the product to sell the
Number of workers higher production.
The graphic analysis for the monopolist is
Figure 3.11 The market demand for labour the same as for the market demand for labour:
if there is a wage reduction, and thus
increased employment and output, the ~ The market demand for labour is a derived
MRP curve shifts to the left because the demand; it depends on the demand for the
monopolist reduces the price of the out- product or service produced by that labour.
put. Employment increases to a lesser
~ The demand for labour will decline as wages
extent than in the case of an individ- increase, and the decline will be larger over
ual employer in a perfectly competitive
SUMMARY
the long term, because employers have more
market. Employment by the monopolist options to adjust to the higher wages, for
is thus less sensitive to wage reductions instance by becoming more capital intensive.
(and similarly, wage increases). The long-run demand for labour is thus more
elastic (sensitive) than short-run demand.
Why is there only one
Monopolies Board? ~ The market demand for labour is less elastic
(less sensitive) to wage changes, because the
Graffiti resultant changes to the price of output reduce
the impact of wage changes on the demand for
labour.
Key concepts
capital and labour intensity informal sector
capital/labour ratio labour absorption capacity
derived demand law of diminishing marginal product
diminishing marginal product marginal revenue product
elasticity output effect
employment elasticity Quarterly Employment Statistics
employment intensity substitution effect
For students

1. Describe the methods used to measure 6. Describe some of the most important factors
employment in South Africa, and discuss that affect the demand for labour in this
some shortcomings of these methods. country.
2. Describe the general employment trends and
7. Discuss the importance and size of the
characteristics of employment in South Afri- informal sector in South Africa.
ca over the past number of years.

8. Discuss the law of diminishing marginal
3. Discuss employment developments in vari-
ous sectors of the South African economy. product and illustrate graphically how this
law can be used to derive the short-term
4. An important reason for high unemploy- demand for labour.
ment in South Africa appears to be the
reduced employment elasticity of growth. 9. Describe what influence each of the follow-
Explain this statement and discuss possible ing would have on the demand for labour,
reasons why this is happening. and illustrate graphically:
5. Discuss developments in respect of the cap- a. an increase in the demand for the prod-
ital and labour intensity of production. uct produced by that labour
b. an increase in the productivity of that 11. What is the difference between the demand
labour for labour by the individual employer and
c. an equal increase in the price and in the the demand for labour by the market as a
productivity of that labour whole? Illustrate graphically.
d. a decline in the price of a substitute for 12. Discuss the differences in the demand for
that labour labour by an employer in a perfectly com-
10. Explain why an increase in the wage rate for petitive market and that of a monopoly
farm workers will have a bigger effect on employer. Illustrate graphically.
the employment of farm workers in the long
run than in the short run. Illustrate graphic-
ally.
Suggested reading*
Bhorat, H. 2001b. McConnell, C.R., Brue, S.L. & Macpherson,
Employment trends in South Africa. Johannes- D.A. 2006.
burg: Friedrich Ebert Stiftung. Contemporary labor economics. New York:
McGraw-Hill.
Casale, D., Muller, C. & Posel, D. 2004.
“Two million net new jobs”: a reconsideration Standing, G., Sender, J. & Weeks, J. 1996.
of the rise in employment in South Africa, Restructuring the labour market: the South Afri-
1995–2003. South African Journal of Eco- can challenge. Geneva: International Labour
nomics, December, Vol. 72: 5. Organisation (abbreviated as ILO Review).
Development Bank of Southern Africa.
1998.
Impediments on the labour absorption capacity
of the South African economy. Johannes-
burg: Development Bank of Southern Afri- * The bibliography contains the full list of ref-
ca. erences.
4.1 Introduction
4.2 The determination of wages
4.3 Earnings in South Africa
4.4 Wages and inflation
4.5
4.6
Wage differentials
The trade-off between wages and
Wages and
4.7
employment
The impact of labour laws on the cost of
the cost of
4.8
labour
Deeper insight I: determination of wages
labour
in a perfectly competitive labour market
4.9 Deeper insight II: determination of
wages in a monopsony market
I would like to see a fair division of profits between capital and labor,
so that the toiler could save enough to mingle a little June with the
December of his life.
ROBERT G INGERSOLL
4.1 INTRODUCTION
One of the most important outcomes of labour Therefore, careful note should be taken
markets is the determination of wages. Wages of how wages are determined, and also of the
play a major role in respect of the allocation of extent to which the determination of wages in
labour between occupations, sectors, regions a particular country deviates from the perfectly
and even countries. They also play an important competitive model, which theoretically should
role with regard to decisions about education, not allow unemployment to rise to the levels that
and higher education in particular. it is currently at in South Africa.
Because they play such an important role in This chapter begins to look at some of these
determining supply and demand, as discussed factors, and also at some of the interactions
in previous chapters, labour market outcomes, between wages and other factors, for instance
such as the oversupply of labour in the form of inflation and employment. More of these fac-
unemployment or an undersupply in the form tors are discussed in Chapter 5, i.e. the impact
of labour shortages, are influenced by develop- of unions and collective bargaining, bargaining
ments with regard to wages and wage levels. councils and minimum wages.
4.2 THE DETERMINATION OF WAGES

Wages in a market economy are usually deter- of market forces can be quite strong, whereas
mined in different ways, and the strength of the in others, it may be less so. Some of the most
various factors that influence wage levels are dif- important mechanisms of wage determination
ferent in each case. In some instances, the impact are discussed below.
A
C H A P T E R 4 W A G E S A N D T H E C O S T O F L A B O U R
4.2.1 The determination of wages in 4.2.3 The determination of wages in a

a perfectly competitive labour segmented labour market
market The traditional analysis of the labour market
The first method of wage determination is by does not succeed in explaining certain phenom-
agreement between an individual employer and ena – several segments of the labour market
an individual employee, for example in a con- are not characterised by the models outlined
tract of employment. This is the classic example above. Access to the labour market for med-
of the operation of market forces and is also one ical doctors, for instance, is very tightly con-
of the assumptions of the model of a perfectly trolled. Furthermore, within many individual
competitive market. It is the predominant meth- enterprises, factors and rules internal to these
od for wage determination in sectors such as organisations rather than market forces often
agriculture and domestic service and in smaller determine wages and the allocation of labour.
enterprises not covered by bargaining councils or For instance, appointment to a specific job is
trade unions, as well as among many casual and more often determined by internal promotion
unregistered employees. However, even in these than by open competition among all possible
markets wages cannot be set freely because of candidates within and outside an enterprise.
the obligation to pay a certain minimum wage to The wages of such workers are usually more
the lowest skilled workers. favourable than the market would determine.
In perfectly competitive markets, equilibrium In addition, in direct contradiction to the trad-
between the demand for labour and the supply itional analysis, widespread discrimination
of labour will determine employment and wage against some groups persists over time (even in
levels. If there is excess demand for labour due supposed non-discriminatory countries).
to an increase in production, it will drive up the The segmented labour market theory was
wage rates and thus also the quantity supplied developed to explain these phenomena. Accord-
of labour until equilibrium has been achieved. ing to this theory, the labour market is perma-
If there is unemployment (an excess supply of
nently divided into a number of segments, each
labour), it will drive down the wage rates, the
with its own characteristics and mode of oper-
quantity supplied of labour will decline and the
ation, and with little or no mobility between
quantity demanded will increase until eventually
them. Market forces do not always play the
equilibrium is achieved.
major allocative or pricing role in these seg-
The theoretical explanation of how these mar-
kets work is discussed towards the end of this ments, and can be replaced by institutional
chapter in section 4.8. forces, for example collective bargaining, which
introduces rigidities such as employment secur-
ity and seniority rules. The interplay between
4.2.2 The determination of wages in a employer and union also introduces wage struc-
monopsony labour market tures that are not always related to economic
A market is called a monopsony market when factors (e.g. market forces or worker productiv-
the employer is a wage setter and can set wages ity) and these wage structures differ from one
by adjusting the number of workers he or she labour market segment to the next, depending
hires. This occurs where there is only one on relative union and employer strengths.
employer or where there is collusion or cooper- Another characteristic of segmented labour
ation between employers in a certain market markets is that access to the better segments is
to fix wages at a certain level (McConnell et controlled and mobility between segments is
al. 2006: 181). For example, a monopsony can very restricted. Good examples of such segments
develop if there is a large company employing are the labour markets for various professions,
the majority of workers in a specific occupa- such as medical doctors and lawyers, where
tion, or where employers form a united front access is tightly controlled.
in respect of wages, for instance in the case of a
bargaining council.
T H E D U A L L A BO U R M A RKET
As is shown in section 4.9, equilibrium in this
market might be reached at a point where both A special case of the segmented labour market is
wages and employment are lower than they would the dual labour market. This market is charac-
have been in a perfectly competitive market. terised by two distinct non-competing markets,
WAG E S A N D T H E C O S T O F L A B O U R 4
i.e. the primary and secondary labour markets. i.e. on workers within the enterprise or workers
Each of these is described here. of close competitors, to fill vacancies.
The primary segment. This segment is charac- The secondary segment. Workers “on the out-
terised by high earnings, good working conditions side” often have little or no job security, little
and employment stability. It often consists of prospect of promotion and generally poor con-
large enterprises or segments of the labour mar- ditions of employment. This is the so-called
ket where trade unions play a major role. The pri- “secondary segment”, which consists of jobs
mary market can also be divided into a number that are low paying and have unstable patterns
of internal labour markets, which could refer to of employment. Secondary segment enterprises
individual enterprises or occupations, for example are typically over-competitive, small in scale and
multinational corporations or the labour markets labour intensive with a low level of unionisation.
for lawyers or medical doctors. These markets are There are low levels of skills in this sector, which
characterised by the following: means employers have little incentive to encour-
age stable employment patterns. Employers also
• Access is usually severely restricted and is only have little inclination to train workers properly
possible at the bottom level. – wages are low enough for the employer not to
• Skilled jobs are more often than not filled by pay much attention to productivity.
promotion from within the enterprise. Therefore, in the secondary segment, “bad”
• Promotion is often determined by bureaucratic jobs produce “bad” workers, while in the
and rigid rules of the company or occupation, internal or primary market, “good” jobs make
which may have been established through col- “good” workers. Examples of secondary labour
lective bargaining. market jobs are domestic workers, dishwash-
ers in restaurants, cleaners, janitors and other
• Since there is substantial job security the menial jobs where a low level of skill is required.
internal labour market tends to lack market Workers in the secondary segment have little
mechanisms for the allocation and pricing chance of entering the internal labour markets.
of labour. This is because workers in these They are trapped “on the outside” and educa-
markets are protected against the competition and training by the government will do little
tive market forces of supply and demand and or nothing to increase their earnings.
their behaviour is shaped by internal rules According to the dual labour market theory,
(McConnell et al. 2006: 472). The wage rate inequality in earnings cannot be drastically
is thus not necessarily the rate that would have reduced by investment in education and train-
been determined by demand and supply condi- ing unless workers in the secondary markets are
tions, i.e. market forces, if they had operated integrated through various measures into the
normally. primary labour market. This can be done, for
example, through policies to reduce discrimina-
Employers in the primary market spend large tion, better labour market information and the
amounts of money on the training of their work- reorienting of employers.
ers, partly because of pressures to improve pro- The use of the dual labour market theory to
ductivity, which can be ascribed to high and ris- explain differences in earnings not necessarily
ing wages. These high wages also result in more related to skills or qualifications is discussed
labour-saving and productive equipment being in section 9.3.5, and to explain discrimination
used. This, in turn, generates improved advance- against certain groups in section 10.3.3.
ment and earning opportunities for the remain- Hofmeyr (1998) points out that South Africa
ing workers, creating a self-reinforcing process experienced an extreme form of institutionalised
of progress and development in the primary segmentation of the labour market because of
market, although at the expense of employment apartheid. He contends that this disappeared
creation (McConnell et al. 2006: 471). with the labour market reforms of the 1980s,
The workers who are trained are trained but has been replaced by a form far more typ-
mainly for the “internal” market, and they can ical of some advanced industrial economies.
often be utilised only by that specific employ- This later form of segmentation is between the
er and by close competitors. This means that unionised and non-unionised parts of the formal
employers rely mainly on the internal market, sector, and between the formal and informal
sectors. There are, for instance, large differences

in the earnings of unionised and non-unionised However, such a policy would further
workers, as discussed in section 5.4.1, and he widen the existing large differentials in the
concludes that “the principal source of segment- economy. There is already a large informal
ation is associated with unionisation” (Hofmeyr sector in the country, and it would be
1998: 220). expanded by lower wages and poorer work-
It has been found that transitions from the ing conditions for all new entrants. Further-
informal sector (as a proxy for the secondary more, this type of policy might create more
labour market) to the formal sector (the primary
jobs, but would also lead to the continued
labour market) are surprisingly rare, especially
marginalisation of many workers.
in the case of the youth. It is therefore crucial for
a young person to obtain that first job to ensure The ANC’s Discussion Document to
future involvement in the labour market. If one revitalise small and medium-sized enter-
is in the one section, the formal section, one has prises (ANC 2005) has also raised the possi-
a very good chance of staying in this section. bility of a dual labour market to accom-
About 85% of the entrants into a formal sector modate more flexibility. The following are
job come from another formal sector job. The raised as possible elements of such a policy:
other section consists of unemployed persons,
discouraged work-seekers, persons who are not • Allowing younger people a more flexible
economically active, workers in some types of set of arrangements with regard to min-
atypical employment and the informal sector. imum wages, limits on overtime and dis-
Within this chunk of the labour market, there missal requirements
is substantial dynamism, but none of the labour • Allowing industrial development zones
market statuses in this category are very eco- where labour laws would be more flexible
nomically attractive (Banerjee et al. 2006: 59).
• Allowing more flexibility in labour-inten-
sive sectors, such as tourism, textile and
Policy issue: A dual labour market as a clothing, the household and agricultural
strategy to deal with the labour market sectors
crisis • Having more flexible labour laws for
Some years ago, the South Africa Founda- companies that employ fewer than 200
tion (1996) stated in a major policy docu- people, as opposed to the current cap of
ment that a two-tier labour market should 50
be encouraged to address South Africa’s
unemployment problem. It argued that
large numbers of relatively low-wage jobs
The dual labour market consists of two
should be created by eliminating the exten-
parts: the primary segment characterised
sion of bargaining council agreements to
SUMMARY
by high earnings, good working condi-

non-parties (see section 5.6); maintaining tions and employment stability, and the
only those minimum standards that do secondary segment characterised by
not hurt the poor and unemployed; avoid- low-paying jobs and unstable patterns of
ing minimum wages which threaten jobs; employment. Access to the primary mar-
and encouraging the creation of new jobs ket is restricted and often open only from
and the employment of youths. Youth and the bottom.
regional differentiation should be allowed in
all wage contracts. According to the Foun-
dation, the rights and privileges of existing
4.2.4 Determination of wages
workers would “not be affected much”, as
through collective bargaining
bargaining councils and strong centralised
trade unions protect them. Another way in which wages are determined
is by collective bargaining, where unions and
Í
employers or groups of employers bargain col- tor, subject to certain conditions. This is dis-
lectively on wages and other conditions of cussed in more detail in Chapter 5.
employment. This can take place at enterprise or
sectoral level, for example within a bargaining Legislation impacting on other employment-re-
council. This is discussed in detail in Chapter lated issues can also have an effect on wages.
5. There are also some sectoral collective bar- For instance, legislation reducing working hours
gaining arrangements where parties bargain at can impact on wages as unions attempt to pre-
sectoral level but not within a bargaining coun- vent a reduction in the take-home pay of their
cil, for instance gold mining, coal mining and members or employers try to avoid an increase
automobile manufacturing. There are many in the hourly cost of production. The impact of
factors that determine the outcome of collect- reduced hours of work on the cost of labour is
ive bargaining. One of the most important is the discussed in section 4.7.1.
power balance between the parties but, as will
be discussed, this does not mean that market
4.2.6 Communes and communism
forces do not play an important role.
Another way in which the allocation and pricing
4.2.5 Government involvement and of labour can be organised is the commune,
influence its ultimate form being communism (Fearn
1981: 15).
Government involvement in and influence on The “pure” commune (and therefore pure
wage determination can take a variety of forms, communist philosophy) is based on two princi-
of which the following are pertinent in South ples (Fearn 1981: 16):
Africa:
• There is social, collective or public owner-
a) The government sets an example as an ship of physical capital (e.g. land, machinery)
employer in determining the wages of its and property. This system is properly called
employees. In 2005, wages in the public socialism. In the former Soviet Union (under
sector bargaining councils were significant- communist rule) this principle was extended
ly higher – nearly double – than in private to include state ownership of the economy, i.e.
sector bargaining councils (Bhorat, Van der authoritarian central economic planning and
Westhuizen & Goga 2010: 36). At the time
decision making.
of writing all indications are that this has
not changed, if anything the gap between • Consumption (including payment for product-
public sector wages and private sector ive effort, i.e. wages) is separated from pro-
wages seems to have increased. ductive effort. The pure commune operates
in terms of the principle from each according
b) Legislative measures that determine min-
to his ability – to each according to his need.
imum wages. In South Africa, the Minister
of Labour can make sectoral determina- Wages would therefore not be determined in
tions for sectors that are regarded as hav- the normal way, i.e. through the joint oper-
ing insufficient collective bargaining for the ation of market forces, productivity and col-
determination of wages. Section 5.7 deals lective bargaining.
with the issue of minimum wages and is
relevant here, as it is one of the methods Under capitalism
through which the government influences man exploits man;
wage determination. under socialism
c) Legislative measures which protect and the reverse is true.
encourage centralised collective bargaining. Polish proverb
For instance, the Labour Relations Act not
only provides for the registration of formal Regardless of the theory, labour markets in the
collective bargaining arrangements between Soviet Union under communist rule were a curi-
representative employer organisations and ous blend of free choice and government direc-
unions in a particular sector, but also pro- tion. Workers were generally free to move, but
vides for the Minister of Labour to extend there were exceptions, for example the assign-
these agreements to all employers in the sec- ment of graduates to a specific location for three
years; the mobilisation campaigns of workers to determine wages, for example representation
and students for special tasks; state control over at the decision-making levels in the company,
education; and state determination and manipu- merit awards, productivity or production-linked
lation of wages. Trade unions were controlled pay, or profitability-linked remuneration.
by the Communist Party and could exercise only
such freedom as the party permitted (Marshall et
al. 1980: 160).
SUMMARY
The most important methods of deter-
mining wages are contracts of employ-
4.2.7 Other methods of wage ment, collective bargaining, government
determination regulation and methods that link wages
Various methods of worker participation and to productivity or profitability.
worker incentive payment systems can be used
4.3 EARNINGS IN SOUTH AFRICA

The structure of actual earnings in South Afri- the methodology for collecting information
ca comes from the combined effect of the vari- on earnings. For instance, between 2000 and
ous ways in which wages are determined. The 2003 there was the Survey of Average Monthly
main source of data on these earnings is Statis- Earnings. Thereafter it was replaced by the Sur-
tics South Africa surveys – the QES for busi- vey of Employment and Earnings. This survey
nesses and the QLFS for households (see section was replaced by the QES in 2005. Even though
8.3.1). The latter is probably a less dependable the different surveys are therefore not strictly
source of statistics because individuals might not comparable, if one uses average earnings, it is
reflect their earnings correctly, for instance they possible partly to eliminate some of the differ-
do not always include employer contributions ences between them.
to various benefit funds as part of their income The QES covers businesses that employ
package. Another source is the record of gradu- people and are registered for income tax. This
ates’ earnings compiled by the Human Sciences has meant better coverage of small businesses
Research Council (HSRC). Private organisations as these were not previously registered for VAT
also compile data on wages or earnings in South (which was the basis of the preceding survey).
Africa, for example the Labour Research Service Some research has found that average wages
(wage settlement data) and PE Corporate Servi- have dropped since the advent of democracy
(see sources quoted by Burger & Yu 2007).
ces (average earnings by occupation). Such data
However, Burger and Yu point out that such
are usually available only to subscribers.
research is based on an incorrect comparison of
Money doesn’t buy friends, the October Household Survey and the Labour
but it allows a better Force Survey. Although there was an inexplic-
class of enemies. ably large drop in average earnings between the
two surveys, if the data are properly analysed
Lord Mancroft (for instance by the removal of unrealistic out-
liers) there is actually a real increase in the wages
In section 10.4.4 there is a further discussion of formal sector earnings since the transition to
on wages in South Africa, with the emphasis on democracy, and not a decline.
wage and income inequalities between different Figure 4.1 gives an indication of the increases
population groups. in current wages during the period 2002–2011
and compares these with inflation. It shows that
4.3.1 Average salaries and wages in current wages increased much more rapidly than
South Africa inflation. This means that workers enjoyed a
relatively sharp increase in real wages (i.e. after
F O R MAL S ECTOR allowing for inflation), as is apparent from Fig-
At various stages, Statistics South Africa changed ure 4.2.
300
250
Index of current wages
Index 1996 = 100
200
150
Consumer Price Index
100
50
0
Mar 02
Sep 02
Mar 03
Sep 03
Mar 04
Sep 04
Mar 05
Sep 05
Mar 06
Sep06
Mar 07
Sep 07
Mar 08
Sep 08
Mar 09
Sep 09
Mar 10
Sep 10
Mar 11
Sep 11
Mar 12
Sep 12
Mar 13
Sep 13
Year
igure 4.1 Indices of current wages and inflation
ource: SA Reserve Bank, Data series 7013L and 7170N
150
140
130
Index 1996 = 100
120
110
100
90
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
M
Year
igure 4.2 Index of real wages
SA Reserve Bank, Data series 7013D
ource:
The increase in real wages over the period 2000– worker had grown to 250% of the 1970 level.
2010 amounts to about 1.8% per annum. How- At the same time, unemployment among these
ever, as will be indicated in section 6.3, labour lower skills levels increased rapidly.
productivity has also increased at a relative-
ly high rate since the latter part of the 1990s,
which more than compensated for the increase • Average real wages have increased
SUMMARY
in real wages. relatively sharply in most sectors of
Table 4.1 shows current wage levels in vari- the South African economy in recent
ous sectors in August 2011. As stated above, years.
the survey was only introduced in 2005, so that
• The real wages of unskilled workers
unfortunately a comparison of changes over time
have increased much more rapidly
cannot be made. What is clear from the table,
than those of skilled workers.
however, are the relative earnings in various sec-
tors. Earnings in mining, manufacturing, finance • Earnings in the informal sector are
and real estate, and community, social and much lower than in the formal sector
business services are more or less in line with and the gap is increasing over time.
the average of all non-agricultural sectors. The
earnings in construction and in the wholesale
and retail trade sectors are, however, far below
the average. Electricity is far above the average 4.3.2 Non-wage labour costs
(especially because of the high percentage of In South Africa, employer-provided entitlements
skilled workers in this sector). The earnings in to cover contingency risks are relatively high
the transport and communication sector are also compared to other countries at about the same
significantly above the average. development level. Neither the state nor rural
Lewis (as quoted by Mazumdar & Van kinship support systems have played a major
Seventer 2002: 1089) makes the point that the role because of the legacies of apartheid (ILO
real wages of unskilled workers increased quite Review 1996: 214).
sharply between 1970 and 1999, relative to According to a survey undertaken in the
the increase in real earnings of the skilled. The Greater Johannesburg Metropolitan Area in
real remuneration of highly skilled and skilled 1999, non-wage costs formed about 25% of
workers in 1999 respectively formed 90% and wage costs (Bhorat & Lundall 2004: 1035).
110% of their 1970 levels. In contrast, the real In this survey, non-wage costs refer to worker
remuneration of an unskilled or semi-skilled benefits such as overtime pay, housing allowan-
Table 4.1 Average monthly earnings in non-agricultural sectors at current prices, August 2011
Rand Ratio to total
Mining 13 830 106
Manufacturing 11 569 89
Electricity, gas and water 24 446 188
Construction 9 579 74
Trade 8 443 65
Transport and communication 16 432 126
Finance, real estate 15 099 116
Community, social and personal services 14 917 115
Total 13 005 100.0

Source: Statistics South Africa, Quarterly Employment Statistics
ces, transport allowances and contributions to to occupation, employer sector, age and working
unemployment insurance, pension funds and hours. Data on additional earnings, the value of
medical insurance funds. fringe benefits and the income package are also
Non-wage labour costs in the USA and Euro- provided.
pean countries form between 30 and 40% of Graduates in the public sector seem to be
total labour costs (Clarke 1985: 406). The rela- earning less (about three-quarters) than their
tively high ratio means that total remuneration, counterparts in the private sector, although the
to an increasing extent, does not reflect the gap appears to be narrowing. The remunera-
worker’s productivity or even supply-and-de- tion of white male graduates in the public sector
mand conditions. It increases the fixed-cost com- is about half that of white male self-employed
ponent of total labour costs and also the differ- graduates.
ence between the employee’s take-home pay and Self-employed graduates appear to earn more
the employee’s cost to the employer. than those in the private sector. However, the
However, it cannot be denied that bene- self-employed graduates have an average of 20
fit funds contribute to substantial long-term years’ work experience compared with 12 years
social gains for workers and protection against for graduates in the private sector.
unstable economic circumstances, dangerous These figures are slightly misleading, since
working conditions, high medical costs and many employees in the public sector are in rela-
other eventualities. In addition, with the excep- tively lower paid professions such as teaching,
tion of unemployment insurance and insurance nursing and other supplementary medical pro-
for occupational injuries and diseases, there is fessions.
no overarching social security or social insurance
system in South Africa, although a basic income 4.3.4 Share of employee remuneration
grant has been proposed by some union and
in national income
community interests (see section 8.7.6).
South Africa’s national income and production
accounts measure the total share of employ-
4.3.3 The income of graduates
ee remuneration in the national product. These
according to the HSRC
data indicate that remuneration of employees
Since 1971, the HSRC has undertaken surveys to comprises between 49 and 57% of gross nation-
monitor the income structure of graduates (web- al product, with a tendency to decline over time
site: www.hsrc.ac.za or www.graduates.org.za). (see Figure 4.3). This contrasts with the net
These data are gathered by postal survey among operating surplus, which in effect is the profits
graduates, and the income is presented according of enterprises, which generally show an increase
70
Employee compensation
60
50
40
30
20
Net operating surplus
10
0
75
78
81
84
87
90
93
96
99
02
05
08
11
19
19
19
19
19
19
19
19
19
20
20
20
20
Figure 4.3 Compensation of employees compared to net operating surplus of enterprises, 1970–2011

Source: South African Reserve Bank, Data series 60006003
71
(South African Reserve Bank, South Africa’s total remuneration of all workers together. If
National Accounts 1946–1990, and Quarterly there has been a general decline in employment
Bulletin). or even a relatively small increase (as was the
However, these data do not necessarily relate case for many years), the share of employee
directly to the average wages of individual work- remuneration will tend to decline, even though
ers. The remuneration of employees measures wage levels may have increased substantially.
4.4 WAGES AND INFLATION

As stated above, the real wages of workers in
South Africa increased quite sharply over time, typical spending patterns of representative
meaning that money wages (or nominal wages) household samples in different areas of the
increased at a more rapid rate than the infla- country. These expenditure patterns are
tion rate. The question that arises is whether updated roughly every five years. The infla-
the high increase in money wages (often caused tion rate obtained by including the complete
by the outcome of collective bargaining – see basket is called Headline CPI, or the official
Chapter 5) might not cause inflation to increase, inflation rate.
or whether the wage increases are high simply
From 2009, Statistics South Africa has
because inflation is high.
applied the concept of owners’ equivalent
In order to analyse this question, it is import-
ant firstly to consider how inflation is measured rent to measure the cost of housing. This
(see accompanying box). concept reflects the cost of the accommo-
dation services derived by owner occupiers
Inflation means that from their own homes. It excludes, as it
your money won’t buy should, the investment component of home
as much today as it ownership. Owners’ equivalent rent meas-
did when you didn’t ures the opportunity cost to the owners of
have any.
forgoing a rental income by living in rath-
Anonymous er than renting out the house they own (see
Statistics South Africa 2008c). This means
that there is no longer a need to distinguish
The measurement of inflation between different measures of inflation in
The inflation rate is the annual rate of order to exclude volatile items such as inter-
increase in the general price level, and price est rates.
levels are determined by using a price index. The Producer Price Index is another
The Consumer Price Index (CPI) is the most measure of inflation that might be used for
common measure of inflation and shows specific purposes such as to determine the
how the average price level of all those goods inflation rate for producers (as opposed to
and services bought by a typical household consumers).
(a “basket” of goods and services) changes During the 1990s the first multi-year
over time. It is generally used to determine wage agreements based purely on infla-
the national inflation rate of the country. tion were concluded in South Africa. These
The basket of goods and services and agreements linked the wage increases in
the weighting afforded to each item in the the second or third year to the inflation
basket are based on surveys of household rate. Initially, this rate was the increase in
expenditure, which are conducted every five the CPI, specifically headline inflation, but
years by Statistics South Africa. The weights other measures of inflation were also used
of the items in the basket are based on the in later years (Barker & Spowart 2000).
Í
Wage levels are usually adjusted upwards dur- increased quite substantially since 1996, at a rate
r
ing inflationary times to keep up with increas- of about 1.5% per annum.
es in the cost of living. Price increases therefore The inflation phenomenon is a very complex
result in wage increases. At the same time, an one, and a simplistic approach, for example
increase in wages might also cause prices to rise to blame unions for inflation, is certainly not
because wages are an important cost element in helpful. In a country such as South Africa the
determining prices. Even if unionised sectors do influence on inflation of factors such as import-
not comprise the majority of workers, wage and ed inflation, an earnings spiral caused by skilled
therefore cost increases might be transmitted to labour shortages, the high degree of economic
other sectors (the spillover effect). concentration and restrictive business practices
Wages and price levels are, however, influ- (i.e. reduced competitive forces), in addition to
enced by a multitude of other factors. Wages, for union influences, cannot be ignored. It should
instance, are not only influenced by prices but be mentioned, however, that countries such as
also by educational levels, discrimination, produc- Ireland, the Netherlands and Australia were
tivity, legislation and many other factors. Prices able to reduce inflation significantly and at the
are influenced by, for instance, the exchange rate, same time substantially increase employment by
monopoly conditions, prices set by public enter- wage moderating policies, as indicated in section
prises, high government expenditure and high 7.6.2.
growth in money supply. Exogenous factors, such Countries with high inflation have used vari-
as crop failures and increases in oil prices, can ous measures to reduce inflation while minimis-
also increase price levels. It is therefore not pos- ing the social effects of very restrictive monetary
policies. One such mechanism is incomes policies
sible to fully isolate the influence of a single vari-
(see accompanying box).
able such as the money wage level on price levels.
The extent of the influence of money wage
levels on price levels is determined, first, by the Policy issue: Incomes policies
proportion that the wage bill forms of the total
costs of an enterprise and, second, by produc- From time to time various countries have
tivity trends. If wage increases exceed productiv- implemented incomes policies to reduce
ity increases, production costs will rise, and this inflation without generating unacceptable
might eventually lead to increased prices. How- levels of unemployment. Income policies
ever, as already stated, there is also an interrela- are defined as policies by which the govern-
tionship between wages and productivity. ment tries directly or indirectly to control or
McConnell et al. (2006: 359) come to the fol- influence wage and price levels by specifying
lowing general conclusions regarding wages and standards which should apply when wages
inflation: or prices are changed (Barker & Holtzhau-
• Over the long term, expansionary fiscal or sen 1996). There are three categories of
monetary policies or supply shocks appear to incomes policies:
be a significant factor in determining the rate • The first category is wage and price
of inflation. increase guidelines, where compliance
• Unions do not appear to be the basic cause of with such guidelines is mainly voluntary.
inflation. • The second category is mandatory wage
• Unions do appear to perpetuate existing infla- and price controls. This category of
tion and increase the difficulty of reducing policies was attempted in South Africa
inflation once it has begun. between 1975 and 1977, but was per-
ceived to be ineffective (Mohr & Rogers
As stated earlier, nominal wages in South Afri- 1991: 419). There appears to be substan-
ca are increasing much more rapidly than infla- tial consensus that both guideline and
tion, which means that workers are enjoying control policies were a failure in the USA.
sharp increases in real wages. The increases in • The final category is incentive-based
real wages since 1990 are shown in Figure 4.2, incomes policies, which entail giving an
where it is evident that, overall, real wages have
Í
incentive to unions and employers not tegrate if the exchange rate depreciates
to demand or pay higher wages. For sharply, leading to high imported inflation.
instance, a tax surcharge can be applied International experience has shown that it
to the corporate profits of enterprises that is useless to try to freeze the price of a cur-
grant pay increases above a certain level. rency, especially of a developing country. If
a country depreciates its currency, the prices
Despite the possible advantage that incomes
of all imports increase, and the higher input
policies may reduce inflationary expect-
ations over the short term, they suffer the costs inevitably cause prices to rise.
major disadvantage of not necessarily The prospect of a voluntary incomes
addressing the most important sources of policy was raised by the government’s
inflation but only its symptoms. However, Growth, Employment and Redistribu-
if they are used as part of a wide-ranging tion policy (GEAR). This policy calls for a
package of measures to end extremely high national social agreement to ensure, among
inflation, they can contribute to the success other things, that wage and salary increas-
of such measures, as in Brazil, Argentina es do not rise above productivity growth
and Israel in 1985 and 1986 (Mohr & Rog- (Republic of South Africa (RSA) 1996: 20).
ers 1991: 419).
Such measures were voluntarily introduced
A further disadvantage of such policies
with very positive results in countries such
is their distributional aspect. Because their
as the Netherlands and Ireland (see section
aim is to “freeze” prices and wages, income
7.6.2).
inequalities remain constant and cannot be
addressed (Marshall et al. 1980: 174). It is
also not feasible to exclude lower income
groups from the incomes policy as the policy
will then disintegrate rapidly. High wage increases do not appear to be
SUMMARY
At the same time, such policies distort the initial cause of inflation, but they do
resource allocation as prices cannot adjust seem to perpetuate existing inflation and
to reflect relative scarcities (Van Tonder increase the difficulty of reducing infla-
1982: 143). The policy may also disin- tion once it has begun.
4.5 WAGE DIFFERENTIALS
A competitive labour market is characterised ( A ) D I S C RI M I N A TI O N
by wage or pay differentials, i.e. differences in Differences in the average or mean wages of
wage rates between industries, different classes
workers of different races or genders do not
of employees in the same industry or between
necessarily indicate discrimination by employers,
geographic areas. Wage differentials can also
because they may be due to differences in occu-
refer to differences in wages paid for similar
work, in which case it is likely to be discrimina- pation, education, experience and similar fac-
tory (Barker & Holtzhausen 1996). Fallon and tors. However, such factors can point to before-
Lucas (1998) state that non-productive factors the-market discrimination, for example where
such as discrimination, union membership and African workers occupy less skilled positions
employment status (i.e. being employed or not) because of poorer educational standards.
have resulted in larger differentials occurring in A better indicator of employer discrimination
South Africa than in other countries. would be differences in wage levels in the same
There are many reasons for such differentials, occupation, after allowing for differences in edu-
and a few are highlighted below. cation or experience. This is discussed in more
detail in section 10.4.4, where it is shown that (C ) I N TERS EC T O RA L D I FFEREN T I A L S
there is still a large measure of wage discrimin- Table 4.1 shows the sharp differences in the
ation in South Africa that cannot be ascribed earnings of different sectors. This is partly relat-
to education, occupation, level of skill or some ed to differences in the skills structures of work-
other non-discriminatory factor. ers and partly to the rate of unionisation in the
various sectors. In addition, Fallon and Lucas
The workers spend (1998) have found that bargaining council activ-
what they get and ities have also led to increased wage differen-
the capitalists get tials, i.e. higher wages in sectors with bargaining
councils compared to those without (this issue
what they spend. is discussed in more detail in section 5.6). The
M. Kalecki authors of the ILO Review (1996: 187) state
that although there is some similarity to the pat-
( B ) E DUCATIONAL DIFFERENTIALS tern found in other countries, the extent of the
differential between agriculture and other sectors
The level of schooling is an important cause in South Africa is very high.
of large wage differentials. Bhorat (2000a: 24)
found that the most important factor determin-
(D ) TH E D E G REE O F U N I O N I S A TI O N
ing higher earnings is education, especially mat-
ric or tertiary education. Bhorat (2001a) shows It is argued in section 5.4.1 that unions have
that the median wage for those with a matric is caused wages to peak at between 10 and 30%
close to 70% of those with a degree. However, above those in non-unionised situations, and
the median wage of people whose highest edu- that they have caused a higher differential in
cation is Grade 8 to 11 is only 35% of the wage South Africa than in other countries.
earned by a person with a tertiary education. He
concludes that the most important element in an (E ) S I ZE O F T H E E N TERPRI S E
employment equity strategy would be to equalise According to a survey undertaken in the Great-
access to and the quality of educational provi- er Johannesburg Metropolitan Area in 1999, on
sion. average large firms pay more than small firms
However, educational level is not the only across all occupational categories. The premium
education-related factor of importance. Bhorat for being in a large firm seems to be in the order
(2001a) also shows that there are at least two of 15–25% (Bhorat & Lundall 2004: 10–31).
other important factors. The first is that there Smaller enterprises are usually more labour
appears to be a disparity (either actual or per- intensive than larger ones and they tend to com-
ceived) in the quality of a tertiary qualification pete more on the basis of labour costs. Therefore
from historically white and black universities, wages tend to be lower in smaller enterprises.
which is probably mainly as a result of differ- This would normally not be so if a bargaining
ent resource allocations to the universities. The council were involved. This means that small
second important factor is that a tertiary degree enterprises might lose their competitive advan-
is a heterogeneous product. Some diplomas and tage vis-à-vis larger enterprises.
degrees are in higher demand than others, for An important reason for the higher pay in lar-
instance a person with an engineering degree will ger firms is that larger firms are probably union-
probably earn a higher salary than a person with ised, whereas it is often difficult for unions to
a humanities degree. organise workers in smaller enterprises.
The authors of the ILO Review (1996: 188– Another reason for this differential is the
190) warn that raising the general education- efficiency wage hypothesis (see section 6.4.3).
al level among disadvantaged groups will not Because higher wages may result in increased
necessarily reduce inequalities. If schooling is effort, reduced shirking and lower monitor-
used as a screening or discriminating device by ing costs, larger firms are willing to pay high-
employers, a general increase in schooling lev- er wages in line with their greater ability to pay
els will simply result in the screening levels being such wages. Smaller firms may have the same
raised. priorities, but their opportunities to gain the
ISA
benefits of efficiency wages are restrained by 2011: 24). In the UK, the New Economics Foun-
their lower ability to pay higher wages. Further- dation has stated that the average CEO earns
more, workers in larger firms may indirectly 100 times more than a teacher (Labour Research
share in the higher profits of larger companies Service 2011: 25).
by being paid higher wages. There are a number of factors that should be
taken in account when interpreting this informa-
tion. The first is that until recently the typical
( F ) A GE OR EXPERIENCE
executive’s package was made up almost entire-
Employees with more experience are usually paid ly of cash and a few benefits. Today it is likely
higher wages. In some cases this may amount to to be split among basic salary, annual incentive
older workers being paid higher wages. In some (e.g. performance bonuses) and long-term incen-
cases employees receive a salary increment based tives (e.g. share options). A substantial portion
on years of service. of a senior executive’s pay packet is made up of
variable components, i.e. components that are,
( G ) WORKING ENVIRONMENT theoretically at least, at risk and dependent on
the performances of the employee and the enter-
Circumstances such as night work, unpleasant prise. This is very seldom the case with produc-
physical working conditions and hazardous tion workers, as most of their remuneration is
work can justify higher wage rates. guaranteed pay.
Another factor that should be taken into
( H ) OCCUPATIONAL DIFFERENTIALS account is the skills profile of workers in dif-
ferent countries. Production plants in European
There is a large difference between the wage countries and Japan are usually highly mech-
level of the average production worker and anised and very capital intensive. These plants
that of the chief executive officer of the enter- have a very small proportion of production
prise. This is sometimes referred to as the wage workers and such workers are usually high-
gap. The Employment Equity Act refers to it ly skilled operatives using very sophisticated
as income differentials. The Labour Market machinery. This means that their productivity
Commission believes that income differentials is also very high, with commensurate pay pack-
between the highest and the lowest paid workers ages. South Africa is at the opposite end of the
in South Africa are high, both by developed and spectrum, with many workplaces still being very
developing country standards (Labour Market labour intensive, in spite of increases in capital
Commission 1996: 71). intensity in recent years. This is particularly the
In a survey of 38 very large companies, the case in the resource-based industries.
Labour Research Service has estimated that the Demand and supply factors can also not be dis-
average CEO remuneration (including salary, regarded. In South Africa there is an oversupply
benefits and bonus) is 255 times the average of workers at the lower skills levels, whereas
low-wage worker. The average executive direc- people with the necessary skills and abilities to
tor earns 154 times what the average low-wage occupy executive, managerial and other senior
worker earns. However, PE Corporate Services positions are in very short supply. Many of these
have determined that the average CEO earns skills are tradable internationally and therefore
52 times more than junior workers in his or her very mobile. Leading enterprises can retain their
company, and that there has been a decline in competitive edge only by attracting and retaining
the wage gap in recent years (www.pecs.co.za). the best leadership and managerial skills, which
Whatever the true state of affairs, the fact of means high remuneration packages.
the matter is that the wage gap in South Africa The authors of the ILO Review (1996: 206–
is large, but this is by no means a South Afri- 207) found that although senior executives
can phenomenon – the general secretary of UNI receive respectably high salaries by international
Global Union, which claims to represent 15 mil- standards, some other senior employee posts are
lion workers worldwide, has indicated that chief relatively underpaid. Furthermore, the compen-
executives in the USA earn 319 times more than sation levels of workers in manufacturing enter-
the average American, up from 30 or 40 times prises are not low by the standards of developing
more in the 1970s (Labour Research Service countries.
The Employment Equity Act compels an to upward pressure on the total wage bill, and
employer to reduce so-called “disproportionate this will damage competitiveness.
income differentials”. The Employment Con- Companies might also reduce the wage gap
ditions Commission must investigate propor- by getting rid of the lowest paid employees, for
tionate norms and benchmarks, and may make example by mechanisation or outsourcing. This
recommendations to the Minister in this regard. is likely to increase unemployment and lead to
This provision, if applied rigorously, could have more insecure forms of employment.
negative consequences for the economy – the Bhorat (2000a: 26) emphasises that a simplis-
wage gap between the highest and lowest cat- tic legislative approach to reducing the wage gap
egories of workers has arisen, among other would be “foolhardy”. The wage gap has arisen
reasons, because of the double impact of skills due to a fairly intricate interplay of factors, and a
shortages and an oversupply of unskilled labour. blunt instrument to reduce the gap could prove to
To address only the symptoms rather than the be “both extremely disruptive to incentives in the
causes of these imbalances in the labour market labour market, as well as resulting in highly ineffi-
will have various unintended consequences. cient outcomes” (e.g. an exodus of skills from the
First, if an artificial ceiling is placed on the domestic market, thereby aggravating the skills
earnings of highly skilled workers, there is likely shortage). Wage differentials can only be reduced
to be a skills flight from the country, especial- by addressing the root causes (e.g. by improving
ly of those skills that are internationally very education and training, as well as productivity)
mobile. This brain drain will be aggravated by and not by simply addressing the symptoms.
the fact that share option schemes and profit
sharing for senior executives might become less
popular, because they are likely to increase rath- • Apart from discrimination, there are
er than reduce the income differential (especial- many reasons for wage differentials
ly if the enterprise is financially successful). As between workers, among others, dif-
indicated in section 2.7.1, such a skills flight is ferences in skills levels, occupations,
sectors, experience and level of uni-
SUMMARY
certainly not in South Africa’s best interests.

The wages of the lowest categories of employ- onisation.
ees cannot simply be increased without taking • The wage gap between the high-
into account the wage curve (i.e. the wage levels est and lowest paid employees in
of the next level of employees, and so forth), as an enterprise has arisen due to an
such a step might not only lead to inconsisten- intricate interplay of factors, and to
cies, but might also be unfair if unskilled work- address only the symptoms of this
ers receive the same salary as workers with more phenomenon rather than the causes
skills or responsibilities. Furthermore, if the would have extremely disruptive con-
wages of unskilled workers are increased with- sequences for the economy.
out any regard to their productivity, it will lead
4.6 THE TRADE-OFF BETWEEN WAGES AND EMPLOYMENT

4.6.1 The impact of wage increases • When the demand for labour remains con-
on employment stant, any wage increase will tend to reduce
employment.
As one can gather from the discussions of labour
demand and supply, an artificial increase in wages • When the demand for labour rises, a wage
will reduce employment. This is also borne out in increase will reduce employment below what
practice – it is generally accepted among main- it would have been in the absence of a wage
stream economists that union policies of aggres- change, and the rate of growth of employment
sively pushing up wage rates will cause unemploy- will therefore be reduced.
ment. Marshall et al. (1980: 354) summarise the • When the demand for labour falls, any wage
impact of wage increases as follows: increase will magnify the reduction in employ-
ment.
What are ignored in this analysis, however, found that “rising real product wages have had
are developments with regard to productivity, a substantial dampening effect on the demand
which, through its impact on unit labour cost, for black workers”. Econometric analyses have
will obviously also influence the net impact of a indicated that a 10% increase in the real product
wage increase on employment. wage would eventually lead to a 7.1% decrease
The outcome of a wage reduction is not neces- in African employment. However, employment
sarily the mirror image of a wage increase, as changes take a significant time to adjust to the
wage changes can have an asymmetrical effect. effects of wage changes, and this period can, in
This simply means that a wage increase might fact, be several years. More specifically, after
adversely affect job prospects by reducing the nearly three years only slightly more than half of
number of jobs available, whereas a wage reduc- the adjustment to a wage change will have taken
tion might not necessarily improve job prospects place. This is an important fact, and makes
by increasing the number of jobs (ILO Review research work in this regard more complicated.
1996: 204). A reduction in wage rates can lead Mazumdar and Van Seventer (2002: 1082)
to smaller declines or larger increases in employ- found that during the 1970s the gains in manu-
ment, depending on the circumstances. facturing output could be attributed almost
In the case of South Africa, the Labour Mar- equally to an employment increase and a wage
ket Commission (1996: 51) stated that the level increase. This changed quite substantially in
of unskilled workers’ wages cannot be omitted the second half of the 1990s when, in spite of a
from any discussion seriously concerned with relatively small increase in output, the real wage
mass unemployment among this segment of the increase “bumped up to a whopping 3.9%”
labour force. The Commission referred to two (per annum) and had to be balanced by a fall
studies, one by the World Bank and one pre- in employment (quite sharply so, at a decline of
pared for the Commission by Bowles and Heintz, 3% per annum). This is very similar to trends
both of which found that a 10% increase in real in the European Economic Community (EEC)
wages correlates with a 7% decline in employ- where the outcome of labour market trends was
ment levels. The authors of the ILO Review very much in favour of real wage growth at the
(1996: 204) remain sceptical, but they choose cost of employment.
their words very carefully: “the available stud- The deteriorating wage–employment trade-
ies have not demonstrated either that real wages off in recent years also applies to small business.
have been rigid or that they have had a strong Mazumdar and Van Seventer (2004: 113) found
{sic} negative effect on employment.” that the largest part of the increase in output of
Other studies reach similar conclusions. An small firms in the 1993–1996 period occurred
econometric analysis of South African data for in real wage growth rather than employment
1974–1987 by Lawrence and Van der West- growth. However, because of sizeable output
huizen (1990: 324) shows that “an increase of increases, employment also increased, but at
nominal wages of say 10% would lead to a fall a lower rate than before. This is in stark con-
in employment levels of around 3%”. In addi- trast to the period 1972–1993, where the wage
tion, the wage increase would also lead to a loss growth was relatively low, thus allowing strong
of foreign exchange as it would result in a 4% employment growth. They speculate that insti-
drop in exports. tutional factors may have impacted dispropor-
Two researchers from the World Bank, Fallon tionately on the small business sector after 1994.
and De Silva (1994: 138), assessed the implica- The firming of legislation regarding the imple-
tions of a 5% real wage increase in 1995 owing mentation of bargaining council agreements may
to union pressure, with no real wage declines have been such a contributing factor (see section
after that. They found that such a scenario 5.6).
would increase the number of persons with- Mazumdar and Van Seventer (2002: 1089)
out jobs by as much as 3% in most years from state that one of the most probable causes of the
1994–1997. Inflation would be higher by about greater tilt in recent years towards wage increas-
ten percentage points, and exports and GDP real es at the cost of employment is trade unions and/
growth lower. or government policies that might be pushing up
In a World Bank study done for the Labour wages at the cost of employment. Another pos-
Market Commission, Fallon and Lucas (1998) sible reason may be that the increased cost of
A
dismissals or lay-offs induced employers to pay to note that unemployment is not necessarily
higher wages to improve productivity. “caused” by high wage levels. As indicated in
Fedderke and Mariotti (2002: 861) have sim- Chapter 8, unemployment is the result of a com-
ilarly found that real wages are likely to be plex interaction of various factors, and it cannot
important in determining employment trends in be addressed by a simplistic approach. In any
South Africa’s labour markets. More specifically, event, reducing wages is politically not feasible.
where the growth rate in labour remuneration has Nevertheless, slower increases in wages would
outstripped growth rates in labour productivity, have fewer negative consequences for employ-
there is a tendency for labour inputs to decline. ment than wage increases significantly above the
Furthermore, the large employment sectors rate of inflation, which seems to have become
of the economy that have experienced strong the norm in several sectors.
declines in employment also show strong nega-
tive correlations between real labour remunera-
tion and employment. These sectors are agricul- • Labour cost increases that are not
ture, household domestic services, gold mining, associated with equivalent productiv-
SUMMARY
transport, and building construction. These ity increases will reduce the demand
were also the very sectors that showed negative for labour to a level that is lower than
growth rates in employment. would otherwise have been the case.
However, Banerjee et al. (2006: 32) come to a • In the case of South Africa, it seems as
different conclusion when they say that there is if a 10% increase in wages may lead to
no evidence that the increase in unemployment a 7% decline in employment, but will
in South Africa was driven by wage growth. In take some years to take full effect.
fact, the collapse of employment in the mining
and agriculture sectors during the 1990s and the
high turnover rates we observe in the micro-data
would mute the power of wage-push by damp- 4.6.2 The impact of high
ening union demands. unemployment on wages
Although most research points to a wage– As indicated by the theoretical discussions,
employment trade-off, it does not follow unemployment will lead to competition for jobs
that lower wages will necessarily “solve” the among unemployed people. This will result in
unemployment problem. As discussed in Chapter wages declining, which in turn will both increase
3, what happens to employment depends very the demand for workers and reduce the supply
much on the elasticity of the demand for labour. of workers. In other words, if high unemploy-
If the demand for labour is very inelastic, that ment levels cause wages to fall, unemployment
demand is not very “sensitive” to wages, and will reduce and eventually be eliminated. This
wages might have to drop substantially before will happen in perfectly competitive labour mar-
increasing the demand for labour significantly. kets, but the reality is that markets are imperfect
It can be argued that a drop in wages will also as a result of a number of factors, in particular
have an impact on the total income of work- artificial wage determination as a result of the
ers. Although a decline in wages will increase impact of the government, unions, monopoly
employment, the increase in income as a result of employers and bargaining councils.
the increase in the number of workers may still Fallon and Lucas (1998) found that the labour
be smaller than the decline in the total income markets for skilled workers in South Africa clear
of all workers, in which case workers as a group well, but the same cannot be said of the markets
will be worse off. Therefore, if wages fall pro- for unskilled workers. Using the wages of Afri-
portionately more than employment increases, cans and whites as representative of unskilled
total wage income will be reduced. This reduc- and skilled wages respectively, they found that
tion in wages will increase profits, which may “unskilled wages have been much less respon-
not necessarily be channelled into increased sive to unemployment levels than those of the
investment. This could impact negatively on skilled”. The positions of skilled Africans and
economic growth if the negative impact on con- unskilled Africans are different in that there is
sumption spending is large enough. clear evidence that the markets for skilled Afri-
This having been said, it is also important cans do in fact clear. Another finding was that
African wages do not adjust to changes in the (1991). The following general remarks, however,
inflation rate as quickly as those of whites, sug- suffice to illustrate the fallacy of this argument.
gesting greater rigidities in wage setting. If wages are increased, the higher wage bill has
to be financed in some way. If it is financed by
passing the costs on to consumers in the form
Unskilled wages have been much less of higher prices, the consequent higher infla-
S UM M AR Y
responsive to unemployment levels and tion rate will reduce real wages and workers
inflation than skilled wages, which sug- will be no better off; in fact, they may be worse
gests greater rigidities in wage setting off because inflation has negative redistributive
among unskilled workers. effects and feeds on itself. If employers dip into
their profits (if any) to finance the wage bill, sur-
pluses available for reinvestment will be reduced,
4.6.3 Will high wages increase and this will affect economic growth negatively.
economic growth? If the employer attempts to avoid a higher wage
bill by reducing employment or by replacing
There is an argument that if wages are increased workers with machinery, employment will be
on a wide enough scale, consumption and even- reduced. Total spending power is therefore not
tually economic growth will increase because necessarily increased.
workers will have more spending power. The
higher economic growth will, so the argument Nobody kin talk as
goes, lead to an increase in employment. interestin’ as th’feller
However, if it were this easy to increase that’s not hampered by
employment, no country in the world would
facts or information.
experience unemployment. For a thorough cri-
tique of these populist theories, consult Moll Kin Hubbard
4.7 THE IMPACT OF LABOUR LAWS ON THE COST OF LABOUR

Various laws, and labour laws in particular, 4.7.1 The Basic Conditions of
can increase the cost of labour and thus have a Employment Act
negative impact on employment. In many cases,
HOURS OF WORK
this may be entirely justified on the basis of the
improved protection of those in employment. Some years ago, there was an intensive debate
However, the broad impact of the legislation in South Africa about the impact of a reduction
should be considered more thoroughly than has in the hours of work on the cost of labour and
been the case up to now. What is important is on employment (for a full discussion, see Barker
for the legislator specifically to compare the 1997a). This debate was fuelled by the reduction
benefits (in terms of the greater protection) and in hours of work in terms of the Basic Condi-
the cost (in terms of increased labour cost and tions of Employment Act (Act No. 75 of 1997)
the impact thereof on employment and competi- (BCEA). Even before these changes were intro-
tiveness). Such a comparison can help prevent duced, the number of hours worked in South
the unintended consequences of laws. Africa was lower than for comparable middle-in-
By way of example, the impact of some provi- come countries, for example Turkey, Malaysia
sions of labour laws on the cost of employment and Thailand (Nedlac 1998: 45).
is discussed below. Chapter 6 will consider the When considering the impact of reduced
impact of labour laws on productivity and flex- ordinary hours through legislative decree, the
ibility. argument is usually that such reduced hours
have social benefits, for example increased time
Private enterprise is for education and training, family and social
ceasing to be free responsibilities, and leisure time (Department
enterprise. of Labour 1996: 42). This, of course, considers
Franklin D. Roosevelt
only the social benefits of those in employment,
while ignoring both the costs to the economy This report was a requirement of the BCEA.
and the social costs to those without employ- The report considered international evidence
ment. and found that virtually all European coun-
A legislated reduction in working hours will, tries have experienced a decrease in working
in most instances where hours are reduced, hours since the early 1980s. However, the
increase the unit cost of labour and production evidence suggests that reductions in working
costs in general, because of the impact on fixed
hours can only be achieved when certain pre-
labour cost, variable labour cost and capital
conditions are met. Among these is the need
cost. The fixed cost of labour (e.g. leave pay,
office space, protective clothing, recruitment for an equitable income distribution so that
costs, costs associated with education and train- the reductions do not cause employees to
ing, and severance pay), as well as capital costs, work extra overtime or find other ways of
do not change in relation to hours of work. circumventing the reductions. In addition, all
Therefore, if employees work fewer hours, the the major European agreements on working
fixed costs associated with their employment are time reduction have involved some conces-
spread over fewer hours, i.e. the hourly fixed sions from unions in respect of flexibility and
costs increase. lower wage increases. Where working time
With regard to the variable cost of labour
reductions and pay increases have been nego-
(i.e. labour costs associated with the number of
tiated as a total package, it has been possible
hours worked), the impact of the reduced hours
will depend on what happens to the hourly cost to offset the increase in costs arising from the
of labour. If workers are paid by the hour, the working time reduction with lower pay rises.
hourly cost of labour remains constant, regard- The three main types of flexibility arrange-
less of hours worked. The hourly variable cost ments are the averaging of hours over a long-
of labour for the employer will therefore remain er time period, the extension of operating
constant if hours are reduced, and the employ- hours, and the reduction of costs in exchange
ees’ total take-home pay will be reduced because for flexibility.
of the reduced hours. The report states that without effective
If workers are paid on a weekly or monthly
enforcement and monitoring, actual work-
basis, and the weekly or monthly rates remain
ing hours for full-time employees might
unchanged, reduced hours will increase the
hourly cost of labour. The take-home pay of increase rather than decrease with working
employees will remain constant, but because time reductions, as workers increase their
reduced hours increase production costs and overtime hours. This translates into a form
therefore inflation, and reduce employment, the of wage increase, as overtime is usually paid
real disposable income of households will gen- at a premium rate. However, there are no
erally decline (see the survey of 11 studies by gains in terms of operational efficiency and
the Commission of the European Communities, no social benefit in terms of reduced work-
quoted by Barker 1995: 5657). ing hours.
At the time, Cosatu was advocating a further
With regard to the relationship between
reduction in working hours to a 40-hour work-
working time and employment, the investi-
ing week, and the government commissioned an
investigation into the matter (see accompanying gation found that positive effects are most
box). evident when the reduction in working
hours is not associated with increases in
unit costs, nor with bottlenecks in respect
of skilled labour, reductions in operating
Policy issue: The debate about a
hours, significant fixed costs per employee,
40-hour working week
high wage differentials or low wage levels.
The Department of Labour commissioned a A reduction in working hours might also
report (2000b) on a 40-hour working week. improve health and safety by reducing stress
Í Í
the accompanying box). There are also increases

and fatigue. However, should overtime in paid annual leave, paid family responsibility
increase or longer shifts be worked or shifts leave, longer notice periods, several obligations
arranged in ways that do not conform to relating to night work, and the broad definition
good ergonomic principles, health and safe- of remuneration when calculating leave pay,
ty may be jeopardised. notice pay and severance pay.
With regard to South Africa, the report The Act might also have an indirect impact
states that, in some cases, working time via the determination of minimum wages by the
reductions may have created additional Employment Conditions Commission. This mat-
ter, however, pertains more to the level of the
jobs. However, in most industries that have
minimum wages than to the impact of the BCEA
reported changes in shift work patterns
itself. It is discussed in section 5.7.
and schedules accompanying working time
reductions there have also been reports of
the increasing use of atypical workers such Policy issue: Overtime pay
as casual, temporary or contract staff,
which means that jobs have been created on In South Africa and countries of similar
less secure terms. wealth (classified as upper-middle income by
According to the report there are sets of the World Bank), the norm for an overtime
preconditions without which initiatives to premium is time-and-a-half, which is similar
reduce working time are unlikely to succeed. to that provided for in the BCEA (Business
For South Africa to meet the preconditions, South Africa 1997: 11). However, by com-
wage differentials in the economy will have parison the norm in these other countries is
to be reduced, the overall levels of poverty for this to apply from the 49th hour worked
decreased, skills levels increased and public in the week, whereas in South Africa the pre-
transport improved. In addition, conditions mium starts to apply from the 46th hour.
for reducing working time will be most The effect of this is that even if the premium
favourable where the decreases are phased had remained at time-and-a-third in South
in over time, where productivity increases Africa, the cumulative cost of overtime in
offset the reduction of hours and increased our peer countries remains much lower and
labour unit costs, where new forms of work would only exceed that of South Africa if 54
organisation and shift systems are intro- or more hours were worked in a week. In
duced, and where adequate child care facili- terms of the higher premium, the total over-
ties are available. time premium for an employee working, say,
Cosatu criticised the report because it 50 hours, amounts to 2.5 times that earned
failed to provide clear direction towards by an employee working the same hours in a
attaining a 40-hour working week. The typical peer nation.
fact that the report states that there are The argument that a higher overtime
preconditions for implementing a reduc- premium will lead to employment growth
tion of working time implies that a 40-hour is not supported by evidence. Employing
working week will not be implemented additional workers is more expensive than
unless such conditions are met. This Cosatu paying overtime. This is due to the high
rejected. It recommended that the Minister overhead costs associated with additional
legislate a 40-hour working week with clear labour, such as retirement funding, medical
regulations on overtime. and other insurance, annual and other leave,
various job levies, recruitment and training,
Besides the significant impact of reduced hours severance benefits and notice pay. In addi-
on the cost of production, the BCEA, introduced tion, employees themselves have a vested
in 1997, increased the cost of labour in sever- interest in maintaining overtime rather than
al ways. A prime example is the 12% increase creating more jobs.
in the overtime premium (see Overtime pay in
Impact of reduced working hours on employ-
ment. There are those who believe that reduced A reduction in working hours will
working hours will increase labour absorp- increase the hourly cost of production
SUMMARY
tion, among them Cosatu (1998: 21). It argues and unit production costs unless there is
that existing work will be shared among more a commensurate increase in productivity.
employees. This is the classic “lump of labour” The net effect of a reduction in working
argument. Its fundamental flaw is, however, hours is likely to be a lower demand for
that the number of jobs available is regarded labour than would otherwise have been
as fixed, and can simply be divided up in dif- the case.
ferent ways. In particular, it ignores the impact
of reduced working hours on production costs.
Reduced hours of work will, in most instances,
When making wage recommendations the
increase production costs and this is likely to
Employment Conditions Commission has to
have a negative effect on the demand for labour
take into account the ability of employers to
– there is thus no fixed number (or “lump”) of
carry on their undertakings successfully, the cost
jobs available.
of living, and the operation of small and new
In contrast, there is good evidence that
enterprises. The Employment Conditions Com-
employment will either reduce or at most remain
mission should also consider the likely impact of
constant if working hours are reduced (see
any proposed condition of employment on cur-
the survey of 28 studies on this topic by Bark-
rent employment or the creation of employment.
er 1995: 5557). Roche, Fynes and Morrissey
Having considered a recommendation, the Min-
(1996: 148) state: “Although calculating the
ister may make a sectoral determination.
employment effects of a reduction in standard
Although sectoral determinations have had a
working time is a problematic exercise, the inter-
significant impact on some sectors, for instance
national experience appears to have been dis-
the agricultural sector and domestic work, the
appointing, with some commentators suggesting
minimum wages set by such determinations
the possibility of a negative effect.”
are generally relatively low compared to actual
The one exception to the general finding that
wages in the particular sector. In this sense, they
employment will remain constant or decline is
do not appear to have had a significant impact
the public sector, where it has been found that a
on the cost of labour. The impact of minimum
reduction in hours often increases employment
wages on among, other things the employment
there (Aberg 1986, quoted by Barker 1995: 57).
of farm workers, is dealt with in section 5.7.
Because of the increase in employment and the
generally negative effect on the economy (and
therefore on tax receipts), a reduction in the 4.7.2 Labour Relations Act
hours of work in the public sector is likely to The Labour Relations Act (LRA) firstly pro-
result in a deterioration in government finances. vides for bargaining councils and the extension
With regard to the effect of a reduction in of bargaining council agreements to all parties
working hours on other macroeconomic vari- in a particular sector. Bargaining councils have
ables, a number of studies have found that it been much criticised, not only in respect of their
generally leads to higher inflation (see sources impact on the cost of labour, but also for intro-
quoted by Barker 1995: 55–57). Because a ducing rigidities in the labour market. These
reduction in working hours reduces competitive- criticisms as well as some counter-arguments are
ness, it also has a negative effect on the balance discussed in section 5.6.
of payments. As discussed in section 5.3, the LRA also act-
ively promotes unionisation and, according to
some authors, does not properly apply the prin-
M I N I MUM WAGES
ciples of positive labour relations, i.e. voluntar-
The BCEA provides for the establishment of ism for all parties, equality before the law for
the Employment Conditions Commission. This all parties, and non-competitive universal human
body makes recommendations to the Minister of rights. Although unions are essential for vari-
Labour in respect of minimum wages and other ous reasons, they do cause wages to be higher
conditions of employment. than in non-unionised situations – international
earchers have put this differential at between 4.7.3 Other laws

and 30%. Union action in South Africa has
Another potentially negative effect of labour
ulted in larger wage differentials in this coun- policies on wage costs is the provisions relat-
than in other countries (see section 5.4.1). ing to income differentials in the Employment
lon and Lucas (1998) found that employ- Equity Act (EEA). This issue is discussed as
nt was reduced by about 6.3% by the effects part of occupational differentials in section 4.5
unions raising wages. As indicated in section above, where some of the unintended conse-
.2 the level of unionisation in South Afri- quences are pointed out.
is high by international standards and very
h by the standards of developing countries
O Review 1996: 155). This is one reason for Provisions relating to bargaining councils
SUMMARY
significant impact that unions have on the in the LRA are likely to increase the cost
our market in this country. of labour, as will the provisions that have
he LRA also increases the cost of labour in encouraged and protected the growth
ious other indirect ways, for instance by mak- towards strong unionism in the country.
ing dismissals and retrenchments more difficult However, the potential positive effect of
and expensive. This is discussed in more detail in unions should not be ignored.
section 6.6.1.
4.8 DEEPER INSIGHT I: DETERMINATION OF WAGES IN A PERFECTLY

COMPETITIVE LABOUR MARKET
Wages in a market economy are usually deter- the wage level will be set by the market. If the
mined in different ways, and the strength of the supply curve is assumed to be S and demand D,
various factors that influence wage levels will be then the market will stabilise where supply and
different in each case. This section deals with the demand are equal, i.e. at point E. The wage will
perfectly competitive market, and certain imper- be W1 and employment L1. This is called equi-
fect conditions are introduced in the next section. librium, or the market-clearing level.
Wages are
determined by the
bitter struggle S
between capitalist
and worker. A B
Wage rate
Karl Marx
W2
The functioning of the perfectly competitive E

market can be studied by considering the inter- W1
action of the supply and demand curves that
were developed in the previous chapters. In this
market, all workers and all jobs are homogen-
eous. Furthermore, information on the labour D
market and the availability of skills and of
vacancies is immediately available without cost,
and workers are perfectly mobile. In such a mar- L2 L1 L3
ket, there will be no wage differentials. Clear-
ly, these assumptions are unrealistic, but the Number
Figure 4.4 Equilibrium of workers
between supply and
assumption of a perfectly competitive labour demand
market helps to understand the operation of the
labour market. A higher wage than W1 will mean an oversupply
In this market, and as shown by Figure 4.4, (excess supply) of labour. Consider a wage
level of W2. Reading down from points A and demand will increase the demand for labour, and
B, quantity supplied has increased to L3 and will move the demand curve to the right. This
quantity demanded has reduced to L2. The over- will cause an excess demand for labour, which
supply of labour is the distance between points will increase the wage rate and employment.
B and A, i.e. L3–L2. A number of people look-
ing for work will be prepared to accept a job at
a lower wage, and at a lower wage employers S1
will also be willing to take on more workers. D1
This reduces both wages and the oversupply of S2
labour, until equilibrium is eventually reached at E1 E3
Wage rate
point E. W1
Similarly, a lower wage rate than W1 will
mean an undersupply (excess demand) of work- E2
ers and employers will bid wages up to the equi- W2
librium or market-clearing level.
D2
S H I F TS IN SUPPLY AND DEMAND
C U R V ES
Let us assume that an exogenous (external) fac-
tor, for example higher immigration, moves the L1 L3 L2
labour supply curve from S1 to S2 in Figure 4.5. Number of workers
There will thus be an oversupply of labour to
the extent of L2–L1 at wage level W1. Work- Figure 4.5 New equilibrium level between
ers will bid down wages and the quantity sup- supply and demand
plied of labour will decrease. Because of lower
wages, employers will employ more work-
ers, i.e. the quantity demanded for labour will In a perfectly competitive labour mar-
SUMMARY
increase. Eventually a new equilibrium level will ket, markets will move towards equilib-
be reached where quantity supplied and quantity rium through the wage mechanism, and
demanded are equal, i.e. at point E2. Wages will equilibrium is defined as the point at
be at level W2 and employment at level L3. which quantity supplied equals quantity
Similarly, the demand curve can also move to demanded.
the right or left. A seasonal increase in consumer
4.9 DEEPER INSIGHT II: DETERMINATION OF WAGES IN A

MONOPSONY MARKET
A monopsony market occurs where there is to work for him. This situation is not entire-
only one employer or where there is collusion ly theoretical and may arguably be present in
or cooperation between all or most employers South Africa, for example with large companies
in a certain market to fix wages at a certain level employing the majority of workers in a specific
(McConnell et al. 2006: 181). The monopson- occupation. A bargaining council is also a form
ist is therefore a wage setter and can influence of monopsony because all the employers in bar-
wages by adjusting the number of workers he gaining councils form a united front in respect
or she hires (Ehrenberg & Smith 1985: 64). The of wages and can thus be regarded as a single
customary example is that of a huge steel mill in employer.
a very small town, where the employer would For the sake of simplicity, only the single
have to increase wages every time he wants to employer situation is considered. Because it is
employ another worker in order to attract, the only employer, a monopsonist enterprise
for instance, housewives or students to come will face an upward-sloping labour supply
curve, similar to the cumulative supply curve in

a perfectly competitive labour market. Where- S = MC
as an employer in the perfect labour market can
employ as many workers as he or she wants at a
constant wage rate (because of the assumption
Wage rate
that no single employer is large enough to influ-
ence the market wage), the monopsonist enter- E
prise drives wages up if it expands employment. W1
The monopsonist thus faces the market supply
of labour. The monopsonist will have to entice
every next worker into the labour market by MRP
paying a higher wage than the previous wage,
because the reservation wage of that worker is
higher than that of the previous worker (Hamer-
mesh & Rees 1988: 140). This is reflected by the L1
same market curve that was discussed in Chap- Number of workers
ter 2 (see curve S in Figure 4.5).
For the sake of simplicity, we continue to Figure 4.6 The perfectly discriminating
assume that all workers have equal skills. As far monopsonist
as the wage levels are concerned, the monopson-
ist can do one of two things. Firstly, the monop- N O N - D I S C R I M I N A T I N G M O N O PS O N I S T
sonist can decide to pay all workers the same
As discussed above, a non-discriminating
wage, which means he would have to increase
monopsonist is an employer who pays all his
the wages of all current workers to the level
workers the same for the same job, even if he
at which he employed the last worker (in this
was able to recruit some at a lower wage rate.
case the monopsonist is non-discriminating).
The cost of employing an additional worker
Alternatively, the monopsonist can discriminate
becomes quite expensive for the non-discrimin-
between employees, and simply pay them their
ating monopsonist. First, the monopsonist has
reservation wages, which means each next work-
to pay the additional worker a higher wage to
er will get more than the previous worker (the
attract him or her. Second, as the monopsonist
monopsonist is “perfectly” discriminating). The
employer is also a non-discriminatory employer,
latter case is the simplest and will be dealt with
he will, in addition, have to increase the wages
first.
of all his other workers to that same level. The
enterprise’s total cost of employing one addi-
T H E DISCRIMINATING MONOPSONIST tional worker (the marginal cost) will therefore
In Figure 4.6, the marginal cost (MC) of the be the wage of the additional worker plus the
discriminating monopsonist will be equal to cost of increasing the wages of existing workers.
the supply curve of labour – the employer sim- The marginal cost of employing that additional
ply pays the worker his or her reservation wage worker will therefore be higher than the wage
and can hire different workers at different wage of the particular worker. The wage of this work-
rates. The marginal revenue product (MRP) of er is also the wage of all the workers, which is
the monopsonist is also indicated in the figure the average wage. If the marginal cost of the last
and, as outlined in the previous chapter, equi- worker is higher than his wage, then the margin-
librium will be where the marginal revenue al cost will also be higher than the average cost
obtained by employing another worker is equal of all the workers.
to the marginal cost of employing that worker This is reflected in Figure 4.7, where MC indi-
(the wage of the worker) – therefore where MRP cates the marginal cost curve and AC the aver-
= MC. This is indicated by point E. Only the last age cost curve. The MC curve lies above the
worker will earn this wage, and all other work- AC curve to indicate the higher marginal cost
ers will earn a lower wage. involved in employing additional workers.
profit by employing more labour. However, if
MC he employs more than L1 workers, the marginal
cost of the last worker will be higher than the
marginal product. The employer will then reduce
AC (= Supply)
the number of workers to reduce costs until the
marginal cost of a worker is equal to the margin-
Wage rate
W1 E
al revenue produced by that worker.
Q If an employer employs L1 workers, he will
W3 pay the wage of W2 to all his workers. However,
if it were a perfectly competitive market, equilib-
W2 rium would have been be at point Q, i.e. where
D (= MRP) supply and demand intersect, in which case
wages would be higher at W3 and not W2, and
employment higher at L3 and not L1. It is clear
that in a monopsony market both wages and
L1 L3 employment could be lower than they would be
Number of workers in a perfectly competitive market (Hamermesh
& Rees 1988: 142).
Figure 4.7 The non-discriminating monopsonist
To maximise profits, the monopsonist enterprise In a monopsony market, i.e. where there
must ensure that its marginal cost is equal to is only one employer or where there
SUMMARY
its marginal product (MRP). In Figure 4.7 this is collusion between employers to fix
means that it will employ L1 workers. Profits wages at a certain level, equilibrium
will be maximised because if the monopsonist might be reached at a point where both
employs fewer than L1 workers, the margin- wages and employment are lower than
al product produced by the employment of an they would have been be in a perfectly
additional worker will be greater than the mar- competitive market.
ginal cost and the employer can make more
Key concepts
bargaining power money wage levels
dual labour market monopsony
equilibrium or market-clearing level perfectly competitive labour market
incomes policies primary and secondary labour markets
internal labour market real wage levels
labour market segmentation wage differentials
For students
1. Broadly describe the most important meth- 3. Why might wages and employment be lower
ods of wage determination in South Africa. in a monopsony than in a perfectly competi-
tive labour market? Explain this with the
2. Use demand and supply graphics to explain
assistance of a graph.
what impact an increase in migrant workers
might have on wage rates and on the supply 4. Discuss the theory of labour market seg-
of and demand for labour. mentation (also known as the dual or inter-
nal labour market theory).
5. Would you describe parts of the South Afri- 10. Discuss the impact high wage costs might
can labour market as a dual labour market, have on inflation, and an incomes policy as
and if so, why? a possible measure to reduce inflation with-
out generating unemployment.
6. Discuss the reasons for wage differentials in
the South African labour market, and pos- 11. What is the likely impact of wage increases
sible measures to reduce these differentials. on employment? Discuss the results of stud-
ies relating to South Africa in this regard.
7. Discuss the provisions in the Employment
Equity Act to reduce income differentials. 12. What is the likely effect of labour legislation
in this country on the cost of labour?

8. Describe the most notable developments
regarding earnings in South Africa over the 13. It has been argued that a reduction in the
last few years, including sectoral develop- working week will increase employment
ments. because available work can be spread
among more people. Discuss the validity of
9. Discuss the various ways of measuring infla-
this statement, with particular reference to
tion in South Africa.
the impact of working hours on production
costs.
Suggested reading*
Bhorat, H. 2000a. Presidential Commission to Investigate
Wage premia and wage differentials in the South
Labour Market Policy. 1996.
African labour market. Submission to the
Restructuring the South African labour market.
Employment Equity Commission. Pretoria:
Pretoria: Department of Labour.
Department of Labour.
Standing, G., Sender, J. & Weeks, J. 1996.
Borjas, G.J. 2000.
Restructuring the labour market: the South African
Labor economics. New York: McGraw-Hill Higher
challenge. Geneva: International Labour
Education.
Organisation (referred to as ILO Review).
Ehrenberg, R.G. & Smith, R.S. 1985.
Modern labor economics. London: Scott Foresman.
McConnell, C.R., Brue, S.L. & Macpherson, D.A.
2006.
Contemporary labor economics. New York: * The bibliography contains the full list of
McGraw-Hill. references.
5.1 Introduction
5.2 Collective bargaining and the labour
market
5.3 The union movement
5.4
5.5
The impact of unions
The influence of strike action
Unions,
5.6
5.7
Bargaining councils
Minimum wages
collective
5.8 Minimum subsistence levels bargaining
and minimum
wages
Trade Unionism is not Socialism:

it is the Capitalism of the Proletariat.
G EO RG E B E R N A R D S HA W
5.1 INTRODUCTION
Chapter 4 discusses the determination of wages Although the role of unions in preventing the
in a more or less perfectly competitive labour exploitation of workers is generally accepted,
market. It shows that in this market wages are there is discomfort in some quarters about
determined through the interaction of demand unions becoming too strong. It is feared that
and supply, and would, theoretically at least, strong unions might cause wide differentials
be determined at levels that will eliminate between the wages of unionised and non-union-
unemployment. Some imperfections are raised in ised sectors, and increase unemployment. At the
that chapter, for instance the impact of labour same time, there is much debate about whether
laws on the cost of labour and monopsony unions promote or inhibit productivity and flex-
labour markets. ibility in the workplace.
This chapter takes the discussion of labour These are the issues that are discussed in
market imperfections further. One of the most this chapter. The first section is dedicated to
important factors that impact on the free oper- an analysis of collective bargaining. The union
ation of market forces is labour unions. They movement and the impact of unions on wages
negotiate wages and conditions of employment and on productivity are then discussed. This is
with one or more employers. The outcome of followed by a discussion of strike action and its
such collective bargaining usually determines particular consequences.
minimum wages in an enterprise or even in a The discussion then shifts to bargaining coun-
whole sector. However, where unions are absent cils, which are both important forums for cen-
or not strong enough to ensure proper collective tralised bargaining and a source of much con-
bargaining, the government might intervene to troversy in South Africa. The pros and cons of
set minimum wages for vulnerable workers. these councils are outlined. Among the functions
A
C H A P T E R 5 U N I O N S , C O L L E C T I V E B A R G A I N I N G A N D M I N I M U M W A G E S
of bargaining councils is the determining of min- minimum wages are considered. Wages, and
imum wages, which are then extended to apply minimum wages in particular, are often related
to a whole sector. Other ways in which min- to minimum subsistence levels, and this concept
imum wages are determined in South Africa are is also discussed in the final part of this chapter.
mentioned, and the arguments for and against
5.2 COLLECTIVE BARGAINING AND THE LABOUR MARKET

T H E RIGHT TO BARGAIN Higher coverage of collective bargaining
C O L LECTIVELY ensures that wages are more responsive to eco-
An individual employee and an individual nomic growth, and also contributes to lower
employer do not have equal bargaining power. wage inequality. In “high coverage” countries
This situation is exacerbated when the work- (defined as coverage above 30% of employees),
er is unskilled or when unemployment is high. the wage elasticity is 0.87. In other words, when
Because of this unequal bargaining power, it is GDP per capita grows by an extra 1 percentage
accepted in most countries and also in terms of point, average wages increase by an extra 0.87
international labour standards that mechanisms percentage point. This compares with a lower
should be implemented to protect the individual wage elasticity of 0.65 in countries with lower
employee against exploitation. This includes the coverage.
right to form unions and employee organisations Bargaining power is not only determined by
that can bargain with the employer for accept- the formation of unions, but also by the extent
able conditions of employment. Principles such to which bargaining is centralised within differ-
as freedom of association, the right to bargain ent sectors, for instance in a bargaining coun-
collectively and to be protected against victimis- cil. As indicated in section 5.6, South Africa’s
ation because of union activities are acknow- system of bargaining councils probably allows
ledged worldwide as fundamental human rights. unions and employers substantive control over
The right to bargain collectively is also the labour and product markets, which might be
acknowledged in the Constitution of South to the eventual disadvantage of the consumer,
Africa and in labour legislation. Collective bar- the small enterprise and the unemployed worker.
gaining therefore plays a major role in the deter-
mination of wages in this country. FA C TO R S TH A T D ETERM I N E
Developments in the coverage of collective TH E O U TC O M E O F C O L L E C TI V E
bargaining around the world are divergent (ILO BA R G A I N I N G
2008). In many countries collective bargaining
is low and decreasing due to a variety of factors, Although the outcome of collective bargaining is
including the increase in the number of workers more often than not determined by the respective
in smaller firms or under atypical forms of con- bargaining powers of the union and the employ-
tracts. At the same time, collective bargaining er involved, market forces and the economic
coverage remains high – and is sometimes environment continue to play a role. This also
increasing – in some European countries, such applies to strike action, which is the ultimate
as Denmark, Finland, Portugal, Slovenia, Spain sanction of collective bargaining. It appears,
and Sweden, and a number of countries in other however, that factors such as the inflation rate,
regions have also succeeded in stimulating col- profitability, standards of living, market condi-
lective bargaining, including Argentina. tions and, to a lesser extent, productivity have
South Africa is also listed by the ILO as one featured much more in collective bargaining
of the countries that have stimulated collective recently than a few years ago.
bargaining. In South Africa, the primary instru- Some of the most important factors that deter-
ment of collective bargaining at industry level is mine the relative power of the collective bar-
the bargaining council, which is discussed in this gaining parties and, therefore, the outcome of
chapter. collective bargaining are discussed below.
U N I O N S , C O L L E C T I V E BA R G A I N I N G A N D M I N I M U M WAG E S 5
• The unemployment position and the effect price increase will sharply reduce the demand
of the outcome of collective bargaining for that product and the employer will be
on employment do not always seem to be more resistant to wage demands. For instance,
important considerations in collective bar- consumers tend to be very price sensitive (i.e.
gaining in South Africa. This contrasts with the demand is elastic) if there is intense com-
the approach in many other countries, where petition between producers, which means that
employment considerations appear to be much any individual producer will attempt to keep
more prominent. Reasons for this may be that wage and cost increases to a minimum. This is
the unemployment problem in this country discussed in more detail in section 3.7.3.
is already so severe that it seems an accepted
• In monopolistic conditions employers will also
fact of life, or that the employment effects
grant wage increases more readily because
often lag so far behind the wage settlements they can usually recover higher costs aris-
that the parties to the settlement (in particu- ing from wage increases by increasing the
lar the union, but also the employer) do not prices of their products (Ehrenberg & Smith
recognise or acknowledge the link between 1985: 382). This is discussed fully in section
wages and employment (Marshall et al. 3.7.6. In a competitive market, an enterprise
1980: 353). Furthermore, unions often argue might price itself out of the market if the price
that employees need to receive high wages of the product is increased because of high
when unemployment is high because they have wage increases. For the same reason, in a rela-
to support the unemployed. The effect of wage tively open economy, imported products can
increases on employment is considered in sec- compete with local products and this reduces
tion 5.4.1. the local employers’ ability or willingness to
• Demand conditions, profitability and pro- grant wage increases.
ductivity also have an important influence on • The export orientation of both employers and
collective bargaining. In buoyant market con- unions has a significant influence on collective
ditions or when labour productivity is increas- bargaining. If both employers and unions are
ing, the employer will more readily grant very conscious of the importance of exports
wage increases. In recessionary conditions, and aim to keep local products highly com-
an employer might be more willing to face a petitive in international markets, market
strike than give a substantial wage increase. forces will play a bigger role and bring more
Strikes during such periods might even reduce economic realism to collective bargaining than
the need for retrenchment or shorter working otherwise.
hours. Strike activity during recessions pres-
surises employers less than during boom per- • The employer’s capacity to deal with a strike
iods and is therefore less prevalent than during directly affects collective bargaining. If pro-
boom periods or seasonal peaks. duction can, for instance, be easily varied or
stopped, or sufficient inventories have been
Collective bargaining built up to provide for uninterrupted market-
without the right to ing during the strike, the employer will be less
willing to grant high wage increases. Similarly,
strike becomes
if the employer does not have a large compon-
collective begging. ent of highly specialised workers but can make
Anonymous use of temporary workers during a strike, the
employer might decide to take his or her chan-
• The elasticity of demand for the employer’s ces with a strike (Marshall et al. 1980: 327).
product is also an important consideration. • The standard of living of the workers is also
If the demand is inelastic, i.e. the demand an important consideration. Relatively low
does not vary much with price increases, the standards might influence the union to fight
employer will grant wage increases more read- harder for a high wage increase and might also
ily and will pass the cost increases on to the make the employer more sympathetic in this
consumer through higher prices. If the demand regard. The same applies if the inflation rate is
is very elastic, any wage increase leading to a relatively high.
SUMMARY
The outcome of collective bargaining is determined by the bargaining power of the parties
involved, market forces and the economic environment.
5.3 THE UNION MOVEMENT

Unions were formed when industrialisation
forced workers into positions of dependency in that only a liberal democracy can provide
which their earnings, working conditions and the institutional environment for fulfilling
job security were largely beyond their control these rights. In some developing countries
as individuals. As a result, workers increasingly the evolution of democratic institutions
bonded together to prevent exploitation and to such as unions is accepted as part of dem-
promote their interests. ocracy, but in others union activities are
frowned upon as being “unpatriotic” or
It obviously hurt him to
economic sabotage. In a number of coun-
wear the dinner jacket of
tries and in South Africa in particular, trade
respectability instead of
unions have been instrumental in accelerat-
the boiler suit of revolt.
ing the pace of transformation through their
Sir William Connor sustained support and solidarity with the
struggle for liberal democracy. Only pro-
In any modern economy, unions are protected
longed struggle and profound sacrifice have
through legislation because they are important
mechanisms to protect individual workers and brought them closer to the goal of guaran-
also help to reduce the possible negative impact teeing civil and political liberties to a broad
of market forces on the most vulnerable work- spectrum of society. Unions have a special
ers. If unions did not play this role, the state challenge to continue playing this role in
would have to interfere in the market mech- countries throughout the world.
anism to ensure the protection of workers to a Kochan (as quoted by Maree 2003) has
much greater extent than is currently the case. argued that “no democracy can long pros-
Unions are critical in addressing some of the per or indeed even survive in the absence of
shortcomings of a market economy at the level an independent, strong, and forward-look-
of the enterprise (the exploitation of individual
ing labour movement”. He highlights the
workers by employers being the most obvious
danger of the loss of this democratic voice
example). In this regard, legislation should aim
to strengthen and protect unions. in the USA, which has allowed that country
Another important role for unions, which is to pursue its agenda without considering its
not always recognised, is in the protection of impact on the welfare of working families,
democratic values (see accompanying box). the economy, or the solidarity and cohesion
of citizens in America or abroad.
Policy issue: Unions as important

protectors of democratic values
While legislation should protect unions, it should
One lesson emerging from the experience also aim to achieve the correct balance between
of unions in industrialised countries is that voluntarism and compulsion, and between indi-
civil and political liberties are essential pre- vidual rights (e.g. the discretion that individual
conditions for exercising labour rights, and employers and employees have to agree on con-
ditions of employment) and collective rights.
Í
There are those who argue that legislation social or economic policies. This also relates
South Africa has moved too far from volun- to whether the unions have the necessary
rism and has significantly reduced individual capacity to engage employers or other social
iscretion regarding conditions of employment. partners at various levels, for instance in the
his has given both unions and the government workplace, in sectoral bargaining structures
reat power. Garbers (1995: 101) lists a number such as bargaining councils, or at national
f measures in the LRA that bolster the influ- level on policy issues. Often one finds a lack
ce of trade unions. He regards the LRA sim- of strong and capable union leadership, due
ly as a mechanism of redistribution from cap- to the leaders being poached by employ-
al to labour. This it achieves by entrenching ers or by government, and this has a nega-
e power of labour in relation to capital and tive effect on the strength and capacity of
y sanctioning the use of that power to effect at the union. Another important factor is the
ast a nominal transfer of wealth to labour. extent to which the union or union feder-
In the WH Hutt memorial lecture, Baird ation acts independently from government
998: 198) refers to three important principles or political parties. Even though this might
r labour relations, i.e. voluntarism for all par- at times be influenced by legislation, this is
es, equality before the law for all parties, and not always the case, and the independence
on-rivalrous universal human rights. Baird lists of the union movement is then based on the
umerous examples of labour policies in South approach by the union itself.
frica that do not fulfil these principles, for
stance the restriction on individual employees’ (c) Labour institutionalisation – extent to
eedom of association through the closed shop, which worker and union rights, as well as
nions’ right of access to employer information union participation in decision-making pro-
ithout the employer enjoying a corresponding cesses, have been institutionalised through
ght of access to relevant union information, the labour legislation, collective agreements and
ght of unions to embark on sympathy strikes union participation in the administration of
hich impinges on the rights of employers and benefits. As far as legislative provisions are
ployees not involved in the dispute), union concerned, unions have a priority to ensure
rotection for socioeconomic protest action, and job security, unemployment insurance and
e fact that employers are subject to anti-mon- special benefits on termination of employ-
poly laws, but not unions. ment, as well as social security providing for
health care and pension schemes.
.3.1 Factors that have an impact on (d) Globalisation. Globalisation has led to
the strength and influence of intense competitive pressure in product mar-
unions kets, accelerated the mobility of capital and
added to the vulnerability of labour. Unions
he strength and impact of unions are influ-
are therefore under pressure to participate
nced by the following factors (Jose 1999,
in the development of wage policies that
ebster 2006; European Foundation for the
accommodate productivity differentials for
provement of Living and Working Conditions
greater efficiency in resource allocation. The
010: 57–58):
increasing mobility of capital means that
) Union density – extent to which unions “the cost of labour is back ... in the competi-
have built a solid base by representing a sig- tive sphere” (ILO 1997). Modern human
nificant proportion of the workforce. This resources management policies require a
in turn is influenced by a wide variety of union to facilitate cooperation-based meth-
factors as indicated below. ods such as teamwork, and modern incen-
tive payment systems or similar policies are
) The union capacity and organisational cap-
used to counter the influence of unions.
ability – extent to which unions, irrespective
of numerical strength, have the capacity to (e) More insecure and atypical employment.
mobilise labour successfully, for instance to Flexible labour market policies have been
bring workers out on strike, or to organise gaining greater legitimacy and political sup-
national protest action against unpopular port than before, owing to factors such as
globalisation, technological change and, in One of the ways in which unions have
some cases, worker preferences. Practices responded to this challenge is to extend their
such as subcontracting, outsourcing and the membership drives to non-traditional con-
hiring of temporary and part-time workers, stituents. These may be grouped into several
long considered as atypical employment, are distinct but overlapping categories: (i) new
becoming more common, especially at the entrants at the higher end of labour mar-
lower end of the labour market. The net out- kets, including professional and white-collar
come is an increased segmentation of labour workers; (ii) casual workers, who are either
markets, with one group of workers having part-time or temporary; (iii) home-based
very insecure jobs on the one hand and, on workers and those in the informal sector;
the other hand, (often unionised) workers and (iv) women workers.
having more secure employment in the pri-
Trade unions are ideally placed to lead an
mary labour market (see section 4.2.3).
initiative for a social minimum wage, con-
In this regard, Webster (2006: 7) has found sisting of the right to income security and
that Cosatu members are better educated and other entitlements such as education, health,
more skilled than the average worker. More shelter and a safe environment.
than 90% of Cosatu members are in the
(f) Small business. Technological changes have
“core” of the labour market. Even though
made it possible to reshape production
Cosatu affiliates have attempted to make
through new forms of industrial organisa-
inroads into organising non-core workers,
tion. This has often resulted in a number
they have largely not been successful in orga-
of smaller enterprises undertaking produc-
nising them (Naledi 2006a: 15). It is thus
tion or other activities that large compan-
probably not surprising that a survey showed
ies might previously have undertaken them-
that only 10% of Cosatu member belong to
selves.
a union to improve their job security (Nal-
edi 2006b: 25). The importance of organis- The larger number of production units
ing non-core workers was again raised as an makes it more difficult for unions to
important priority (Naledi 2006a: 33). organise workers and to bargain collective-
ly. Often there is a more personal relation-
A politically important task for unions is
ship between workers and employers, and
thus to build distributive institutions to
unions have greater difficulty in recruiting
defend the interests of workers at the lower
members. This is one of the reasons for
end of the market, particularly the vast
unions striving to achieve multi-employ-
reservoir of workers in the informal sec-
er agreements on minimum standards, for
tor. Ideally, this could be attained through
instance through bargaining councils in
macro-level framework agreements encom-
South Africa (see section 5.6).
passing minimum standards of employment,
minimum wages, portable benefits including (g) Geographic dispersion of production.
health care, and safety nets which workers Technological changes have also resulted in
are entitled to irrespective of the location production being geographically dispersed
of employment. The question is whether even outside the boundaries of urban labour
unions can empower themselves to ensure markets. In addition, production or other
a secure income, decent working conditions activities have been outsourced to other
and social justice for all, and not focus on regions or even other countries. The geo-
their members only. Such empowerment graphic dispersion within a country makes
is a precondition for unions to emerge as it more difficult for unions to gain access to
credible partners ensuring social cohesion. every workplace. However, a bigger threat
Webster (2006: 6) calls this role of unions is the ease with which employers can move
“social unionism”. In this regard unions can production to other countries. This often
also play an exceedingly important role to gives employers more leverage in negotia-
ensure democratic principles in countries tions – if the union does not agree to moder-
(see preceding box – Policy issue: Unions as ate wage increases, the employer will move
important protectors of democratic values). production out of the country.
(h) Skills composition. The skills composition issues: gender work in unions continues to
of the workforce is changing and work- be unsupported, under-resourced and mar-
ers are increasingly being differentiated by ginalised (Naledi 2006a: 51).
their competence. At the higher end of the (j) Structural adjustments. The shift in focus
scale, workers tend to be better educated, from the manufacturing sector, which nor-
career minded, individualistic and less mally has a relatively high union density,
motivated by class interests and solidarity. to the services sector, which is less union-
These workers often have incentivised pay ised, has contributed to the decline in union
arrangements and they generally have less density. There is also a shift towards the
need for trade unions. Owing to techno- information economy, which has no trad-
logical developments and consumer prefer- ition of supporting collective bargaining,
ences, employers are also often more intent which also accelerates the decline in union
on the development of human resources membership. Initially, the growth of union
than before. This encourages the trend membership in the public sector compen-
towards a more skilled workforce. This is sated for this decline, but recently there
also reflected in the membership of Cosatu, has been a reshaping of the public sector
which has seen growing numbers of mem- in many countries, which has reduced the
bers with higher skill and education levels overall union density (European Foundation
(Naledi 2006a: 28). for the Improvement of Living and Working
On the other hand, there is a discernible Conditions 2010: 57).
concentration of workers (mainly women or
migrants) at the lower end in service indus-
tries or occupations. This trend has resulted
SUMMARY
The changing economic environment,

in greater wage disparities and inequalities often linked to globalisation, has created
between different classes of workers, and a number of threats for unions and the
this has increased the tensions within the unions have responded in a variety of
union movement between the higher paid ways to such threats.
and lower paid employees. Union solidarity
might thereby have been reduced.
The change in skills composition is clear in
surveys done by Webster (2006: 7). In 1975, 5.3.2 The union movement
he found that 92% of union members were internationally and in South
semi-skilled and unskilled, with the per- Africa
centage in 2005 being 38%. In 1975, no
The profound changes in the social and econom-
members were educated beyond Grade 10
ic environment in many countries, as outlined
and only 34% had post-primary education, above, have had a negative effect on the position
compared with no less than 64% having and influence of trade unions in many countries.
matric or above in 2005. To determine union strength and influence,
(i) Women workers. The large-scale entry of it would be more accurate to use union density
women into labour markets has changed than union membership. Union density is
the priorities and agendas of many unions. defined as union membership as a percentage of
Women often have a greater need for flex- the number of employees as defined in national
ible working arrangements and, owing to labour force surveys.
family commitments after hours, might be The European Foundation for the Improve-
less interested in union activities. At the ment of Living and Working Conditions
same time, in the past important union (2009: 23) found a declining trade union density
activities took place in South Africa in sec- in most European countries between 2003 and
tors with a high concentration of women 2008. Of the 24 countries for which the relevant
workers, such as clothing and textile, and information is available, all but two – Belgium
the retail trade. It is thus rather surprising and Greece – experienced a decline in density
that there has not been meaningful change between 2003 and 2008. Slovakia and Sweden
in Cosatu unions with regard to gender experienced the sharpest declines, followed by
Austria, Bulgaria, Denmark, Hungary, Latvia, other countries that have shown sharp declines
Lithuania and Malta. While trade union density in union membership figures.
is still decreasing in the central and eastern Euro- The membership of registered unions
pean countries, the rate of decline has slowed increased quite sharply in the period 1980–2000,
considerably in most cases when compared with from 782 000 in 1980 to 3 million, which repre-
the previous period 1993–2003. sents an annual increase of nearly 6%. The Inter-
In spite of the declines in union density in national Labour Office described the increase as
Sweden and Denmark, the union density in these the highest of 92 countries that it surveyed in its
countries remains at about 70%. Other coun- annual study of the world’s labour markets (ILO
tries with equally high union density figures are 1997). This can be ascribed to a number of fac-
Finland, Belgium and Norway. Countries such tors, including the heightened awareness of pol-
as the UK, the Netherlands, Portugal, Spain, itical and worker rights and the registration of
Germany and several central and eastern Euro- unions that were previously not registered. Many
pean countries have union density figures of unions were not allowed to register before the
below 30%. Wiehahn reforms of labour policy in the early
Unions in South Africa are still relative- 1980s, while others initially refused to register,
ly strong. According to information from the as this was seen as cooption into the “system”.
Annual Report of the Department of Labour As indicated in Figure 5.1, the number of
(2005: 17), as well as the LFS, there were about unions increased sharply after 1995. This was
3 million union members in 2005. This repre- probably as a result of changes to the LRA, which
sents a union density of just less than 40%. made union registration easier. In 2002, there
This union density is based on union density as were further changes to the LRA aimed at elimin-
a percentage of employees in formal employ- ating consultancies fronting as trade unions. This
ment, excluding the agricultural sector, domestic made union registration more difficult and there-
workers and self-employed persons. This is high after the number of unions started to decline.
by international standards and very high by the Union membership, on the other hand,
standards of developing countries (ILO Review increased almost continuously up to 2002. This
1996: 155). As will be pointed out below, union can be ascribed partly to unions being registered
membership in South Africa has been increasing more easily and also to intensive union recruit-
for a number of years, in contrast with many ment drives, especially in the civil service. How-
4500 600
4000
500
3500
Union membership (’000)
Number of unions
3000 400
Membership
2500
300
2000
1500 200
Unions
1000
100
500
0 0
80 82 84 86 88 90 92 94 96 98 00 02 04
Year
Figure 5.1 Registered trade unions and their membership
Sources: National Manpower Commission, Annual Reports; Department of Labour, Annual Reports; Department of Labour 2005a
ever, this changed from about 2002, and there unite all union federations in the country into
has been a clear downward trend in union mem- one federation), and international worker soli-
bership since then. Over the long term, one can darity. Cosatu adopted the Freedom Charter
expect trade union membership in most organised and formed an alliance with the ANC and the
sectors of the economy to stagnate or even to start South African Communist Party to ensure “a
to decline. This is because trade union density in democratic, non-racial society” in South Afri-
some industries is reaching maturity and because ca. Cosatu is committed to a socialist econom-
the political dispensation in the country is grad- ic system.
ually starting to normalise. This decline is in line • The Federation of Unions of South Africa
with trends throughout the world. (Fedusa) was formed in 1997 by the merger
Trade unions in South Africa are probably of the Federation of South African Labour
no longer seen as a vehicle for liberation from Unions (Fedsal) and the Federation of Organi-
oppression, and even though they remain strong- sations Representing Civil Employees (Force).
ly politicised, they will probably start concen- Fedusa consists of nearly 19 affiliated trade
trating more on workplace and socioeconomic unions with a claimed membership base of
issues in future. about 515 000 (website: www.fedusa.org.za).
Fedusa is founded on the principles of party
L A R G EST UNION FEDERATIONS political independence (it is therefore not
Three trade union federations comprise the bulk aligned to any political party), equal oppor-
of union membership in South Africa. They play tunities and non-discrimination, a democratic
a significant role in the formulation of policy. labour environment, professionalism, disci-
There are also a number of smaller labour move- plined action, and support for balanced eco-
ments that play a lesser role, although certainly nomic policies. At the time of writing, Fedusa
not irrelevant. The most important union move- and Nactu (see below) had just agreed to start
ments in the country are the following (Barker the process to revive the South African Con-
& Holtzhausen 1996): federation of Trade Unions (SACOTU).
• The Congress of South African Trade Unions • The National Council of Trade Unions
(Cosatu) claims to have approximately 1.8 (Nactu) has about 15 affiliates (website: www.
million paid-up members and 33 affiliates nactu.org.za). It believes in non-affiliation to
(2002) (see accompanying box) (website: political parties, non-racialism and autonomy
www.cosatu.org.za). It was founded in 1985 of affiliates.
and is the largest labour federation in South • Although not a federation, another important
Africa. Even by international standards it union movement is Solidarity (website www.
has been among the fastest-growing unions solidaritysa.co.za). It claims a membership of
in the world. It is founded on the principles 150 000. In 2006 Solidarity affiliated with
of non-racialism and non-sexism; one indus- the Confederation of South African Workers’
try, one union; worker control of the union; Unions (Consawu). This membership enables
paid-up membership to ensure self-sufficien- the trade union to take part in the labour
cy; one country, one federation (i.e. to try to debate both nationally and internationally.
Largest trade unions in South Africa

The four largest trade unions in South Africa are all affiliated to Cosatu. Their unconfirmed
membership is as follows (www.cosatu.org.za):
Trade union Claimed membership
National Union of Mineworkers (NUM) 300 000
National Education, Health and Allied Workers Union (Nehawu) 235 000
South African Democratic Teachers Union (Sadtu) 240 000
National Union of Metalworkers of South Africa (Numsa) 340 000
SUMMARY
• Unions in South Africa are very powerful and members of registered unions form about 40% of
the formal employment. This is high by international standards and very high by the standards
of developing countries.
• The principal bodies representing organised labour in South Africa are three labour federations:
Cosatu, Fedusa and Nactu.
Against this background, the impact of unions on the cost and productivity of labour is discussed in
the next few sections.
5.4 THE IMPACT OF UNIONS

5.4.1 The impact of unions on wages Upon being asked
and the cost of labour what unions wanted,
Samuel Gompers,
Most researchers accept that unions cause an
increased wage differential between unionised the founder of the
and non-unionised sectors. A theoretical explan- American Federation
ation is given before some research results are of Labor, replied:
discussed. “More”.
If a union bids up wages in the unionised sec- Anonymous
tor, it may lead to lower employment in that
sector. In turn, this may mean an oversupply We assume that exactly half the labour market
of labour in the non-unionised sector, which is unionised and the other half is not. Further-
will lead to lower wages there. Unions may more, let us assume that the total labour mar-
thus cause an increase in the wage differential ket is in equilibrium to start with: in both
between unionised and non-unionised sectors. halves wages are W and the number of workers
This is illustrated by the graph in Figure 5.2. employed N.
Wu Wu
Wage rate
Wage rate
Wt
W W
Ws
Nu N Employment N Nn Employment
(a) Unionised sector (b) Non-unionised sector
Figure 5.2 The influence of unions on wages

Source: McConnell et al. 2006: 335
Let us now further assume that the union most productive workers and, in time, the firms
in the unionised half (Figure 5.2(a)) succeeds will benefit. Such workplaces might thus acquire
in increasing wages to Wu. The real union/ better skilled workforces, and there might be a
non-union wage gap is thus WuW. However, higher wage paid in union firms because of the
the wage increase results in employment in the higher skills available rather than the presence of
unionised half of the market being reduced from the union.
N to Nu workers. This will leave NNu work-
ers unemployed. They now migrate and look for IM P A C T O F TH E ELA S T I C I TY O F
work in the non-unionised half of the market DEMAND
(assuming the supply of labour stays constant).
Instead of N workers working in the non-union- The extent to which unions impact on employ-
ised half (Figure 5.2 (b)), the supply of workers ment by increasing the cost of labour depends on
will be N + (NNu) = Nn. This will force wages the elasticity of the demand for labour, i.e. the
down to Ws in the non-unionised part. In the sensitivity of the labour demand to wage changes.
unionised part wages will be at level Wu. This is illustrated in Figure 5.3. Two labour
Instead of the union/non-union wage gap of demand curves are presented – Del, which is
WuW, it now seems as if the union has caused relatively elastic, and Din, which is relatively
a wage gap of WuWs between the unionised inelastic. The supply of labour is S, which results
and non-unionised sectors. However, this is the in an equilibrium wage of W and employment of
measured gap, which has been caused by surplus L. If the union increases the wage to Wu, then
labour in the unionised sector migrating to the the impact on employment will differ depending
non-unionised sector. The measured differential on whether the labour demand curve is elastic or
of WuWs is much larger than the actual differ- inelastic. If demand is elastic (Del), employment
ential of WuW. It therefore overstates the impact will decline relatively sharply to Lel. However, if
of the union. the demand for labour is inelastic (Din), employ-
As outlined by McConnell et al. (2006: 335), ment will show a smaller decline to Lin.
this impact of the unionised sector on the
non-unionised sector is called the spillover effect.
The spillover effect refers to the decline in non- S
union wages caused by displaced union work-
ers supplying their services in the non-unionised
labour market – they will “spill over” to the
Wage rate
non-unionised sector. It thus appears as if the Wu

union has caused a much bigger wage differen- W
tial than is in actual fact the case. Del
However, there are also other effects that
union wages might have on non-union wages. Din
One is the so-called threat effect. This refers
to the increase in the non-union wages that is
offered by an employer in the non-unionised sec-
tor in response to the threat of unionisation. The Lel Lin L
employer thus hopes to discourage workers from Number of workers
joining the union by paying wage rates that are
more comparable to union wage rates. To return Figure 5.3 Impact of a union where there are
to Figure 5.2 – the threat effect might increase
different demand elasticities
the wages in the non-unionised sector from W
to Wt. The differential now appears to be only
The elasticity of labour demand has a direct
WuWt. In this case, the true effect of the union is
bearing on union behaviour, as is apparent from
understated.
the following (see also Borjas 2002: 131–134):
A final effect is the superior worker effect –
the higher wages paid by the union firms will (a) The elasticity will be higher if the firm is
cause workers to queue up for the “good” union easily able to substitute capital for labour
jobs. This will enable the employers to select the as wages increase. This is one reason why
unions may at times be inclined to resist influences, in particular the substitution effect,
the introduction of technological advances. the threat effect or the superior worker effect.
Such new technologies increase the possibil- Other factors such as inequalities in education,
ities of labour being substituted by capital. variable demand conditions, imperfect know-
ledge, monopsony conditions and productivity
(b) The elasticity of labour demand will be
improvements may also play a role.
higher if the demand for the output is more
To try to determine the influence of unions on
sensitive (i.e. more elastic) to price chan-
wages, researchers usually use two methods of
ges. A wage increase can increase the price
empirical studies.
of the output, and if the demand for that
output declines significantly because of the • Different enterprises within an industry.
increased price, the demand for labour will These studies concentrate on a single industry
also decline significantly. Unions thus very and compare wages for different enterprises
often resist imported products that may under varying degrees of unionisation in that
compete with the products they produce industry. The shortcoming of this approach,
domestically, because the availability of the however, is that unionised and non-unionised
alternative goods will result in the demand enterprises influence each other, as indicated
for the products being more elastic to price above.
changes. The demand for luxury goods is
also usually more elastic than the demand After considering various empirical studies,
for basic necessities because consumers can Marshall et al. (1980: 372) conclude that the
more easily postpone their purchases or craft unions (those for specific occupations)
even desist from purchasing luxury products are capable of securing relatively large wage
subject to high price increases. increases because they have control over the
labour supply. In this instance the wage dif-
(c) The elasticity of labour demand will be ferential because of unions is about 25%. In
higher if labour cost constitutes a large pro- industrial union situations, the wage advan-
portion of the total cost of the product. If tage seems to be much less marked.
the share of labour cost is high, an increase
in wages will lead to a proportionately big- • Inter-industry. This type of study compares
ger increase in the price of the product, different industries with varying degrees of
which will encourage consumers to cut back unionisation to determine the impact unions
on their purchases. This will have a greater have on wages. The shortcoming of this
impact on the demand for labour. approach is that it is very difficult to find
industries with varying degrees of unionisa-
(d) The elasticity of the demand for labour will tion but where other conditions, such as the
be higher if the supply elasticity of other skills level of the workforce, the occupational
factors of production is higher. For instance, groups, the labour supply and the market con-
if the price of capital increases as a firm ditions for the product, are the same. It would
demands more capital to replace the more not be sensible, for instance, to compare the
expensive labour, then the supply of cap- agricultural and manufacturing sectors.
ital is inelastic and it is not quite as prof-
itable to substitute capital for labour. If a This type of study estimates that the average
company outsources certain functions in
percentage difference between unionised and
order to obtain labour at a lower cost, the
non-unionised wages was about 20% in the
unions will try to ensure that the contract-
period 1938–1960 in the USA (Marshall et al.
ors are paid the prevailing rate, for instance
1980: 374). The differences were most notable
by ensuring that they are also covered by a
in recessionary periods, during which unions
bargaining council agreement.
caused downward rigidity in wages, where-
as in non-unionised industries wages tended to
R E S EARCH RES ULTS ON THE WAGE decline. The union wage advantage was eroded
A D V ANTAGE OF U NIONS
during times of inflation and buoyant economic
As can be gathered from the above, it is difficult conditions because all employers then competed
to isolate the influence of a union from other for workers by offering higher wages.

In general, however, one should take into Borjas (2002: 418) refers to different wage
account that the extent to which unions are able advantages in different sectors (with sectors such
to influence wages depends on the extent to which as construction experiencing high advantages).
economic considerations influence collective bar- Furthermore, lower-skilled workers experience a
gaining. This issue is discussed in section 5.2. higher union wage gap than skilled workers.
I N T E RNATIONAL EVIDENCE
Hamermesh and Rees (1988: 298) conclud- Wages may have an impact on levels of
ed that unions have caused wages to peak at unionisation
between 10 and 30% higher than in non-union- It should be kept in mind that the extent of
ised situations. Another study by Blanchflower unionisation does not only influence wage
(reported in Business Day, 27 May 1997), indi-
increases – successes with increasing wages
cated an average union wage premium of 10.7%
also influence the extent of unionisation.
from 1983–1995 in the UK and 15% in the USA.
Hamermesh and Rees (1988) emphasise, There might be a correlation between highly
however, that results are inconclusive because unionised enterprises and high wage increas-
productivity is probably higher in unionised es, but this does not necessarily indicate a
enterprises since, over the long term, unionised causal relationship: wages might increase
enterprises can compete with non-unionised sharply, but not simply because of a high
enterprises only if productivity is higher. How- degree of unionisation. In fact, it may be
ever, in many cases the increases in productiv- that more employees join the union because
ity might have been gained through reduced of the union’s successes, which means that
employment. This issue is discussed in section high wage increases have resulted in an
6.2.1.
enterprise being highly unionised, rather
McConnell et al. (2006: 338) refer to stud-
than the other way round. Van Heerden
ies that found a much lower wage advantage of
unions. In 2003, for instance, the wage advan- and Van Tonder (1987: 38), for instance,
tage was only 13%. In the 1970s, the advantage have found that among whites, coloureds
was higher, peaking at 20% in 1976, with some and Asians the rate of growth of unions can
other researchers finding a wage advantage of be explained by the increase in real wages
between 20 and 30% in the 1970s. This large as well as union density (i.e. the higher the
wage advantage can be ascribed to two factors: density, the lower is trade union growth).
the high inflation caused by the oil price shocks
resulted in high union wage increases, whereas
the high unemployment resulted in low wage
IM P A C T O N I N F L A TI O N
increases in the non-union sectors.
These findings are in the main confirmed in As outlined in Chapter 4, economists are gen-
a review of more than a thousand studies of erally divided on the role of wages in causing,
the impact of unions and collective bargaining perpetuating or merely transmitting inflation.
by the World Bank (2003). Union members This will equally apply to the impact of unions
on average get significantly higher wages than on inflation – once inflation begins, it becomes
workers not affiliated to a trade union. The nearly impossible to determine whether the high-
wage markup can be as high as 15% in the USA, er wages caused by unions are pushing prices
with most other industrial countries having a upwards or whether wages are being pulled
markup of between 5 and 10%. In South Africa, upwards by price increases. However, what does
the World Bank found a relatively high markup seem clear is that unions appear to perpetuate
for union members, as is discussed below. existing inflation and increase the difficulty of
reducing inflation once it has begun.
Demand on strike picket’s
placard: “4% of nothing is SOU T H A FRI C A N E V I D EN C E
nothing ... We want 12%”.
It seems that unions have caused a higher wage
Anonymous differential in this country than in other coun-

tries, and there are a number of relevant research ation and discipline) might have resulted in
results in this regard. workers finding themselves in the various
Most of the studies arrive at more or similar unionised or non-unionised segments of the
results (see, for example, Hofmeyr 1993; Moll labour market.
1993; Hofmeyr 1998; Fallon & Lucas 1998; f) In recent years, unions in the public sec-
Armstrong & Steenkamp 2008). After control- tor have been considerably more effective
ling for observable variables such as industry, at increasing the wages of their members
personal characteristics and region, the research in the public sector than was the case for
results can be summarised as follows: their members in the private sector. Bhorat
a) Union pressure resulted in a relatively sharp et al. (2009: 53) found a wage premium for
increase in the wages of lower-skilled Afri- unionised workers in the public sector not
cans relative to non-union workers. belonging to a bargaining council of 23%.
The premium associated with belonging to
b) The reason that wages in sectors such as a bargaining council should be added to the
manufacturing and mining increased more union wage premium, and the researchers
rapidly than in domestic service and agricul- estimated that “a joint premium of as high
ture can to a significant extent be ascribed as 51 percent may be present through these
to the higher union density in the former institutions of the labour market”.
sectors.
g) Unions also tended to compress wages
c) The union wage premium (i.e. the per- across skills levels by securing higher min-
centage by which the wages of the average imum wages for the unskilled. This resulted
unionised workers exceeds that of the aver- in the union wage premium for unskilled
age non-unionised worker) has been esti- workers being slightly higher than for semi-
mated at anything between 14 and 46%, skilled workers. It seems as if the union
for instance between 35 and 42% in 1995 wage premium for higher skilled unionised
(Hofmeyr 1998), between 14 and 46% workers decreased over time, suggesting
over the period 1995–2005 (Armstrong & that productivity increased more than wages
Steenkamp 2008); in the region of 24% (Banerjee 2006: 32).
in 1985 (Moll 1993); and between 25 and
35% in the period 1980–1993 (Fallon & However, the total share of employee remunera-
Lucas 1998). tion in the national product seems to have been
d) Even though the union wage premium var- declining for several years now, in spite of sharp-
ied from year to year, there seems to have ly increasing wages in many unionised sectors.
been an almost doubling of the premium This is probably related to declining employment
between 1995 and 2005. In 1995, the pre- levels (see Chapter 4).
mium appeared to be just below 20%,
whereas in 2005, it was between 30 and
40% (see Armstrong & Steenkamp 2008; • International evidence shows that the
Banerjee 2006) and seems to have peaked in
wages of unionised employees have
2002. However, Bhorat et al. (2009: 47), in
on average been between 10 and 30%
considering unionised workers not belong-
higher than those of non-unionised
ing to a bargaining council, found that the
employees.
union wage premium might have declined
SUMMARY
slightly over the same period. • Unions have generally caused higher
wage differentials between unionised
e) Other factors might or might not have
and non-unionised workers in South
played a role in explaining this differential.
Africa than is the case in other coun-
Armstong and Steenkamp (2008: 30) found
tries.
that the wage gap in 2002 was not driven by
differences in the characteristics of workers, • The wage differential seems to have
but that this might have started to change increased over time, and is higher for
towards 2005. Hofmeyr (1998) argues that workers in the public sector than in
non-observable characteristics such as deci- the private sector.
sion making and other factors (e.g. motiv-

SA
4.2 The impact of unions on duction to meet union wage demands and to
flexibility and productivity maintain profitability.
en if unions are responsible for an increase • As indicated in the box in section 6.4.3, a
wages, the cost effect can be neutralised or wage increase can, under certain circum-
duced if unions also bring about an equal stances, lead to an equivalent productivity
higher increase in productivity, as this will increase (the efficiency wage hypothesis). If
duce unit labour costs. The impact of unions the union is responsible for the wage increase,
productivity therefore needs to be considered. it will also indirectly be responsible for the
On the negative side, there are the follow- productivity increase.
g possible influences (see McConnell et al. • Unions may also encourage further training
06: 343): initiatives by the employer either in response
Unions may impose work rules that diminish to union demands in this regard, or because
productivity in an enterprise. They may, for the employer tries to improve productivity to
instance, impose restrictions on the kinds of counter the impact of high wage increases.
jobs workers may perform or the assignment Armstong and Steenkamp (2008: 21) have for
of workers to jobs. instance found that unionised workers appear
They may also engage in so-called “feather- to have invested more in human capital, illus-
bedding” practices by forcing an employer to trated by a higher mean level of education and
employ more employees in a particular occu- experience amongst union members relative
pation than required, for instance a certain to non-union workers. However, the results
ratio of apprentices per artisan. could also be interpreted differently, name-
ly, that employers operating in a unionised
Unions may refuse to have new shift systems environment prefer to appoint better educated
implemented or may hamper the introduction workers or workers with more experience
of new technology. because of the wage premium associated with
Unions may insist on promotion in line with a unionised environment.
certain criteria unrelated to merit and effi-
ciency, such as seniority, affirmative action or The results of overseas empirical studies in
the person having strong union sympathies. regard to whether unions improve or detract
Strikes can have a negative influence on out- from productivity are inconclusive. McConnell
put and eventually on productivity, although et al. (2006: 352) list a number of studies indicat-
as indicated in section 5.5.1, the data on ing that productivity was both higher and lower
strikes may be misleading as a measure of the in unionised industries. In one study both posi-
cost of a strike. tive and negative effects were found for different
industries. However, if there was an impact, it
e possible positive influences of unions seems that the positive impact on productivity is
clude: the greatest in industries where the wage advan-
Union wage increases may accelerate the tage is the highest. This is probably due to firms
search for cost-reducing and productivity-in- responding to the high cost of unionised employ-
creasing technologies, or may prompt employees by becoming more productive. Ingram and
ers to ensure that workers are more product- Lindop (1990) also reviewed evidence and found
ive because of the higher direct and indirect that productivity growth was slower on average
expense entailed in employing unionised in unionised plants than in non-unionised ones
workers. during the late 1970s. In the early 1980s there
was a faster growth in productivity in unionised
Unions may improve job satisfaction by acting plants, while in 1987–1989, very rapid produc-
as a collective voice for dissatisfied employ- tivity growth was recorded in unionised and
ees. Unions also tend to emphasise training by non-unionised manufacturing establishments,
which productivity in general can potentially with the non-unionised plants recording faster
be increased. average growth overall.
Enterprises may be forced to adopt better In a study that reviewed more than a thousand
methods of dealing with personnel and pro- investigations on the effects of unions and collect-

ive bargaining, the World Bank (2003) found that by the World Bank (2003) confirms this conten-
in firms where industrial relations are of a “high” tion – union membership reduces wage differ-
quality (in terms of a low number of unsolved ences between skilled and unskilled workers and
grievances, low strike activity, etc.) the presence between men and women.
of unions tends to increase productivity levels. In a country such as South Africa, bargaining
One difficulty in measuring the influence of councils also allow unions to seek standard
a union is that unionisation is higher in larger wages for given occupational classes within
plants and in more mature enterprises. These the same industry, thereby promoting equality
plants and enterprises are likely to experience among firms with different productivity and
slower productivity growth for reasons unrelat- profitability profiles within the industry.
ed to the presence of trade unions. In South Hofmeyr (1993) has found that from 1985
Africa, some wage negotiations since 1991 show onwards there was a sharp increase in the wages
that both management and unions accept the of those with lower skills levels. In fact, wage
importance of productivity improvements. In rates rose in inverse proportion to skills level,
some instances, such as the mining industry in and this reduced inequalities. Hofmeyr (1993)
1997, wage increases have been linked directly concludes on the basis of available evidence
to productivity. that union pressure was the major factor driving
What is clear is that the industrial relations African wage levels after 1985. Hofmeyr’s find-
climate is critical in determining whether unioni- ings are substantially confirmed by Moll (1993).
sation is accompanied by higher or lower pro- The South African Reserve Bank (2002: 3)
ductivity. If industrial relations are good, with states that the wage compression policies of
management and unions working together to trade unions have resulted in lower inequality in
produce a “bigger cake”, productivity is likely the unionised sectors than in the non-unionised
to be higher under unionism. In an atmosphere sectors.
of conflict, productivity is likely to be lower in This is confirmed by the findings of Arm-
unionised enterprises. strong and Steenkamp (2008: 35). They found
that the advantage of belonging to a union was
greatest for workers at the lower end of the wage
distribution. Union membership may therefore
SUMMARY
Unions may have a positive or negative

effect on productivity. Empirical studies have decreased the level of inequality within the
conducted overseas in this regard are union sector. They also found that the inequality
inconclusive. reducing characteristic of unions appeared to be
increasing over time.
However, even though unions seem to reduce
inequalities in unionised firms or sectors, they
5.4.3 The impact of unions on appear to increase inequalities between union-
equality objectives ised and non-unionised sectors. Because they
raise the average wage in the unionised sec-
Without unions, employers may tend to pay tors relative to the non-unionised sectors, they
differential wages to individual workers on the increase the inequality between these sectors as
same job, or to pay much higher wages to work- discussed above.
ers with better skills than workers who are in
oversupply, irrespective of their marginal pro-
ductivity. This may also relate to differential
wages being paid owing to the dual labour mar- Unions in general reduce the level of
SUMMARY
ket, as discussed in earlier chapters. wage inequality within a firm and also
Unions promote equality by insisting on high- among firms in a particular sector. How-
er wage increases for lower-skilled workers, ever, they increase inequalities between
thereby reducing the gap between skilled and unionised and non-unionised firms, and
unskilled workers. between unionised workers and the
A review of more than a thousand studies on unemployed.
the impact of unions and collective bargaining

5.5 THE INFLUENCE OF STRIKE ACTION

The ultimate sanction of unions to enforce their maturity is required for effective collective bar-
demands for higher wages, i.e. strikes, has both gaining and the responsible use of bargaining
costs and benefits. The media especially are fond power. Such maturity cannot be easily achieved
of referring only to the high cost of strikes to the without going through a process of development
economy. One cannot deny that strikes do entail and a period of immaturity. Effective and realis-
a cost to the economy (and to the employers tic collective bargaining can also not be expected
and workers involved), but the possible benefits in a period of political upheaval and polarisa-
of a dispensation that acknowledges strikes as tion. This is especially so when the political
part of the basic rights of workers should not be polarisation found in the South African society
ignored. Therefore this section focuses more on at large also exists in the workplace, i.e. manage-
the possible benefits of a system that recognises ment usually being white and capitalist oriented,
the responsible use of the strike weapon. and lower-skilled workers usually being African
Strike activity is an integral part of collective and often socialist oriented.
bargaining, and the power relationship between
employer and employee would be severely dis- We recently heard of
torted without the right to strike (see section a big business man
5.2 for a discussion of bargaining power). The
who had to stop going
overall benefit of collective bargaining is that
workers have more influence over their work- to baseball games.
ing environment, and this can conceivably lead He just couldn’t
to improved productivity. As stated before, col- stand hearing the
lective bargaining also helps to avoid exploita- umpire call a strike.
tive actions by the employer, thus reducing the
Anonymous
need for government intervention. The system of
collective bargaining should be seen as a process The point is not that strikes do not have costs.
of relationship building between employer and They certainly do have major implications for
employee (see Marshall et al. 1980: Chapter 13
enterprises, employees and often the economy.
for a full discussion).
At the same time, the acknowledgement of the
Strikes are a healthy sign of a free economy,
right to strike does have certain benefits. In addi-
i.e. of a market-oriented economy. To severe-
tion, the loss of working time because of strikes
ly limit the right to strike would increase the
does not necessarily imply a proportional loss
necessity of introducing other measures to pro-
of production. Whether this is the case or not
tect workers, which would mean more central
control of the economy. In general, the efficient depends on a number of factors. For example,
operation of the economy would then be nega- the long platinum sector strikes of 2014 was
tively affected. costly and the cost extended beyond the cost of
The threat of industrial action is usually suf- production outage. However, it seems probable
ficient for employers and unions to arrive at that the loss of production through strikes and
a mutually acceptable settlement. However, the loss of earnings of striking workers are usual-
should a strike take place (and assuming it ly much less than would appear from the loss of
is used only as a last resort), its psychological working time (see Marshall et al. 1980: 327331
benefits should not be ignored. A strike is often for a full discussion). Some of the factors that
a way for workers to get rid of resentments or have a bearing on the extent of losses suffered as
grievances that have built up over time. Strikes a result of strikes are referred to in section 5.2.
may help to build long-term working relation- For instance, losses will be reduced if employ-
ships and to achieve more realism and modera- ers are able to stockpile production before the
tion in both demands and offers. strike, if they are monopolist producers, if over-
During the initial stages of union development time worked after the strike can catch up some
not all the above-mentioned intrinsic benefits of the backlog, or if replacement workers can
of strikes are evident as a certain level of union continue production during the strike.

The two high points of industrial action in this

Although industrial action does have a graph are also significant. The first is in 1987,
SUMMARY
cost to the economy, this cost should the mining industry strike. The number of work
not be exaggerated, particularly as the days lost as a result of the strike is quite appar-
right to strike is an integral part of col- ent. This shows that the strike had a significant
lective bargaining, with such bargaining impact on the mining industry. The second high
reducing the need for government inter- level of strikes took place in 2000, when a large
vention. number of workers were involved. However, not
many work days were lost, which is an indica-
tion that the strikes were of relatively short dur-
ation. In 1998, for instance, many more work
5.5.1 The influence of industrial days were lost than in 2000. Even though fewer
action in South Africa workers were involved, the strikes were thus of a
It is common knowledge that strike activity in relatively longer duration.
South Africa increased considerably in the 1980s The loss of work days through strike activity
and especially in the second half of that decade, is usually regarded in a very negative light by the
as shown in Figure 5.4. Compared to previous average person in the street, who regards strikes
years, it appears that industrial action in South as a severe cost to the South African economy.
Africa increased to a new, higher plateau after Even though the cost of strike activity to the
the Wiehahn reforms to labour legislation in the economy cannot be denied, the right to strike
early 1980s, and especially after the formation does play an important role in voice regula-
of Cosatu in 1985. tion, i.e. employers and employees determining,
6010 1200
5010 1000
4010 800
Workers involved ’000
Labour days lost ’000
3010 600
2010 400
1010 200
Labour days
Workers
10 0
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
Year
Figure 5.4 Strikes and work stoppages in South Africa

Department of Labour.
Source:

without government interference, conditions of
employment through collective bargaining. The and intimidation against workers continued
right to strike and to lockout, provided they throughout the period. The severe econom-
are not abused, improve the probabilities that ic and human cost of the industrial action
employers and unions will agree on economic- has since prompted senior representatives
ally justifiable and socially acceptable conditions from government and the private sector to
of employment. suggest fundamental changes to the South
African industrial relations framework. One
He uses statistics as a salient policy suggestion that emerged was
drunken man uses lamp-posts a so-called “forced arbitration” by which
for support rather than an official can force the parties to return
illumination. to negotiations and suspend the industrial
action. This measure would be triggered by
Andrew Lang evidence of protracted industrial action with
broader economic impact. The urgency of
The cost of strike activity should not be exag- a policy amendment was emphasised when
gerated. The total average annual loss of work the steel manufacturing sector entered into
days in the period 1986–1990, when a large industrial action just weeks after the plat-
number of work days were lost, made up only inum sector reached agreement. The ultim-
about 0.20% of total working time. This was ate impact of the industrial actions in both
equivalent to each worker taking off 20 minutes sectors was a severe loss of investor confi-
once every month. Such time loss can relative- dence as illustrated by the downgrading of
ly easily be made up by improved management South Africa’s internationally traded gov-
practices to ensure efficient utilisation of the ernment bonds by two credit rating agen-
time at work. The loss of labour days through cies. In October 2014, the International
strikes in the period 1986–1990 was also only Monetary Fund (IMF) downgraded South
one-tenth of the loss of labour days through Africa’s GDP forecast from 1.7% to 1.4%
industrial accidents. growth based largely on the malign impact
that industrial action in the platinum sector
had on the broader South African economy.
The 2014 industrial action in the platin-
um sector lasted 5 months and cost an Written by P. Roos
estimated R24 billion in lost revenues for
the mining companies involved. The Asso-
ciation of Mineworkers and Construc-
tion Union (AMCU) originally demanded
an immediate doubling of basic wages to
SUMMARY
R12 500 per month but the ultimate settle- Strike activity in South Africa reached
ment was a R1 000 per month increase. high points in the mid-1980s and in 2000,
Taking into account the adjustments to but seems to have tapered off since then.
existing benefits the increase came to However, it is still much higher than in
10.9%. Reports of widespread violence earlier years.
5.6 BARGAINING COUNCILS
5.6.1 Background to bargaining
councils
Bargaining councils are permanent collective and other conditions of employment and to
bargaining institutions established on a volun- resolve disputes (Barker & Holtzhausen 1996).
tary basis by employer and employee organisa- The union and employer organisations that form
tions in a specific industry to negotiate wages the council have to be sufficiently representative

to form a council. What constitutes sufficiently the private sector bargaining council system on
representative is not specified in the LRA, but in the one hand and the rapid rise of this system of
respect of the unions it is usually the percentage bargaining in the public sector. This is confirmed
of employees in the sector that are union mem- by Godfrey, Maree and Theron (2006).
bers, and in respect of employers the percentage Although it is true that the coverage of bar-
of employees in the sector employed by them. gaining councils is not extensive, it seems to be
Bargaining council agreements can also be especially high in sectors with a high proportion
made applicable (the so-called extension of of mid- to lower skilled workers, who often have
agreements) by the Minister of Labour to parties permanent employment contracts. These are also
that were not party to the agreement, but that the sectors where permanent jobs for those with
fall within the council’s jurisdiction. The Min- poor educational levels could most likely have
ister is obliged to do so if the employer parties been created. Further research is also required
employ, and the union parties have as members, about the overall economic impact of bargaining
the majority of employees within the scope of councils in the tradable sectors, i.e. those sec-
the council. If this is not the case, the Minister tors that have to compete with international
may still extend the agreement if the parties are competitors, that is, where competing products
“sufficiently representative”, and if he is satisfied can easily be imported, or where South Afri-
that failure to extend the agreement may under- can products are struggling to compete on the
mine collective bargaining at sectoral level. This international markets, or where services are pro-
particular provision in the LRA is highly contro- vided that are an important input to exporting
versial, as will be pointed out below. companies. Apart from the clothing sector, this
could include sectors such as motor components,
C O V ERAGE OF BA RGAINING COUNCILS chemical, metal and engineering, leather, road
There are about 60 councils in South Africa and freight and Transnet (the latter two would relate
about one million workers are covered by bar- to transport costs).
gaining council agreements. However, this cov-
ers only the private sector, and the bargaining 5.6.2 Importance of bargaining
councils in the public sector (central government councils
and local authorities) should also be included.
The Public Service Co-ordinating Bargaining (a) Probably the most important reason for bar-
Council (PSCBC), for instance, covers another gaining councils is that minimum conditions
one million workers. There are a further 200 000 of employment are set by the parties them-
workers in the bargaining council covering the selves without government intervention.
local authorities. The number of employees Bargaining councils are probably the only
within the jurisdiction of bargaining councils reasonably effective mechanism to ensure
increased substantially after the inclusion of the that atypical employees, in particular, are
public sector under the scope of the LRA and the also covered by collectively agreed wages
consequent registration of the public sector bar- and conditions of employment. This is
gaining council in 1997. because it is especially difficult for unions to
Bhorat et al. (2009: 27) have found that while organise atypical employees (see Chapter 6),
the institutionalised collective bargaining system with the result that the normal mechanism
covered substantially more formal sector work- of collective bargaining between an employ-
ers in 2005 (30%) compared to 1995 (15%), er and a group of employees to set wages
this still meant that less than a third of the for- and conditions of employment does not
mally employed were covered by bargaining apply to atypical employees. The determin-
councils. Notwithstanding this the overall rise ation of minimum wages and minimum con-
in the number of workers covered by bargaining ditions of employment across an industry
council agreements between 1995 and 2005 was could eliminate exploitation by employers,
driven almost entirely by the introduction of and is an important advantage of bargaining
public sector councils. Thus, bargaining council councils. This is discussed more fully as part
coverage in the first decade of democracy was of the discussion on minimum wages in sec-
characterised by an erosion of coverage within tion 5.7.

A bargaining council is an important mech- age about a quarter of the approximately
anism to protect workers in a manner that 17 000 disputes referred to them every year
balances the interests of employers and (information supplied by the Department of
employees without state interference. How- Labour). This lightens the load of the Com-
ever, whether it is the best or only mechan- mission for Conciliation, Mediation and
ism, especially when taking into account the Arbitration (CCMA), thus saving taxpayers’
imperatives of competing in international money.
markets and creating employment, needs
more intensive debate and research. South However, bargaining councils also appear to
Africa should also be much more cogni- have significant disadvantages when considered
sant of the reasons for the worldwide trend from an economic point of view. This is dis-
towards decentralised (i.e. workplace) wage cussed in more detail in the three sections that
bargaining, whereas South Africa is moving follow.
in the opposite direction (see for instance,
Ouchi & Takashi 2007).
5.6.3 Economic analysis of the impact
(b) Conditions of employment are standardised of bargaining councils
for the industry and competition on the basis
of labour costs is eliminated. This compels In economic jargon, bargaining councils may be
employers to compete on other bases, for regarded as a form of bilateral monopoly. In the
example higher productivity and better qual- case of employers, there is a monopsony because
ity. There is thus not the “race to the bot- of solidarity among them to fix wages at a cer-
tom” in respect of labour standards, where tain level. At the same time, however, labour
every employer attempts to reduce costs has a monopoly in the sense that the union bar-
by reducing wages and other conditions of gains a certain wage level for all employees. In
employment. Employers thus have to concen- this case, wages are determined by the relative
trate on other methods to reduce costs and strength of each party.
increase productivity and workers would not Because neither party has all the power, some
have to bear the brunt of these efforts. compromise in respect of wages must be reached.
The final wage outcome in such a market will
(c) Closely related to the previous point is therefore be indeterminate – the negotiated wage
that bargaining councils remove wage con- may be either above, below or equal to the com-
flict from the shop floor, which means that petitive wage rate (Marshall et al. 1980: 347).
employer and employee relations at this
level are not damaged by the bitterness that South Africa’s
often characterises wage bargaining. Bar- cost competitiveness
gaining councils may also promote labour
has been jeopardized
peace as there is much more pressure on
by insider-dominated
employers and unions to reach agreement
because of the significant impact that a wage bargaining.
strike in a bargaining council can have on OECD
the whole sector. Bargaining at the central
level can also be more professional, and it Some economists (as quoted by McConnell
is easier to make financial information on et al. 2006: 197) reject the proposition that
general conditions in the industry available countervailing or balancing power determines
without having to release information on the wage outcome in the case of a bilateral mon-
individual enterprises, which may damage opoly. These economists maintain that there is
their competitiveness. tacit collusion between employers and union to
control both the labour and product markets,
(d) Bargaining councils play a very important
i.e. to suppress competition. In such circum-
role in the provision of pension and provi-
stances, product prices and wages will be higher
dent benefits as well as medical benefits.
than determined by the market. Such collusion
(e) Bargaining councils assist with the settle- therefore has as its objective the maximisation
ment of disputes. They settle on aver- of the income of employers and union members

to the detriment of non-participative employers with lower and less persistent unemployment,
(especially small employers), consumers and job lower earnings inequality, and fewer and shorter
seekers. As discussed below, the impact could be strikes.
potentially severe in a sector that is subject to If the labour costs of all employers increase in
intensive foreign competition (the so-called trad- tandem, the possibility of all enterprises passing
able sectors), or where the wage rates are set by on the increased cost to the consumer is much
the larger, formal employers, and do not allow greater. This form of indirect price fixing is in
scope for the smaller or less formal employers to the interests of employer parties to the council.
grow and expand. Because wages are standardised throughout the
It is thus not surprising that the type of mes- industry, it might happen that employers, in the
ocentralised wage bargaining system found in interests of labour peace, agree to higher wages
bargaining councils does not perform well in than they would have done in the absence of
terms of employment, economic growth and a bargaining council. As all employers have to
price stability. Significantly, the authors of the pay the same wages, and all can pass the higher
ILO Review (1996: 194) point out that because costs on to the consumer, the incentive to resist
of their macroeconomic properties for influ- wage demands is reduced. The setting of a rela-
encing employment, unemployment, econom- tively high minimum wage could price workers
ic growth and inflation, highly centralised and out of employment and unemployment would
highly decentralised bargaining systems perform consequently increase (ILO Review, 1996: 153,
much better than intermediary systems such as 194–195).
bargaining councils. This refers to the so-called The International Panel on Growth appointed
“U-shaped relationship” between a country’s by the South African government refers to the
economic performance and its level of collective existence of wage rigidities that bind more at the
bargaining, meaning that both highly centralised bottom of the pay scale (Hausmann 2008). The
and decentralised bargaining give better econom- Panel states that increases in the cost of labour
ic outcomes than systems such as the bargaining can only in some cases be passed on to the con-
councils (Calmfors & Driffel 1988). The OECD sumer. This is where all competitors must pay
similarly states (2010: 11) that high levels of the increased wages, which is the case if the
coordination – either through greater centralisa- activity is non-tradable (i.e. not traded on inter-
tion or greater decentralisation – are associated national markets). However, in tradable activ-
with better employment outcomes by avoiding ities, such as manufacturing, foreign competitors
inflationary wage demands, reducing the real face a different labour code and the producer
costs of disinflation and increasing the scope for cannot as easily pass increases on.
interest rate reductions. Currently, South Africa The distinction between the tradable and
is characterised by an intermediate level of wage non-tradable sectors is a central pillar of the
coordination, which is found elsewhere to be Panel’s approach. Their recommendation is
associated with poor employment outcomes. It that jobs should be created in the tradable sec-
also seems as if decentralised but highly coordin- tor, because this sector can create the kinds of
ated bargaining has a positive effect on eco- jobs that use more of the human resources that
nomic performance (Auer 2000: 54). The ILO the country has in abundance (i.e. unskilled and
questions whether the system of sectionalism semi-skilled workers). Furthermore, the country
contained in bargaining councils is appropriate needs to earn more foreign exchange in order to
in South Africa (ILO Review 1996: 16). sustain economic growth over the long term.
However, the World Bank (2003) has found For 1995, Butcher and Rouse (2001, quoted
another interesting outcome: where trade unions in CDE 2001) provide an estimate of the effect
are weak, decentralised bargaining may be the of unions on non-unionised workers in sectors
most economically efficient form of collective with industrial councils in the order of 10%,
bargaining, but where trade unions are strong, while they estimate the union-wage premium at
centralised bargaining is a better level of bar- about 20%.
gaining measured against the criterion of eco- Another important factor not always taken
nomic performance. In this instance, the World into account in the context of bargaining coun-
Bank also refers to highly coordinated collective cils is their impact on the likelihood of young or
bargaining, which then tends to be associated inexperienced workers finding employment. The

National Treasury (2011: 14) has for instance effect, which might be one reason why there is
stated that South Africa’s system of sectoral min- limited evidence of a significant wage benefit
imum wages may have contributed to the low for those employees covered by non-public sec-
levels of youth employment by pushing up the tor bargaining councils. In any event, Bhorat’s
cost of entry-level workers. The potential effects research seems to be refuted by other research
of minimum wages on youth employment and which shows evidence of a significant wage
unemployment rates have been examined in a effect for bargaining councils, for instance by
number of international studies. The balance of Magruder (as quoted by Rankin 2010).
this international empirical evidence suggests However, the conclusion that workers have
that high minimum wages can have a negative not benefited from bargaining councils is dif-
impact on youth employment by driving a wedge ferent when considering specific occupations.
between youth labour costs and their expected Unskilled elementary workers within a bar-
productivity, thereby raising unemployment gaining council earned more in both 1995 and
and discouraging some youth from entering the 2005 than workers not in a bargaining council.
labour market. Elementary workers who are not part of a bar-
National Treasury (2011) quotes data from gaining council earned about 60% of the aver-
Andrew Levy which show that the average min- age wage of a bargaining council member in
imum wage across all sectors is about 62% of 1995, and about 56% of the average wage of
the average formal sector wage. This is very high a bargaining council member in 2005 (Bhorat
by international standards and far above the et al. 2009: 37). This is precisely where the
average in the OECD (37%), which is already unemployment problem in South Africa is the
elevated compared to emerging and developing most serious.
countries. Furthermore, whereas many countries In 2005, the only other occupation category
differentiate minimum wages by age through the that benefited from being covered by a bar-
inclusion of sub-minima for youths, this is not gaining council agreement was service and sales
the case for South Africa. The minimum wage workers, whose earnings were almost double
in South Africa therefore does not account for those of non-bargaining council service work-
the lower productivity of younger workers. This ers. However, this seems to be mainly because
exacerbates the implicit gap between entry-level of the coverage of some public sector workers
wages and productivity, and hinders the hir- categorised as service workers, who were not
ing of younger workers. One way of negating covered by a bargaining council in 1995 (Bhorat
some of the potential negative impact of bar- et al. 2009: 37).
gaining councils on youth unemployment would
be to differentiate wage levels by age (OECD
5.6.4 Extension of agreements
2010: 11).
Leaving aside the question of wage differen- As indicated above, the Minister of Labour
tials for young workers, the general wage ineffi- can be requested by the parties in a bargaining
ciencies caused by bargaining councils seem to council to declare an agreement concluded in
be refuted by research undertaken by Bhorat it to be binding on all parties that fall within
and Van der Westhuizen (2009: 23). They the council’s jurisdiction, even though they are
find that with the exception of the public sec- not parties to the agreement. Where the parties
tor bargaining council, there is no evidence of in the council are representative of the major-
a significant wage benefit for those employees ity of employers and employees, the Minister is
covered by a bargaining council, particularly in obliged to do so, and in other cases he has some
2005 when compared with 1995. As far as the discretion.
bargaining council for the public sector is con- The major rationale for the extension is to
cerned, another study by the researchers points buttress sectoral bargaining – if it is cheaper to
to a wage premium of 28% in 2005 (Bhorat et compete from outside the council, employers
al. 2009: 52). might resign from their employer organisation.
However, what they do not seem to take into This will lead to an increasingly unrepresentative
account is that the outcome of public sector bar- employer organisation and to the eventual col-
gaining often sets a precedent for other sectors lapse of the council.
through the demonstration effect or the threat However, the extension of bargaining council
111
agreements can also have a particularly negative • Building 41%

effect on non-party employers and particular- • Metal and engineering 45%
ly small employers. The wages agreed in bar- • Construction: Electrical 47%
gaining councils are usually based on what the • Clothing 48%
party employers can afford, and these are often • Road freight 57%
the large, profitable and capital-intensive enter-
prises. The wages are consequently often higher However, these authors have also researched
than the smaller, more labour-intensive and less how representative bargaining councils are in
profitable enterprises (usually not members) can terms of party employers as a percentage of all
manage. employers in the particular sector. In this regard,
The authors of the ILO Review (1996: 194– they found (2006) that bargaining councils are
195) refer to seven effects on the labour market unrepresentative: party employers make up only
caused by the compulsory extension of agree- 41% of all registered employers. As many as 24
ments, including making it more difficult for councils (out of 41) are unrepresentative on the
smaller enterprises to expand employment, high- third measure. National councils and other large
er wage settlements, creating a barrier to entry councils are even less representative on the third
for small enterprises and increasing the dualism measure than the system as a whole (seven of the
in the South African economy. nine councils in this category are unrepresenta-
The government’s Labour Market Commis- tive on this measure). Similarly, seven of these
sion (1996: 55) has expressed its “deep concern” nine councils are unrepresentative in terms of the
that non-parties are not afforded the opportun- number of employees belonging to party unions
ity to influence bargaining council agreements. as a percentage of all employees.
The Commission (1996: 59) has recommended Boccara and Moll (as quoted by Nattrass
that the Minister should have greater discretion 1998b) have confirmed that wage levels agreed
in deciding whether to extend agreements, and
in bargaining councils do have a significant
should specifically take into account the effect of
effect on smaller enterprises. It is for these vari-
agreements on non-parties and on job creation.
ous reasons that the government in its Growth,
The extension of agreements, together with
Employment and Redistribution (GEAR) policy
the fact that representation on councils is not
suggested that the Minister of Labour should
always properly regulated, has led to claims by
have more discretion in the extension of agree-
some critics that bargaining councils are “min-
ments to permit the Minister to bring labour
ority rule masquerading as majority rule” (as
market considerations into play (RSA 1996: 18).
quoted by Madden, CEO of a bargaining coun-
However, this was never fully implemented: if
cil, 2005: 52).
parties to the council have majority representa-
In trying to determine how significant the
tion, the Minister has no option but to extend
impact of the extension of agreements is, con-
the agreement if requested by the parties. This
sideration could be given to the percentage of
would also be the case if the employer parties to
additional employees affected when the agree-
the council are large employers and thus repre-
ments are extended. Godfrey et al. (2006) con-
sent only a small proportion of employers in the
ducted an extensive survey of bargaining coun-
industry, but employ the majority of employees.
cils. As far as bargaining councils in the private
The OECD (2010: 11) has in fact stated that
sector are concerned, employees working for
a weakening of the legal extension of sectoral
employer parties of the council form 72% of
bargains would likely also help with wage mod-
all employees (party and non-party employers).
eration, since social partners would know that
This means that an additional 28% of employ-
agreed wage levels could be undercut by other
ees are covered by the extension of agreements.
firms.
However, in some sectors the percentage of
additional employees covered is quite a bit high- Whenever a strike is settled,
er, for instance in the following sectors, with the
the consumer knows who will
percentages showing the percentage of addition-
have to do the settling.
al employees covered by the extension of agree-
ments in 2004: Anonymous

5.6.5 Making provision for special by their very nature do not have the capacity
circumstances of employers or knowledge to properly participate in the
activities and caucuses of employer bodies. The
Bargaining councils introduce an element of
researchers also raise the possibility of blanket
inflexibility, and do not take into account that
exemption for start-up businesses, and a gradual
circumstances can vary radically from one phase-in period. However, this again assumes
enterprise to the next, and from one region to that small businesses will be able to afford the
another. Bargaining councils cannot make pro- types of wages paid by large businesses, which
vision for the special circumstances of individual are often more mechanised and hence use less
employers, even if they are members of the coun- labour that is more skilled.
cil. They could therefore be an important source The second mechanism in terms of which pro-
of labour market inflexibility (see section 6.6). vision is made for the special circumstances of
Two main mechanisms have been introduced businesses is the exemption system. The LRA
to accommodate companies that are unable to requires bargaining councils to have a mechan-
afford the wages rates set by bargaining coun- ism to deal with applications for exemptions,
cils. The first is that small business needs to be and the legislation also provides that bargaining
represented on bargaining councils. The second councils should have an independent body to
mechanism is the provision for companies to deal with exemption appeals.
apply for exemption. Some researchers state that the exemption
The LRA requires the representation of small mechanism makes more than adequate provi-
business on bargaining councils. However, small sion for the shortcomings of bargaining coun-
business is not defined. Furthermore, parties to cils and especially their extension. Godfrey et al.
the council can themselves decide how seats are (2006: 71–79) for instance examined the data
allocated among representatives, and the Depart- on exemptions from 17 bargaining councils for
ment of Labour’s overview role in this regard 2000, 2002 and 2004. They found that for those
is thus very limited. The LRA does not regu- years between 72 and 78% of applications for
late this important issue; apart from prescrib- exemptions were granted, either in full, partial-
ing that small business should be “adequately” ly or conditionally. The majority of applica-
represented it gives no indication of what this tions were granted in full. They compared these
implies (see Madden 2005: 52). There is thus results with data obtained from the Department
no certainty that bargaining councils do, in fact, of Labour (DoL) for 2003 and 2004. The DoL
adequately provide for small business. A survey data cover 44 councils in 2003 and 37 councils
among small business by Godfrey, Maree and in 2004 and show a slightly higher success rate
Theron (2007: viii) confirms that small business- of about 80%. The evidence here is that almost
es are not pursuing the option of representation 80% of exemptions are granted.
in councils. This finding is not surprising, know- However, the reality is that in the clothing
ing all the pressures on small business and the industry many clothing factories have either
fact that they would be a lone voice among the closed, moved to neighbouring countries or
big boys. refuse to pay bargaining council wage rates,
In another study, Godfrey et al. (2006) state which seems to indicate that there might be some
that employer bodies should become more rep- flaws in these findings.
resentative of small business in order to better The fact that bargaining councils grant the
accommodate their needs. In an extensive sur- majority of applications for exemptions is not
vey of bargaining councils, they have found that the full picture. Firstly, it is not known how
employer organisations on large national coun- many are granted in full, except that one study
cils were less representative of small businesses states that the “majority” of those that were
than employer organisations at smaller region- granted were granted in full (Bhorat 2009: 21).
al and local councils. They also found that the It would have been much more useful to provide
average size of party firms at most of the large data on the percentage of the original applica-
national councils is significantly bigger than the tions that were granted in full, rather than sim-
average size of non-party firms. However, their ply referring to the “majority” of those that
proposed solution is equally unlikely to address were granted.
the needs of small business. Small businesses Secondly, and more importantly, many

employers simply do not apply for exemption. and productivity bargaining can really only
Apart from the fact that many small employ- take place at enterprise or shop-floor level, but
ers do not have the wherewithal to apply for then without any direct link to wages. Even
exemption because the procedures could be very though productivity is usually bargained in the
cumbersome and time-consuming, employers workplace and not in the bargaining council,
often have to submit proof that the majority any employer would know that very few trade-
of employees support the proposed exemption, offs to achieve higher productivity are possible
which is unrealistic (see, for example, clause if wage negotiations are not conducted in the
31(7)(g) of the NBC Main Agreement). workplace as well. Unions are less involved in
Furthermore, the system of exemption often factors that influence the sustainability of an
caters only for unexpected, temporary calamities individual company because they do not negoti-
and not for the long-term difficulties a company ate directly with that company.
might have in competing on international mar- Sector-level bargaining has also allowed
kets – exemptions are only granted for a tem- employers to abdicate responsibility for their
porary period (usually one year at a time) and an relationship to employees and their productivity
extension of the exemption is not always easy. levels by blaming the sector-wide deliberations
Under these circumstances, it is not surprising over which they have little influence (Yude-
that many employers experiencing difficulties do lowitz, as quoted in Business Day, 26 August
not apply for exemption. 2010, p 15). Godfrey et al. (2007: iv) refer to the
The authors of the ILO Review (1996: 150, fact that there is a perceived serious decline in
180) list a number of criticisms against the plant-level bargaining within the jurisdiction of
councils. This suggests that little or no produc-
system of exemptions. More fundamentally,
tivity bargaining is taking place.
it could be argued that there would be few, if
any, exemptions if simpler, less onerous “frame-
work” agreements were to be concluded at sec-
toral level. • The strongest criticism against bar-
Van Niekerk (2007: 45) also highlights the gaining councils is that agreements
shortcomings of the exemption system. He has are extended to non-parties. This elim-
proposed that there should be a single national, inates competition among employers
independent body to deal with applications for on the basis of labour costs, can lead
SUMMARY
exemptions in bargaining councils, and that this to tacit collusion and may be to the
body should consist of experts who are know- disadvantage of the non-participating
ledgeable of the small business environment. employer, consumer and job-seeker.
• There is significant evidence that
highly centralised or highly decen-
5.6.6 The link between wages and
tralised bargaining systems produce
productivity far better outcomes in terms of
A further disadvantage of bargaining councils employment and inflation than South
is that the link between wages and productiv- Africa’s intermediate system of bar-
ity becomes tenuous. Wages and productivity gaining councils.
cannot be effectively linked at industry level,
5.7 MINIMUM WAGES
Bargaining councils are one mechanism used in mechanisms to be created by the state in those
South Africa to ensure that a minimum wage industries in which wages cannot be regulated
applies in the sector covered by the bargaining effectively by collective bargaining and where
council. This is in line with international instru- wages are exceptionally low. Conventions 26
ments of the ILO, which provide for the setting (1928), 99 (1951) and 131 (1970) of the ILO
of wages through collective bargaining, and for deal with the implementation of mechanisms

for the determination of minimum wages. These labour because of their strong bargaining power
mechanisms do not mandate the level of min- and their influence on the price of labour. In
imum wages as such, but rather the procedures such circumstances minimum wages are required
for arriving at this level (Shaheed 1994: 3). South to counterbalance some of the distorting factors.
Africa ratified Convention 26 in 1932 (National This is discussed in more detail in section 4.9.
Manpower Commission (NMC) 1983: 19).
5.7.2 Arguments against minimum
5.7.1 Arguments in favour of wages
minimum wages
An important argument against minimum wages
The main argument in favour of a minimum is that they do not accommodate the specific cir-
wage is that every worker should be paid at a cumstances of an individual enterprise (and in
level that enables a certain minimum standard of the case of a national minimum wage, the cir-
living to be maintained (NMC 1983: 11). Society cumstances of a specific industry). The profit
should have an improvement in the well-being of position of enterprises constantly changes and a
all its citizens as one of its objectives. If wages minimum wage system does not provide for this
were left entirely to market forces, many work- eventuality. Minimum wages also do not take
ers (especially the unskilled) could be exploited account of the productivity of individuals, and
by unscrupulous employers and would not be workers should be remunerated in accordance
able to maintain the minimum standard of living with their marginal productivity (as discussed in
required to satisfy basic needs. For competitive Chapter 6).
reasons, other employers would be forced to fol-
low the same policy, i.e. pay “starvation” wages. The patrimony of a poor man
The government should therefore intervene by lies in the strength and dexterity
introducing a minimum wage to ensure that of his hands; and to hinder
society’s objectives in this regard are achieved. him from exploiting this ...
Another argument in favour of a minimum
is a plain violation of this
wage is that the employer will use labour more
most sacred property.
efficiently and therefore improve productiv-
ity because of the increased wage costs (NMC Adam Smith
1983: 16). Employers will be more careful to
recruit the right worker for a particular job, and Another argument against minimum wages is
will be more inclined to train and develop work- that entrepreneurs will usually be able to pass
ers. Unprofitable, inefficient enterprises should the increased costs resulting from minimum
not be “subsidised” by poorly paid workers. wages on to consumers in the form of price
In addition, higher wages can, under cer- increases. This can create an inflationary effect.
tain circumstances, lead to improvements in Consumer demand pressures can compound this
the workers’ morale and nutrition, and reduce effect. Because of the introduction of minimum
absenteeism, illness and labour turnover, all of wages, especially if it benefits many employees,
which can bring about productivity improve- the average consumer demand level in the coun-
ments (ILO Review 1996: 211). This is part of try will rise. However, if this is not accompanied
the so-called “efficiency wage” theory, and is by higher productivity (an increase in the supply
discussed in more detail in the box in section of goods and services), higher inflationary pres-
6.4.3. sures will result.
A further argument in favour of a minimum The main argument against a system of min-
wage is that the market mechanism does not imum wages, especially if set at relatively high
operate effectively. There are many distortions levels, is that it will interfere with the proper and
of the market as a result of, for instance, dis- flexible operation of the market, reducing effi-
crimination, uncompetitive conditions in prod- ciencies and eventually leading to a lower eco-
uct markets, labour that is not particularly nomic growth rate and higher unemployment
mobile between regions, occupations or employ- than would otherwise have been the case. Every
ers, and inadequate information. Furthermore, if employee should be free to sell his or her ser-
there are monopsony employers, they can exploit vices for whatever wage he or she can obtain.

If a minimum wage is introduced, it distorts the whether the minimum wage mechanism is
price of labour compared to capital and results intended to ensure only a bare minimum for
in workers being replaced by capital equipment. the poorly paid and unorganised or whether its
In addition, productive investment becomes less role is to ensure a “fair” wage for a greater pro-
profitable and enterprises may close down or portion of workers. Shaheed (1994: 910) states
new enterprises not start up. These factors will that “if a large proportion of workers received
result in more unemployment, and society at increases in money wages from the general min-
large will not benefit from the introduction of imum, it is believed that subsequent inflation
minimum wages. would lead to no improvement in real wages,
Particularly in periods of economic contrac- and/or that unemployment would be adversely
tion and declining demand, a minimum wage affected”. These harmful effects will be avoided
may imply that, with no possibility of wages if the minimum wages directly affect only a rela-
declining, employees will have less chance of tively small proportion of the workforce.
keeping their jobs. They will be dismissed and The final condition, i.e. the effect on
swell the ranks of the unemployed. In fact, work- unemployment, is obviously influenced in part
ers who lose their jobs owing to minimum wages by the first two conditions. However, it also
in the protected sectors of the economy may depends on the elasticity of the demand for
move to unprotected sectors (e.g. the informal labour, i.e. whether the demand for labour is
sector) and further depress wages or earnings very sensitive or responsive to wage changes.
there. Thus, for the economy as a whole, wage This is illustrated in Figure 5.5, which indicates
dispersion and inequality increase. This principle different demand elasticities.
is also discussed in the context of the impact of The line Del represents a relatively elastic
unions (section 5.4.1). Even within the formal (responsive) demand for labour. If a minimum
economy the market mechanism is distorted as wage is introduced at the level of Wm, then
wage differentials between skilled and unskilled unemployment to the extent of L1L2 will result.
workers are reduced, and the incentive for edu- However, if the demand for labour is relatively
cation and training and promotion is thereby inelastic (such as at Din), unemployment to the
also reduced. extent of only L3L2 will result.
It is necessary to consider these arguments Shaheed (1994: 11) refers to an international
more carefully. workshop that examined various studies relat-
For minimum wages to have these harm- ing to the impact of minimum wages on general
ful effects on the economy they would have to employment and “the general consensus seemed
comply with the following conditions (compare to be that the minimum wage has at best a mod-
Shaheed 1994: 8): est or no impact on employment”.
However, empirical studies also show that
• To exceed the wage levels the market gener- labour demand is much more elastic for dis-
ates, or to increase all or most wage levels in advantaged groups such as youths, Africans
the formal sector. and women than for other workers. This means
• To apply to a large proportion of the work- that even though they probably are most in need
force. of protection, they will be worst affected by a
• To increase unemployment. minimum wage. Various studies in this regard
are discussed in the NMC Report on Minimum
As regards the first condition, it is not unusual Wages (1983: 79). Fearn (1981: 120) sums up
to find that developing countries accorded min- various findings in respect of the USA and con-
imum wages too ambitious a role in the post- cludes that it seems that an increase of 10% in
colonial euphoria. However, in most countries the minimum wage there reduced employment
governments soon reduced real minimum wages among all young people by between 1 and 4%.
to more realistic levels, with the result that their There are thus a number of arguments in
effect on wage levels was relatively modest favour of and against minimum wages. How-
(Shaheed 1994: 8). ever, what does seem critical is the purpose of
Regarding the second condition, the propor- setting minimum wages, which will again affect
tion of the workforce covered varies from one the level at which the minimum wages are set.
country to the next. The coverage depends on The Labour Market Commission (1996: 65)

S
Wage rate
Wm
W1
S = Supply of labour
Del = Elastic demand
Del for labour
Din = Inelastic demand
Din for labour
L1 L3 L2
Number of workers
Figure 5.5 Minimum wages and the demand for labour with different demand elasticities
found that there was surprisingly little research minimum wage. Using both the broad and the
about the potential impact of a minimum wage narrow definition of domestic worker employ-
in South Africa, and that recent studies sug- ment, employment levels fell by 5.5% or 7.6%
gest that the evidence against minimum wages respectively. Female domestic workers have
is “surprisingly fragile”, even in less developed been on the receiving end of this decline as their
countries. The Commission concluded that min- employment declined by about 10%. Interesting-
imum wages should be set at a realistic level, ly, male employment increased by about 14%,
should not attempt to regulate the conditions of albeit off a low base, but the reasons for this are
too large a percentage of the workforce, should unclear.
not be seen as the ultimate solution to poverty in Overall, Hertz found that the real wages,
South Africa, and should not be used as a substi- average monthly earnings and total earnings of
tute for collective bargaining. all employed domestic workers have risen since
Saget (2001) uses the ratio of the minimum the minimum wage came into effect. The over-
wage to the average wage as an indication of
all estimated elasticities suggest that the regula-
the impact of minimum wages. In her study
tions should have reduced poverty somewhat for
she found that this ratio varied considerably
domestic workers, although this last conclusion
between countries and within countries over
is the least robust of the findings in the light of
time. According to her, the level of minimum
the loss of some jobs.
wages has had an insignificant effect on the level
of employment. She also considered the impact In a study on the impact of minimum wages
of minimum wages on poverty and found that on farm workers, Conradie (2005) considered
minimum wages in developing countries do not labour trends on wine and grape farms in the
affect the poorest part of the population, but Western Cape. She found that technological
rather the upper levels of the low-income popu- advancement far overshadowed labour laws as
lation. However, a minimum wage may have the most important reason for job losses. She
positive results in poverty alleviation by improv- found that productivity increased sharply, which
ing the living conditions of workers and their was the major reason why there were no large-
families, in spite of it not impacting directly on scale job losses as a result of higher minimum
the poorest people. wages. However, she also found that labour laws
In South Africa, on the basis of the LFSs, (including the Extension of Security of Tenure
Hertz (2005) has found that the employment of Act) had the following unintended consequences
domestic workers fell after the introduction of a that need to be taken into account:

• The number of permanent jobs has been (b) Sectoral determinations. In those sectors
reduced by half since 1994 – for the house- where proper collective bargaining does
holds involved, the increase in wages does not not take place, the Employment Conditions
compensate for the loss of jobs and benefits. Commission can be requested by the Min-
ister of Labour to investigate conditions in
• The wages of the lowest paid workers did
the industry and to make a recommendation
increase substantially, but that of higher paid
in respect of wages and other conditions of
workers increased far less. To some extent,
employment. The Employment Conditions
there was an inclination for the minimum
Commission advises the Minister on the
wage to become the maximum wage. This
making of sectoral determinations and any
reduced the incentive to improve productivity.
other matter concerning the BCEA (Basic
• Basic benefits such as health care and subsidies Conditions of Employment Act). Three
related to housing costs were reduced to com- members of the Commission are appoint-
pensate for the higher cash wages. However, ed by the Minister on the basis of their
these reductions were not sufficient to neutral- knowledge of the conditions of vulnerable
ise the wage increases. and non-organised workers. The Minister
appoints a further two members nominated
by organised labour and business in Nedlac.
Evidence shows that the negative effect When making recommendations on wages, the
of minimum wages on the economy will Employment Conditions Commission has to take
SUMMARY
be negligible provided that they are set into account the ability of employers to carry on
at realistic economic levels, affect only a their undertakings successfully, the cost of living
relatively small percentage of the work- and the operation of small and new enterprises.
force, are not used to combat poverty, The Commission should also take into account
and are not substituted for collective bar- the likely impact of any proposed condition of
gaining. employment on current employment or the cre-
ation of employment. After having considered
the recommendation, the Minister may make a
sectoral determination.
5.7.3 Minimum wage-setting Statistics South Africa and the Department of
Labour have published a report that analyses the
mechanisms in South Africa
mean and minimum wages in South Africa (Sta-
Minimum wages in South Africa are determined tistics South Africa 2000). The report found that
by a dual system. there are significant differences in the legislated
minimum hourly wages of unskilled workers
(a) Bargaining councils. In those sectors where
across industries. The report also found, firstly,
there is adequate collective bargaining
that the minimum wages legislated through bar-
between unions and employers, bargaining
gaining council agreements are in all cases far
councils normally determine wages and
higher than those set through sectoral determin-
other conditions of employment through
ations, with the average difference being about
negotiation. Agreements within bargaining
50%. Furthermore, as far as sectoral determin-
councils are reached without government
ations are concerned, the lowest minimum is in
involvement. However, the government
transport with the rate being only 53% of the
gives statutory force to the agreement by
minimum wage in the sector with the highest
promulgating it in the Government Gazette.
minimum wage, i.e. finance. The same differ-
If the parties to the bargaining council are
ences are evident in bargaining council agree-
sufficiently representative, the agreements
ments, with the trade sector paying the lowest
can be extended to apply to all employers
minimum wage and manufacturing the highest.
and employees in the specific sector.
The report also found, as is to be expected, that
Section 5.6 should be consulted for a more the regulated minimum wages are significantly
detailed discussion on bargaining councils. lower than the mean reported earnings.

SUMMARY
Minimum wages in South Africa are determined by a dual system. In those sectors where there is
adequate collective bargaining, bargaining councils normally determine minimum wages through
negotiation. In other sectors, minimum wages are often set by the Minister of Labour on the rec-
ommendation of the Employment Conditions Commission (through sectoral determinations).
5.8 MINIMUM SUBSISTENCE LEVELS

When one considers the issue of minimum family should be taken as the basis. Usually the
wages, attention should also be given to the family is taken as the basis, and the Bureau of
minimum subsistence level that applies in South Market Research provides for various possibil-
Africa. The Bureau of Market Research (website: ities by giving data for various household sizes
www.unisa.ac.za/dept/bmr) at Unisa undertakes and for an “average” household, married and
regular subsistence surveys. The purpose is to unmarried men in hostels, and married and
determine the minimum subsistence level, i.e. unmarried women in a house in African residen-
the minimum financial requirements of a family tial areas.
to enable members to maintain their health and Table 5.1 shows the MLL in various centres
have acceptable standards of hygiene and suffi- according to the Bureau of Market Research
cient clothing. (2003). It is noteworthy that the average wage of
The Bureau of Market Research uses the fol- an individual African in the non-primary sector
lowing items to calculate the minimum living is more than three times what the average family
level (MLL): food, clothing, compulsory pay- requires to maintain a basic MLL. The level of
ments to local authorities (e.g. rent, water, elec- wages relative to the living level has also been
tricity), fuel and light, washing and cleaning increasing over time. This is also evident from
materials, education, transport, contributions the fact that the average wages have increased at
to medical funds and medical expenses, replace- a much higher rate than the MLL.
ment of household equipment and taxes. Provi- Other factors that should be taken into
sion is also made for a supplemented living level account when considering general living stan-
(SLL), which includes more necessities and some dards in a country are the extent to which
desirable amenities that enable the maintenance employees can rely on various fringe benefits
of a modest low-level standard of living. provided by the employer, the availability of
There is, however, no such thing as a general state services, and transfers between households.
or universal minimum living standard to satisfy This relates to the concept of the social wage (see
certain basic needs. The concept of basic needs accompanying box).
can, for instance, be defined in a variety of ways,
depending on the standard or quality of the
clothing, food or whatever is required for sub-
sistence. In South Africa there are also consider- Social wage
able differences of opinion on how basic needs The social wage is the total sum of all social
should be measured. Some idea of the level of benefits received free or partially free, such
the minimum standards can be gained by a com-
as state transfers, subsidies and services
parison with minimum food ration scales. The
(unemployment insurance, state old-age
MLL is about 85% higher than the South Afri-
can Department of Health’s food ration scales, pensions, free public health services, etc.)
which are based on recommended scales in the and kinship and community transfers (com-
USA. Nel has concluded that, compared with pare ILO Review 1996: 212; Barker &
ILO norms, the standards set for the MLL and Holtzhausen 1996: 138). It therefore com-
SLL are comparatively high (1990: 123). plements the direct and indirect income of
A further problem regarding the satisfaction an employee, such as money wages, fringe
of basic needs is whether the individual or the

Table 5.1 Minimum living levels*
% increase p.a.
Feb-92 Feb-96 Mar-01 Mar-02
1996–2002
Bloemfontein 634 913 1 327 1 474 8.3%
Cape Peninsula 738 1 032 1 526 1 679 8.4%
Durban 787 1 091 1 646 1 850 9.2%
Johannesburg 698 974 1 438 1 575 8.3%
Port Elizabeth 683 1 005 1 448 1 603 8.1%
Weighted average 25 centres 708 1 010 1 535 1 703 9.1%
11% (1996–
Average monthly wages: Africans 2 042 3 224 5 427 6 9941
2001)
Ratio of MLL: Average African
1:2.88 1:3.19 1:3.54 1:4.111
wages
*The minimum monthly financial requirements of an average African family
1 All population groups
Sources: Martins & Maritz 2002; Statistics South Africa.
benefits and employer-provided entitlements urban worker. Female unemployment has

to cover contingency risks (e.g. ill health, also been high, which further increases the
pension, etc.). wage required by those in employment. In
In industrialised market economies, addition, the enterprise share of the social
money wages have been high, comple- wage has been raised because the state pro-
mented by extensive state transfers and vides relatively few transfers.
growing enterprise and private insurance A high proportion of the social wage has
benefits. In former socialist countries, some therefore been borne by enterprises, which
forms of state transfers have been high, has placed them at a structural disadvan-
for example health care, while the system tage as far as international competitiveness
of kinship has been disrupted by the state. is concerned.
High transfers from mainly rural kinship
networks are typical of countries in South-
east Asia (ILO Review 1996: 212). • There is no general or universal
In South Africa, money wages and minimum living standard because
employer-provided entitlements to cover the concept of “basic needs” can
SUMMARY
contingency risks are relatively high. Neither be defined in a variety of ways,

the state nor rural kinship support systems depending on the standard or quality
have played a major role because of the leg- of clothing, food and whatever else is
acies of apartheid (ILO Review 1996: 214). required for subsistence.
In fact, kinship support has tended to flow • A high proportion of the so-called
from urban to rural communities, which “social wage” in South Africa is borne
has raised the wage required by the typical by employers.

Key concepts
bargaining councils Nactu
bargaining power sectoral determinations
bilateral monopoly social wage
Cosatu spillover effect
Employment Conditions Commission supplementary living level
Fedusa minimum wages superior worker effect
minimum living level tacit collusion
minimum subsistence level threat effect
For students
1. What would you say is the future of union- 6. Some elements of the South African labour
ism in this country, and what challenges are market could be described as a bilateral
unions facing? monopoly. Discuss this statement.
2. It is often argued that unions cause wages 7. Discuss the economic and social advantages
to increase more than would be the case in and disadvantages of bargaining councils.
non-unionised situations. Discuss how this
8. Much criticism has been levelled against the
is or should be measured, and give some of
extension of bargaining council agreements.
the general conclusions in this regard, both
In your opinion is this criticism justified?
internationally and in South Africa.
Give reasons for your answer.
3. Discuss the possible positive and negative
9. Discuss the arguments for and against the
influences of unions on flexibility and pro-
determination of minimum wages.
ductivity.
10. There is an argument that minimum wages
4. Although strikes and other industrial activ-
interfere with the efficient operation of the
ities are a cost to the economy, this cost
market to the detriment of the economy.
should not be exaggerated. Discuss.
Discuss the validity of this argument.
5. Collective bargaining essentially determines
11. Discuss South Africa’s dual system of min-
wages through the bargaining power of the
imum wage determination.
employer and the union. However, market
forces also influence the outcome of collect-
ive bargaining. Discuss the role of market
forces.
Suggested reading*
Madden, L. 2005. Shaheed, Z. 1994.
Bargaining councils: Which way Gulliver? South Does South Africa need minimum wages as part of
African Labour Bulletin, Vol 29: 1, March. a system of labour standards? Paper presented
at an NMC workshop on minimum wages.
Presidential Commission to Investigate Labour
Pretoria.
Market Policy. 1996.
Restructuring the South African labour market. Standing, G., Sender, J. & Weeks, J. 1996.
Pretoria: Department of Labour. Restructuring the labour market: the South African

challenge. Geneva: International Labour working poor? South African Labour Bulletin,
Organisation (referred to as ILO Review). Vol 29: 6, December 2005/January 2006.
Webster, E. 2006. * The bibliography contains the full list of
Cosatu at the crossroads: serving the core or the references.

6.1 Introduction
6.2 The importance and measurement of
productivity
6.3 Productivity in South Africa
6.4 Considering productivity and wages
together: unit labour cost Productivity
6.5
6.6
Some factors influencing productivity
The importance and types of labour
and labour
6.7
market flexibility
General considerations regarding market
flexibility
flexibility
Go to the ant, thou sluggard; consider her ways, and be wise:

Which having no guide, overseer or ruler, provideth her meat in
the summer, and gathereth her food in the harvest.
T HE B I B L E , P R O V E R B S 6 : 6 8
6.1 INTRODUCTION
Wages cannot be discussed without reference to the functioning and outcome of labour market
productivity – it is the joint outcome of wages processes. This issue is the subject of heated
and productivity that determines whether South debate in South Africa, to such an extent that
Africa is globally competitive. The joint impact the ruling party, the ANC, released a discussion
of wages and productivity is measured by a con- document in this regard (ANC 2005). Various
cept known as unit labour costs. research studies refer either to how inflexible the
The importance and measurement of produc- country’s labour laws are, or that they are no
tivity, productivity issues in South Africa and more inflexible than those of other developed
factors that influence productivity are therefore countries. Flexibility is discussed particularly
examined in this chapter, as well as develop- in the context of the critical imperative to cre-
ments with regard to unit labour costs. The ate jobs in the country, and therefore the per-
following chapter will consider international ceptions of the owners of businesses cannot be
developments with regard to unit labour costs. ignored – they are after all the major job creators
Productivity and flexibility are very close- in the economy. However, perceptions are not
ly linked – a company can usually increase always an accurate reflection of the true state of
productivity if it is able to increase flexibility. affairs, and the issue of flexibility thus needs to
Labour market flexibility is often regarded as be addressed both at the level of fact and at the
an important policy instrument for improving level of perception.

C H A P T E R 6 P R O D U C T I V I T Y A N D L A B O U R M A R K E T F L E X I B I L I T Y
6.2 THE IMPORTANCE AND MEASUREMENT OF

PRODUCTIVITY
Productivity depends to a large extent on the
flexibility that an employer enjoys or has engin- income of some workers at the expense
eered (for instance through a skilled workforce). of others as this will at most have only a
Productivity is of critical importance for the short- or medium-term influence on the
long-term well-being of any country (see accom- living standards of the workers of a coun-
panying box) and deserves proper consideration try as a whole. Productivity is therefore
and understanding. the real link between output and reward
in production. An increase in the produc-
Nothing is more important tivity of individuals over the longer term
for the long-run economic therefore enables these individuals to con-
welfare of a country than sume more.
improving productivity. • An improvement in productivity is
Milton Friedman important to attain a higher economic
growth rate. Productivity improvements,
rather than low wage levels, should pro-
vide countries with an international com-
The importance of productivity
petitive advantage. However, as indicated
An increase in productivity, and especially below, the improvement in productivity
labour productivity, is important for the fol- in the past made a relatively small contri-
lowing reasons: bution to economic growth in South Afri-
ca. In contrast, for many of South Africa’s
• The productivity of human resources major competitors, productivity improve-
determines their wages, while the produc- ments were responsible for a noticeably
tivity of capital determines the return of higher share in their economic growth
its holders. High productivity not only rates.
supports high levels of income but also
allows citizens the option of choosing • Productivity growth is an anti-infla-
more leisure instead of longer working tionary force in that it tends to offset or
hours; it also creates the national income absorb increases in money wages. In this
that is taxed to pay for public services, respect it can help to restrain increases in
which in turn boost standards of living. unit labour costs (see section 6.4 below)
The capacity to be highly productive also and, in so doing, help to maintain a coun-
allows a nation’s firms to meet stringent try’s international competitiveness. As
social standards, which improve stan- will be indicated in section 7.3.2, South
dards such as health and safety, equal Africa does not do well on this score
opportunity and environmental impact. when compared to other countries.
• It is the basic source of improvements in

real wages and thus living standards (see
Fedderke & Mariotti 2002: 850). With 6.2.1 General remarks regarding
regard to the economy as a whole and in productivity
the long term, real income per worker can D EFI N I T I O N S
increase only at the same rate as real out-
put per worker. If income increases more Traditionally, productivity has been defined as
rapidly than real output, the resulting the relationship between real output (i.e. the
inflation will reduce the changes in real quantity of goods and services produced) and
income to levels consistent with the out- the quantity of input used to produce that out-
put improvements. In the same way put (McConnell et al. 2006: 504). It is therefore
income redistribution cannot increase the a measure of input efficiency, which is expressed
in terms of a ratio:
Í
P RO D U C T I V I T Y A N D L A B O U R M A R K E T F L E X I B I L I T Y 6
Productivity =
units of production Productivity is normally regarded as the
quantity of output
SUMMARY
e.g. relationship between the quantity of
quantity of input units of capital or
output and the quantity of input, but it is
labour or both more appropriate to regard the concept
holistically, i.e. also to have regard for
sold output, consumer satisfaction, qual-
If, for instance, output increases with unchanged ity and value added.
inputs, productivity increases. Similarly, produc-
tivity will be higher if output remains unchanged
with reduced capital or labour inputs.
There are various forms of productivity: SHO R T C O M I N G S O F P R O D U C T I V I TY
D A TA
• Labour productivity is defined as the num-
ber of units of output obtained from a unit of Apart from the shortcomings of the productivity
labour input (i.e. production divided by num- concept, the following shortcomings exist with
ber of workers). regard to productivity data:
• Capital productivity is the number of units of • Most productivity studies tend to focus on
output per unit of capital input. labour productivity, but on closer inspection
• Multifactor productivity or total factor pro- “labour productivity” appears to be a mis-
ductivity takes account of both labour and nomer. In the first instance, it creates the
capital inputs, and is the number of units of impression that labour (i.e. workers) is fully
output obtained from the combined inputs of responsible for labour productivity. This is
labour and capital. only partly true. As will be pointed out below,
most of the factors that govern productivity
The traditional approach to defining produc- can largely be influenced by management, thus
tivity suffers from two shortcomings. First, it labour productivity is as much the responsib-
takes no account of the quality of the product ility of management as of workers. Even deci-
produced or service provided. By concentrating sions made at sectoral or national levels can
only on quantities, quality may suffer, and this have a direct bearing on labour productivity.
may affect the market share of the company and In situations where workers have very lim-
reduce profits. This leads to the second short- ited influence over decision-making at plant
coming of the traditional approach, namely, that or other levels, it is difficult for them to have
productivity cannot be defined without reference more than a partial effect on productivity.
to the consumer. Productivity should thus com-
pare sold outputs with inputs. • Labour productivity can increase without
As a result of these shortcomings, the mod- workers having any role in it. Labour pro-
ern approach is increasingly to see productivity ductivity can, for instance, increase if more
at the workplace as a holistic concept, where capital equipment is utilised (production can
account is taken of quality, quantities of inputs be increased by the utilisation of more capital
and outputs, consumer satisfaction, etc. A useful equipment, whereas the number of workers
approach is to concentrate on value added, i.e. may remain the same or even be less). Labour
the value that labour and capital add to the total productivity will then increase at the expense
output of the enterprise for the satisfaction of of capital productivity. It can be argued that in
the consumer. This is measured by subtracting these circumstances the employer (who made
the total cost of inputs from the total value of the investment in capital equipment), and not
sold outputs. the worker, should receive the benefit of the
labour productivity increase. On the other
It is true hard work hand, it can also be argued that as the workers
never killed anybody, carry more responsibility and their skills levels
increase as a result of the capital equipment
but I figured why
they use, they should also share in the benefits
take the chance.
of the increase in labour productivity. Overall,
Ronald Reagan however, there may be no increase in total fac-

tor productivity, and neither the employer nor

the employee will then be able to share in the Productivity data should take account
benefit of any productivity increase. of both labour and capital productiv-
SUMMARY
ity, because labour productivity often
• Similarly, labour productivity can also
increases at the expense of capital pro-
decrease as a result of factors not under the
ductivity. For instance, if production
control of workers. This will happen, for
processes are suddenly mechanised,
instance, if there is a cyclical downswing in the
capital will replace labour, resulting in
economy (less production, same workforce),
an increase in labour productivity and a
or if there are interruptions in the production decline in capital productivity.
process due to a lack of raw materials or poor
equipment. Workers should not be expected to
carry the burden of such productivity decreas-
es alone.
• Another problem with the concept of produc- P R O D U C T I V I TY A N D E M P L O YM EN T
tivity that should by now be apparent is that it A general misconception regarding productiv-
is a very elastic concept – it changes with the ity is that it necessarily leads to a reduction in
business cycle. During an economic upswing, employment, as such arguments ignore society’s
output may increase faster than employment, desire for additional output and the fact that
and this will be reflected in improved labour rising productivity increases incomes and aggre-
productivity. During a downswing, output gate demand (see McConnell et al. 2006: 521).
will decline more rapidly than employment Increases in productivity enable society to
(employers try to stabilise their workforce or achieve higher levels of output and, as a result,
are discouraged by legislation from retrench- of employment and of living standards (see box
ing), which results in poor labour productivity in section 6.2). The Labour Market Commis-
data even though the workers may not be less sion (1996: 75) states that there is no causal link
“productive”. The same is true for capital pro- between increased productivity and job losses
ductivity. – as long as output increases more rapidly than
productivity, employment levels will be main-
• As stated earlier, the quality of output is not tained or increased.
always taken into account when productivity However, these arguments apply to the econ-
is measured. A better quality product may, omy as a whole and it cannot be denied that
for instance, be produced without increas- improvements in labour productivity have in
ing its price, and this will imply a productiv- some instances led to labour redundancies at
ity improvement, but will not be reflected in the level of the individual enterprise. Under such
the data. Improvements in the quality of out- conditions it is understandable that the workers
put while maintaining unchanged inputs are or unions involved do not view favourably argu-
obviously an improvement in productivity, but ments that the country as a whole benefits from
normal productivity instruments will under- improvements in productivity. If these miscon-
state productivity growth. ceptions and suspicions regarding improvements
in productivity are to be allayed, employers and
• Any measurement of productivity should
the government will need to give much greater
reflect the combined influence of a number consideration to the following two aspects:
of factors, including changes in technology,
capital investment, utilisation of production • The benefits of productivity improvements
capacity, management skills, the quality of should be shared more equitably with work-
labour, economies of scale and the structure ers. All stakeholders should gain from produc-
of the economy. Because of the methodologic- tivity improvements.
al shortcomings in measuring labour produc- • Workers who are negatively affected by pro-
tivity as such, it is important to give attention ductivity improvements should, as far as
not only to labour productivity, but at the possible, be accommodated elsewhere, for
same time also to capital and multifactor pro- instance by being retrained and assigned to
ductivity. other jobs.

One of the greatest recent production improvements in South Africa
r
labor-saving inventions seem to have been achieved through the shed-

of today is tomorrow. ding of labour.
McConnell et al. (2006: 525) have found
Vincent T. Foss
that there is no systematic relationship between
Meth (1997: 30) has also found some evidence productivity and employment growth in indus-
that job losses associated with productivity tries in the USA. They found that productivity
improvements often occur during phases of increased in 92 of 100 industries over the per-
economic “distress”. Frequently, productiv- iod 1991–2001, while employment increased in
ity improvement results from both output and 50 industries and declined in 50 others. Their
employment declining, with the latter falling conclusion is that one cannot generalise on the
faster than the former. This leads to a simul- relationship between productivity growth and
taneous increase in productivity and unemploy- employment growth.
ment. As will be indicated in the next section,
6.3 PRODUCTIVITY IN SOUTH AFRICA

After increasing only marginally in the 1980s, increase of 2.56% per annum during the period
labour productivity increased rapidly from 1989–1995, and even lower before that.
the beginning of the 1990s, and has generally However, when one considers the continuous
increased more rapidly than capital productivity decline in employment in the 1990s (see section
(see Figure 6.1). Table 6.1 shows that the increase 3.2.2), it becomes apparent that the improve-
in labour productivity averaged 3.76% per annum ment in labour productivity was probably part-
for the period 1996–2004, compared to the lower ly achieved through the shedding of labour, i.e.
140
135 Labour productivity
130
125 M
Multifactor
Index 1996 = 100
productivity
pr
120
115
110 Capital productivity
105
100
95
1996 1997 1998 1999 2000 2001 2002 2003 2004
Year
Figure 6.1 Productivity in the private economy

National Productivity Institute 2005
Source:

reductions in the labour force. The economy driving force of the economy during the 1990s,
continued to experience a sharp increase in cap- whereas increases in factor inputs (especially cap-
ital intensity during this period, which enabled ital) were the main drivers in earlier years. His
employers to reduce their workforce and main- findings can be summarised thus:
tain production. This changed only after 2000,
of which
when both labour productivity and employment Growth in Labour Capital Technology/
increases were achieved at the same time. real GDP inputs inputs productivity
Table 6.1 shows that capital productivity
has increased at an average rate of 2.46% per 1970s 3.21 1.17 2.54 –0.49
annum since 1996 compared to a decline in the 1980s 2.20 0.62 1.24 0.34
six years before that. What is significant is that 1990s 0.94 –0.58 0.44 1.07
for the first time capital productivity broke the
downward trend that had developed during the Manufacturing is the one exception to this gen-
previous two decades by starting to improve in eral trend – in manufacturing, output growth
the middle of the 1990s. This probably indi- was increasingly driven by increased capital
cates that producers started to utilise capital inputs, whereas total factor productivity actually
more effectively in the economy, without blindly dragged growth down (a negative contribution).
replacing labour with capital irrespective of pro- In an International Monetary Fund working
ductivity considerations. However, the increase paper, Eyraud (2009: 5) found that labour pro-
in capital productivity still lags behind that of ductivity growth contributes much less to eco-
labour productivity, which suggests that the nomic growth in South Africa than in a panel
replacement of labour by capital has not ceased, of comparable countries, pointing out that had
as indicated in section 3.4 (see also Edwards & “labor productivity in South Africa grown at
Golub 2003: 677). the same rate as in panel countries, all else being
Overall, there was an encouraging increase in equal, its average annual GDP growth would
multifactor productivity in the 1990s, after very have been 3 percentage points higher – sustained
low increases up to 1995. over a decade, that would make a substantial
Fedderke (2002) calculated to what extent difference in living standards”.
total factor productivity as opposed to capital Table 6.1 also compares productivity increas-
and labour inputs contributed to growth in real es with increases in real earnings. Labour pro-
GDP from 1970 onwards. He found that the ductivity increased more rapidly than real earn-
1970s and 1980s saw growth that was mostly ings after the mid-1980s. However, the position
determined by the growth in capital inputs and of earnings at current prices is quite different:
to a lesser extent labour inputs, with very little current earnings increased much more rapidly
contribution by higher productivity. In the 1990s than productivity. From an economic point of
the growth in labour inputs contributed negative- view, this has a negative impact on South Afri-
ly (with formal sector employment declining) and ca’s so-called “unit labour cost” (which takes
the contribution of capital inputs also declined. account of both wages and productivity develop-
Instead, the greatest contributor to GDP growth ments) and its international competitiveness.
during this period was the contribution by pro- This is further discussed in the next section and
ductivity. Efficiency gains thus became the main in section 7.3.2.
Table 6.1 Productivity changes in the private economy
Average % change per annum

1981–1984 1984–1989 1989–1995 1996–2004
Labour productivity 1.45 1.14 2.56 3.76
Capital productivity –2.88 0.40 –0.28 2.46
Multifactor productivity –0.45 0.88 1.19 3.17
Real earnings per employee 1.47 0.13 2.22 3.20

P R O D UCTIVITY CHANGES PER SECTOR
Productivity data in various sectors during the in all sectors, with the highest increases taking
period 1996–2004 are given in Table 6.2. Dur- place in transport and the lowest in mining.
ing this period the transport and construction Productivity cannot be considered in iso-
sectors experienced the highest increases in lation from wage increases. This relationship
labour productivity, and the trade and finance is addressed by using a concept known as unit
sectors the lowest. Capital productivity increased labour cost. Unit labour cost developments in
to a lesser extent, with the highest increases various sectors are discussed in the next section.
also being in transport. The combined effect of A comparison with other countries is important
the changes in labour and capital productivity from South Africa’s competitiveness position.
resulted in multifactor productivity improving This is discussed in Chapter 7.
Table 6.2 Productivity changes per sector, 1996–2004
Average % change per annum

Multifactor productivity Labour productivity Fixed capital productivity
Mining 1.0 4.2 –0.7
Manufacturing 2.8 4.5 1.7
Construction 2.3 7.2 –3.4
Trade 2.2 2.0 2.2
Transport 6.8 11.5 4.5
Finance 2.2 0.2 3.5
Private economy 3.2 3.8 2.5
SUMMARY
Labour productivity in South Africa has improved quite significantly in recent years. This may be
related to the substitution of capital for labour and probably accounts for developments prior to
1995, as indicated by low or negative increases in capital productivity. However, after 1996 both
capital and labour productivity increased.
6.4 CONSIDERING PRODUCTIVITY AND WAGES TOGETHER:

UNIT LABOUR COST
6.4.1 The concept of unit labour cost ments, rather than low wage levels, should pro-
The above discussion of the importance of provide countries with an international competitive
ductivity improvement gives three reasons why advantage. Finally, productivity growth is an
productivity and wages should be considered anti-inflationary force in that it tends to offset or
together. First, productivity is the basic source absorb increases in money wages.
of improvements in real wages. For the economy Therefore, changes in labour costs must be
as a whole and in the long term, real income considered in relation to the changes in pro-
per worker can increase only at the same rate ductivity that may have taken place at the same
as real output per worker. Productivity is there- time. The extent to which changes in productiv-
fore the real link between output and reward in ity and wages have moved together is determined
production. Furthermore, productivity improve- by unit labour cost, as previously mentioned.
129
A
Unit labour cost takes account of changes in es in manufacturing during the latter part of the
remuneration costs as well as labour produc- 1990s grew at a lower rate and labour productiv-
tivity. Unit labour cost is the cost of labour to ity increased at a slightly more rapid rate than in
produce one unit of output. It is also referred earlier years. This resulted in far lower increas-
to as remuneration cost per unit produced. The es in unit labour costs, which might increase
change in unit labour cost is obtained by div- South Africa’s competitiveness relative to other
iding the change in average remuneration per countries. However, it is difficult to reach a firm
worker by the change in labour productivity: conclusion because changes in employment data
during those years impact on productivity data.
Change in unit labour cost = (Unit labour cost in South Africa is compared to
Change in average remuneration per worker that of other countries in section 7.3.2.)
However, it might not be totally relevant to
Change in labour productivity
compare nominal (or money) wage increases with
An increase in unit labour cost implies that the labour productivity. One should make allowances
remuneration of workers is increasing more for inflation, because workers cannot be expected
rapidly than labour productivity, and this will to bear the brunt of inflationary pressures alone
have a negative effect on the cost of production – wage increases should in some way make up
and therefore on competitiveness. for inflation, especially if inflation originates
Figure 6.2 shows the relationship between from external sources such as sharp declines in
wage increases and changes in labour produc- the exchange rate. Figure 6.3 consequently com-
tivity in manufacturing and how this impacts pares both current and real wage increases, i.e.
on unit labour cost. Nominal wages increased after allowing for inflation, with productivity
at a higher rate than productivity in every year, increases from 1996 to 2005. It is clear from this
resulting in a relatively sharp increase in unit graph that current wage increases were far higher
labour costs. What might become significant if than productivity increases, but that productivity
the current trend continues is that wage increas- increased at higher rates than real wages.
20.0
15.0 Earnings
10.0 Unit labour

b u costs
bou
% change
5.0
Productivity
0.0
1985
5
1986
6
1987
7
1988
8
1989
9
1990
90
1991
91
1992
92
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
–5.0
Year
Figure 6.2 Changes in earnings, productivity and unit labour cost in manufacturing
Changes in the definition of employment would have impacted on productivity data after 2000
Source:

220
200
180
Index 1996 = 100
160
140
*
120
100
Current wages
80 Productivity
Real wages
60
96
97
98
99
00
01
02
03
04
05
p
p
Se
Se
Se
Se
Se
Se
Se
Se
Se
Se
Year
Figure 6.3
* Series not Index of wages
comparable from 3rdand productivity
quarter 2002
* Series not comparable from 3rd quarter 2002
Source: SA Reserve Bank, Data series 7013L, 7013D and 7032N
The increases in labour productivity were, There is a common misconception that

however, achieved by reducing the workforce blue-collar workers alone are responsible for the
during the late 1990s, which in turn may have increase in unit labour costs. However, blue-col-
been caused by the sharp increases in real wages lar workers earn on average only a third of what
that had taken place in earlier years. There may their white-collar colleagues earn. Depending
thus be a link between the increases in the real on the relative numbers of workers involved
wages in earlier years and the increases in pro- and their productivity, blue-collar workers will
ductivity in later years. therefore not necessarily have the greatest influ-
ence on labour costs. This is probably why the
6.4.2 Unit labour cost in various Labour Market Commission (1996: 51) con-
sectors cluded that depressing the wages of unskilled
workers may have a relatively small impact on
Figure 6.4 indicates the increase in unit labour average unit labour costs. At the same time, the
cost in various sectors for the period 1996–2004. Commission also argued that, because of the
For the private, non-agricultural economy as a high burden of adjustment international compe-
whole, the annual increase over the period was tition places on South African enterprises with
5.6%, which is a substantial decline from far a high unskilled labour component, the wages
higher increases in previous years. An important of unskilled workers in certain segments of the
reason for the lower increases is that inflation South African economy may well be compara-
was significantly lower during the 1990s than tively high relative to productivity.
during earlier periods. However, all sectors con-
tinued to experience a relatively high increase in
6.4.3 Impact of wage increases on
unit labour cost, with the mining, electricity and
productivity: efficiency wages
finance industries being the highest. This was as
a result of labour productivity not keeping up Thus far wage increases have simply been com-
with relatively high wage increases. pared to productivity increases, with the implicit
131
Mining 8.6
Manufacturing 5.6
Electricity 8.6
Construction 0.9
Trade and accommodation 5.2
Transport and communication 1.6
Finance 8.0
Total 5.6
0.0 2.0 4.0 6.0 8.0 10.0

% change
Figure 6.4 Change in unit labour cost in the private economy, 1996–2004

Source:
assumption that there should be some relation- lent increase in productivity is called the effi-
ship between high productivity increases and ciency wage hypothesis.
high wage increases – if workers can increase There are various reasons why this might be
their productivity, they should benefit through the outcome:
higher remuneration. However, it is possible
that this can work the other way – under certain • Higher wages might enable (or induce) the
circumstances a wage increase can lead to an employer to recruit employees more careful-
equivalent productivity increase. This is called ly, which means better job matching, and the
the efficiency wage hypothesis. employer might also be induced to employ
Most discussions on wages and productivity better quality workers.
explicitly or implicitly assume that wage increas- • A higher wage might make employers more
es should be linked to productivity increases.
willing to invest more in their workers, for
However, higher wage rates (e.g. as a result of
example through training and development, in
collective bargaining) can conceivably also lead
order to increase their productivity and make
to higher productivity (Ehrenberg & Smith,
the wage increases affordable.
1985: 400; McConnell et al. 2006: 232). A dir-
ect comparison between wage and productivity • Workers’ morale might improve due to their
data is even more difficult – how do you sep- higher wages, and their rate of absenteeism
arate cause and effect? Productivity increases might be lower because their opportunity cost
are not always the origin of improvements in of not working (i.e. the wages they lose when
remuneration levels – high wage increases could not working) is higher.
in fact result in job-replacing mechanisation,
which often means higher productivity. So pro- • Workers’ nutritional and health levels might
ductivity, wage increases and job losses are inter- improve, positively affecting their physic-
twined in various ways. al vigour and mental alertness, and therefore
The theory that higher wages can, under cer- increasing their productivity (McConnell et al.
tain circumstances, result in at least an equiva- 2006: 233).

A
• Workers might, at least in the short term, be does indeed happen, it might be more efficient
motivated by the higher wages to improve for the employer to pay higher wages, as this
their productive effort. They might even do might reduce the unit labour cost.
so over the long term if they fear being dis-
missed from a well-paying job. Labour turn-
over, i.e. the rate at which workers quit their
jobs, might also reduce, which would be to the • Unit labour cost measures the joint
advantage of the employer. impact of changes in remuneration
costs and labour productivity on the
• In a less positive vein, labour productivity cost of output. It is defined as the cost
might also increase as a result of wage increas- of labour to produce one unit of out-
es if the employer attempts to reduce the wage put.
bill by becoming more capital intensive, i.e.
replacing workers with machinery. Labour • Unit labour cost in South Africa has
productivity will then increase at the cost of been increasing quite rapidly, which
employment. The employer might also pass on indicates that wages have increased
SUMMARY
higher wage costs to the consumer. The extent without concomitant increases in
to which this might happen will depend in part productivity. However, when one
on the monopolistic power of the employer considers real wages, the increase in
(i.e. on the extent of competition prevalent in labour productivity in recent years has
the marketplace) and on the sensitivity of con- exceeded the real wage increases.
sumer demand to price increases (the elasticity • Wage increases can conceivably lead
of demand – see section 3.7.3). to higher productivity due to factors
such as improved recruitment, train-
There is therefore a possibility that labour pro- ing, higher morale and better nutri-
ductivity will increase as a result of a wage tion. This is called the efficiency wage
increase. However, what is important is not hypothesis. However, the increase in
whether productivity increases, but whether it productivity will not necessarily be
increases by more than the wage increase, i.e. sufficient to compensate fully for the
whether the productivity improvement fully higher labour costs.
compensates for the labour cost increase. If this
6.5 SOME FACTORS INFLUENCING PRODUCTIVITY

Productivity can be improved in a number of firms and shedding low-wage and low-produc-
ways, and the labour market consequences are tivity jobs, it will be accompanied by significant
not always the same. For instance, if improved readjustment, which might lead to instability.
productivity is achieved by improving the Labour policies will have to be geared to facili-
skills of the workforce, it will benefit both the tate the creation of replacement jobs to avoid
enterprise and the employees of the enterprise. high unemployment.
However, this will primarily be a management
responsibility, whereas productivity improve- An efficient employee is one who
ment through greater union–management keeps on his toes but never steps
cooperation will require a great deal of trust on the other fellow’s.
between management and unions. Anonymous
Greater workplace and workforce flexibility
might also increase productivity, but might also Productivity improvements can thus have
result in less favourable working or employment different outcomes depending how they are
conditions, and might not always be sustainable achieved. It is important to take these broader
without the support of the union. If productiv- implications into account when considering the
ity is improved by discouraging labour-intensive various factors that influence productivity.
133
( A ) QUALITY OF THE LABOUR FORCE awareness are important contributing factors to

The quality of the labour force probably has the poor productivity performance.
biggest impact on productivity; thus it is listed as The lack of competition in the South African
the first factor that impacts on productivity. As market and insufficient investment in research
indicated in Chapter 9, the skills level of South and development are among the many factors
Africa’s workforce leaves much to be desired. contributing to poor productivity that can be
There is a high rate of illiteracy and employers laid at the door of management.
invest less in training than do those in many An important part of the responsibility of
other countries. In addition, there appears to be management is work restructuring and reorgani-
a shortage of skills in most phases of the busi- sation to create an environment conducive to
ness cycle. Obviously these factors have a nega- productivity (ILO Review 1996: 5).
tive influence on South Africa’s productivity per-
I’ve met a few people in
formance.
Furthermore, if the Employment Equity Act
my time who were enthusiastic
and especially the BBBEE Codes exacerbate the about hard work. And it was
shortage of skills by compelling enterprises to just my luck that all of them
become equitably representative of the popu- happened to be men I was
lation while the supply of skilled black people working for at the time.
is insufficient, the impact on productivity will Bill Gold
be negative (see section 10.7.4). However, the
Employment Equity Act might have a positive
effect if it leads to the better utilisation of black (D ) S O C I O P O LI T I C A L C I R C U M S T A N C ES
people and women in a manner that retains flex-
ibility and takes into account the circumstances Social circumstances in South Africa are an
of individual enterprises and sectors. important factor contributing to low productivity
growth. In particular, the lack of proper housing,
( B ) L ABOUR MARKET FLEXIBILITY
long travelling distances, unsatisfactory health
care and nutrition, and various other socio-
Numerous aspects of labour market flexibil- economic factors play an important role. HIV
ity can have a critical impact on productivity. and AIDS is also likely to have a negative effect
Among these are flexible working practices and on productivity, as outlined in section 2.6.2.
working time, multi-tasking and extended job
descriptions, transfers within and between work- ( E) P
RO D U C TI V I T Y I N C E N TI V E
places, and appropriate job security. S C H EM ES
However, because this is a very topical issue
and also quite complex, it will be discussed in There are various schemes whereby remunera-
section 6.6, with reference to the various types of tion and productivity can be linked or produc-
flexibility, and whether the South African labour tivity promoted. However, such schemes should
market can be described as “flexible” or not. not be seen as a panacea for solving productivity
problems and should comply with a number of
conditions. There should, for instance, be a dir-
( C ) MANAGEMENT RESPONSIBILITIES
ect link between personal or team performance
The Labour Market Commission (1996: 76) and remuneration. Workers should have con-
has indicated that a lack of management skills trol or influence over the factors that drive both
in leadership, mentoring, work reorganisation performance (output) and payment. The system
and decision-making abilities is a major con- should not be used as a method for reducing the
straint on productivity improvement. Many of fixed or guaranteed portion of pay and should
the factors that influence productivity can be not be implemented in an autocratic, top-down
found in the organisation itself and can large- way. Furthermore, there should be joint develop-
ly be influenced by management. The remaining ment of the common purpose of such a scheme,
factors are comprised of external influences. It the method by which productivity is to be
is generally accepted that South Africa’s lack of measured and the targets. The mining industry
management skills and absence of productivity attempted such initiatives in 1997, and various

lessons can be learnt from this experience (see adversarial and hostile relationship between
for instance, Barker 1997b). management and unions at shop floor level; a
general absence of workplace democracy and
By working faithfully inadequate worker participation structures; poor
eight hours every day, identification by the workforce with productiv-
you may eventually get ity issues, and volatile industrial relations.
to be a boss and work In the new LRA, the government has
twelve hours a day. attempted to improve employer and employee
cooperation by making provision for workplace
Robert Frost forums (see section 11.5.2). These forums do not
seem to have garnered much support, in con-
( F ) M A NAGEMENT –UNION trast to the position on workplace cooperation
C OOPERATION in Germany.
The labour market is often characterised by a An important question is whether unions on
confrontational relationship between employ- their own have a positive or negative influence in
ers and workers. In many cases there is mutual so far as productivity is concerned. Section 5.4.2
distrust, and this makes productivity bargaining should be consulted in this regard.
much more difficult. However, employers in
the past have also not given enough atten- (G ) P
RO D U C TI V I T Y S A
tion to sharing the benefits of productivity Productivity SA, previously known as the
improvements with employees, or addressing National Productivity Institute (NPI) plays an
any possible negative effects of productivity important role in increasing productivity in
improvements on employees. This has resulted South Africa (website: www.npi.co.za). Among
in opposition from unions to productivity bar- other things, the NPI is responsible for the
gaining. Employers are also often unwilling to promotion of productivity awareness, and for
disclose financial and other information during education and training. It provides consulting
collective bargaining negotiations, which makes services to both the private and public sectors.
a joint approach to productivity improvement However, this role was criticised by the Labour
and the sharing of the benefits of such improve- Market Commission (1996: 79) on the grounds
ment difficult. that there appears to be no obvious reason why
a publicly funded body should operate in this
There is an English proverb
type of market.
that says “there are no bad
students, only bad teachers”.
I believe it also applies to
a company. There are no bad There are various factors that influence
employees, only bad managers.
SUMMARY
productivity, among others the qual-

TS Lin ity of the labour force, management
responsibilities, sociopolitical circum-
The Labour Market Commission (1996: 76) stances, productivity-linked pay, labour
has identified the following elements that have market flexibility and management–
a negative impact on productivity: authoritar- union cooperation.
ian and racist supervision of the shop floor; an
6.6 THE IMPORTANCE AND TYPES OF LABOUR MARKET FLEXIBILITY

Low productivity and unemployment could be demand and supply conditions, unemployment
caused by labour markets not adjusting as quick- might, according to supporters of flexibility
ly as they should to changing circumstances. If theory, be reduced (Organisation for Economic
markets could adjust to be more in line with Cooperation and Development (OECD) 1986).

For an excellent discussion of the flexibility lation towards the design of labour legislation
debate, see Gladstone, Wheeler, Rojot, Eyraud with economic policy goals in mind.
and Ben-Israel (1992).
Labour market flexibility refers to the extent
to which an enterprise can alter various aspects Policy issue: ANC Discussion Document
of its work and workforce to meet the demands on flexibility
of the business, for example the size of the work-
In 2005 the ANC released a Discussion
force, the content of jobs, working time, etc.
The argument is that labour market rigidities Document that relates to flexibility, but
prevent enterprises from being as productive as after a brief flurry of media reporting, all
they might have been because enterprises are reference to the study ceased. The purpose
unable to adjust to technological transforma- of the document was to consider meth-
tion, changing economic circumstances, external ods of revitalising small and medium-sized
shocks (e.g. an oil price rise), and more intense enterprises (ANC 2005) and it refers to the
international competition. The labour mar- “unintended consequences” of the LRA and
ket therefore does not operate as efficiently as the BCEA for small businesses. Some of
it should and productivity outcomes are poor. these unintended consequences include the
Employers are also said to be loath to employ “hassle factor” associated with employing
labour on a permanent basis because of its high
labour, higher costs to companies, the use
cost. They therefore switch to capital-intensive
of short-term contracts, the proliferation of
technology, or lose market share. The end result
is reduced employment. It has been shown that labour brokers and the increasing reliance
in OECD countries with flexible labour laws, on the informal sector to absorb those who
the employment rate is 2 to 2.5% higher than are unable to find gainful employment in
in other OECD countries (see sources quoted by the formal sector as a consequence of min-
World Bank 2006: 26). imum wages (Institute for Futures Research
Flexibility and labour rights are very closely 2005: 3). The policy document then raises
interrelated. In South Africa, the protection of the the possibility of a dual labour market (see
rights of labour has been an important element section 4.2.3) to accommodate more flex-
of the democratic order since 1994, and some ibility. The following are raised as possible
labour rights are enshrined in the Constitution of elements of such a policy:
South Africa, for instance the rights to fair labour
practices, freedom of association and collective • Allowing younger people a more flexible
bargaining (section 23 of the Constitution of the set of arrangements with regard to min-
Republic of South Africa). Moreover, the protec- imum wages, limits on overtime and dis-
tion of labour rights is in line with South Africa’s missal requirements
obligations as part of the international commun- • Allowing industrial development zones
ity. As such, these rights are sacrosanct and any where labour laws will be more flexible
debate about the appropriateness or otherwise of
• Allowing more flexibility in labour-inten-
such rights is superfluous.
sive sectors, such as tourism, textile and
The debate about labour market flexibility
clothing, the household and agricultural
should not take place as binary policy alterna-
sectors
tives, i.e. a stark choice between flexibility and
regulation. This is conceptually and empirically • Having more flexible labour laws for
wrong (Bhorat & Cheadle 2009: 39). The issue companies that employ fewer than 200
is much more complex and this is not always people as opposed to the current cap of
recognised by the protagonists of either of the 50
two extreme positions. Deakin and Wilkinson
(as quoted by Benjamin & Theron 2007: 51)
Four types of flexibility have been identified by
in this context refer to the sterile opposition of
the ILO (Ozaki 1999: 5):
rights and efficiency. The alternative to this ster-
ile opposition, these authors suggest, is for eco- • Contracts of employment flexibility. This refers
nomic insights to shift policy away from deregu- first of all to the employer’s ability to termin-
µ BACK TO CONTENTS
ate contracts of employment, and whether the in the LRA preventing unfair dismissals and dis-
employer is restricted in terms of his or her hir- couraging retrenchments, can be described as an
ing decisions. Secondly, it refers to the ability important social advance.
of the employer to have recourse to so-called However, job security is far from cost free (Le
“atypical employment contracts”, for example Roux 1994: 119–120). Not only do legal and
part-time work, temporary work, seasonal other processes incur high costs, but job secur-
employment and fixed-term contracts. ity regulations are blamed for the reluctance of
• Wage flexibility. This is affected by, for employers to engage new workers on indefin-
instance, the imposition of a minimum ite-period contracts. In addition, employers may
wage, and the extent to which wages can be substitute labour with capital or utilise subcon-
linked to performance. Bargaining structures tractors, casual and temporary workers, or they
also impact on wage flexibility, for example may employ workers on fixed-term contracts
whether bargaining takes place at a centralised only. In the end, unemployment may simply be
or decentralised level. increased.
• Working time flexibility. This relates to nor- Britain has invented
mal or overtime working time, or working
a new missile. It’s called
weekends or at night.
the civil servant – it doesn’t
• Work organisation flexibility. This is deter- work and it can’t be fired.
mined by the extent to which new forms of
work organisation are introduced, for instance General Sir Walter Walker
through the multi-skilling and multi-tasking of
workers, and the extent to which teamwork is Job security for those workers already in
encouraged. employment may thus be to the detriment of
labour intensity and therefore to the disadvan-
Some of the most important elements of flex- tage of workers trying to enter the labour mar-
ibility in the workplace are now discussed in the ket for the first time (see sources quoted by Le
context of these different types of flexibility. Roux 1994).
On the other hand, greater job security may
encourage employers to invest more in workers
Labour market flexibility refers to the
in terms of training, and workers may develop
SUMMARY
extent to which different elements of the a greater loyalty towards the enterprise. It may
labour market can adjust to changing also encourage more selective recruitment by the
circumstances and is said to be an employer and thus ensure better job matching,
important element of the battle against which increases productivity. It should result
unemployment. in workers being less resistant to technological
change, as the possibility of job losses as a result
of such changes is much reduced. In fact, work-
ers who have greater job security will be more
6.6.1 Flexibility in contracts of amenable to operational changes. All these fac-
employment: job security and tors should improve productivity.
hiring decisions Apart from anecdotal evidence, there is little
clear-cut information to prove either the nega-
The ability of an enterprise to adjust the size of
tive or the positive effect of high job security.
its workforce to changes in the demand for the
The ILO (Ozaki 1999: 15) also states that even
product (i.e. the ability to hire or fire) and to use
where legislation was relaxed, not all employ-
various types of employment contract, such as
ers seemed to be taking advantage of the new
short-term contracts and subcontracting, is also
possibilities of flexibility in employment. This is
referred to as external or numerical flexibility.
because employers often realise the advantages
of job security for themselves, as outlined above.
( A ) J O B S ECURITY
This conclusion is confirmed by other ILO
The increase in job security in South Africa since research, which considered a number of factors
the advent of democracy, through the measures that may impact on the employment intensity
137
of economic growth. The conclusion is the fol- Niekerk (2006) suggests that the requirements of
lowing: “There was, however, one noteworthy procedural fairness have contributed more than
surprise in the study: stricter employment pro- any other factor to perceptions that the South
tection was not found to be significantly relat- African labour law is inflexible. The Tokiso
ed to the employment intensity of growth” (ILO Report on Dispute Resolution (Tokiso Dispute
2005b). Settlement 2005) found that 78% of those cases
Many countries have nevertheless relaxed job in which findings are made against employers
security regulations, for example by extending incorporate an element of procedural unfairness.
the authorised probationary period, moving The study concludes that the most likely inter-
away from government approval for retrench- pretation of these figures is an intense focus on
ments and making temporary employment con- the minutiae of procedure that currently besets
tracts possible (Gladstone et al. 1992: 24). Other allegations of unfair dismissal. Bhorat (2009: 33)
possibilities are broadening the scope of exclu- considers a number of research reports and also
sions from unfair dismissal legislation and eas- comes to the conclusion that there is an overly
ing or abolishing administrative controls such strict interpretation of the requirement for pro-
as trade union consultation requirements (Ozaki cedural fairness by employers, labour consult-
1999: 14). Germany has been described as the ants and lawyers, the CCMA and the Labour
“top reformer in 2004” (World Bank 2006). Court. This was never the intention of the legis-
New businesses can now issue four-year term lation.
contracts for employees, and small businesses Apart from fairly extensive procedures with
(with fewer than 10 employees) are excluded regard to individual dismissals, there are also
from onerous rules on dismissals. various procedures relating to retrenchments.
In 2005 Australia, for instance, excluded Such procedures in effect introduce a morator-
employees working for small and medium-sized ium of 60 days on retrenchments. On the one
undertakings (with fewer than 100 employees) hand, time limits can, in principle, serve a use-
from unfair dismissal protection to encour- ful purpose by promoting certainty and the
age such businesses to “take a chance about finalisation of disputes, and can also ensure that
employing new people”. However, termination employers are absolutely sure about the need for
for a discriminatory reason remained prohibited. retrenchment before they dispatch workers into
For larger businesses, i.e. with more than 100 the practically inevitable abyss of unemploy-
employees, an employee will have had to have ment. The moratorium also assists parties in the
been employed for more than six months before consultation process. On the other hand, such
he or she can lodge an unfair dismissal applica- moratoriums do not help to bring about more
tion (see section 7.6.2 and www.workchoices. certainty and finality with regard to the retrench-
gov.au and www.australianbusiness.com.au). ment process, and any eventual decisions taken
Even in countries that have had high job secur- by the employer can be overturned by judicial
ity in the past, this was often balanced by other processes.
factors. Japan, for example, had a system of life- There are also other mechanisms to pro-
long employment before the recent economic tect the job security of employees, for instance
woes resulted in decreased job security. This was a right to strike about retrenchment. This does
balanced by a high degree of internal flexibility not apply to employees in enterprises with fewer
– workers were well trained and, in addition, than 50 employees. Excluding small business is a
were rotated within the enterprise as a rule every step in the right direction, but the cut-off point
three to five years. Such rotation was not always is probably too low. In addition, the size of a
upwards or even sideways, and could result in retrenchment that can trigger the right to strike
less favourable conditions of employment. This (i.e. a retrenchment of between 5 and 10% of
led to the multi-skilling of workers, and ensured the workforce in any one year) is so small that,
that they were adaptable to changing circum- practically speaking, there will often be very
stances (Hanami 1991). little distinction between a small-scale retrench-
There is fairly extensive protection of employment and a large-scale retrenchment. The ration-
ees against unfair dismissals in South Africa in ale for covering only large-scale retrenchments
terms of the LRA, both with regard to proced- by such provisions is that these retrenchments
ure and reasons for dismissal. However, Van can have severe and substantial socioeconomic
o
consequences. However, this motivation does • International labour standards do not require
not apply when retrenchments are relatively a formal hearing prior to dismissal – this
small. relates to the fact that the law does not pre-
It is crucial for enterprises to be able to vent an overly strict interpretation by the
adjust quickly, though fairly, to changing mar- CCMA of the dismissal requirements in the
ket demands and thus remain competitive, both legislation (as referred to above)
locally and globally. An inability to do this • International practice recognises the desirabil-
will have a negative impact on an enterprise’s ity and legitimacy of excluding small business
competitiveness and will put other jobs at risk. (e.g. those employing fewer than 20 employ-
Furthermore, if enterprises can restructure only ees) from the ambit of consultation and infor-
with difficulty and after relatively long time mation obligations relating to retrenchments
delays, it will serve as a further disincentive to
• The unrestricted access to the CCMA should
job creation. At the same time, excessive free-
be addressed by making cost orders the norm
dom to hire and fire will not be in the interests
rather than the exception, and there should be
of either the employee or the employer. a requirement to pay a filing fee
Bhorat and Cheadle (2009: 39) have found,
within the global distribution of labour legis-
lation, that there was an increase in hiring and
firing rigidity between 1997 and 2006, but a • Job security is an important social
decline in the cost of hiring and firing. (The cost advance, but is far from cost free, as
of hiring and firing includes all the social security it often incurs costs and may make
SUMMARY
and health costs associated with hiring a work- employers reluctant to engage new
er, whereas the firing costs include costs such as workers.
severance pay and those associated with notice • The rules on hiring and firing in South
period. The cost and rigidity associated with Africa are said to be too procedurally
employment equity legislation are not included.) complicated and overly prescriptive,
Their conclusion is that in the case of legislative which was never the intention of the
provision for firing workers, South Africa pos- legislation.
sesses a “particularly high level of regulation”
(2009: 15). The South African labour market,
in an international context, appears to have
(B ) R E S T R I C T I O N S O N H I RI N G
become more regulated over the last decade as
far as hiring and firing rigidity is concerned. If an employer’s ability to recruit and appoint
Van Niekerk (2007: 43–45) also makes the the best person for the job is inhibited, it will
point that many of the flexibilities that are have a negative impact not only on flexibility,
inherent in the relevant international standards but also on the search for excellence. There are
were never considered for incorporation in the several examples of restrictions on hiring in
appropriate legislation in South Africa, and that South African legislation, for example the pro-
this is particularly so in relation to work secur- vision for closed-shop agreements, in terms of
ity rights. Even though the model underpinning which employers can hire only persons belong-
South African labour legislation is sound, he ing to one or more specified unions.
refers to the following potential flexibilities that Another restriction is the duty on employers
should be considered: to implement affirmative action measures to give
preference in hiring and promotion to so-called
• The possibility of limiting the application of “disadvantaged groups” in terms of the Employ-
laws by reference to the number of employment Equity Act (see Summary box in section
ees engaged in the enterprise, particularly the 10.7.3). On the other hand, the Act might, over
exclusion from unfair dismissal laws of small the longer term, lead to the better utilisation of
enterprises, as contemplated by Convention human resources, which will increase productiv-
158 of the ILO ity. This positive effect is likely in the light of
• The exclusion of workers serving a qualifying the many years of discrimination and under-
period of employment from certain forms of utilisation of an important part of the country’s
employment protection human resources.
139
Another important limitation on the employ-

ers’ right to hire is the introduction of indirect • Labour broking or labour-only subcon-
“racial quotas” by the BBBEE Codes. This is dis- tracting (where the labour broker recruits
cussed in more detail in section 10.7.4. and supplies labour or remains the
The provisions for probationary employ- employer)
ment in the LRA might reduce some of the dis- • Homeworkers or outworkers (working
advantages of substantial job security and might from home for an employer)
thereby increase flexibility, provided this right is
clear and is not undermined by rash decisions
by CCMA commissioners. This will allow the
employer to assess the competence and suitabil- The development of atypical employment is nor-
ity of the employee for a few months before that mally through one or more of the following pro-
employee obtains job security rights. cesses (Department of Labour 2004: par 2.32.5):
(i) Casualisation. This refers to the process
6.6.2 Flexibility in contracts whereby standard employment is displaced
of employment: atypical by employment that is temporary or part-
employment time (or both). However, this mostly takes
place at the workplace of the employer and
Employers increasingly appear to be less inclined employment continues to be regulated by a
to employ workers on a full-time, permanent contract of employment.
basis. There thus appears to be two categories
of workers. The regular, full-time employees (ii) Externalisation. This refers to a process of
who are part of the corporate family and who economic restructuring, in terms of which
receive fringe benefits are referred to as the core employment regulated by a contract of
workers. They have a long-term relationship employment is displaced by employment
with their employer. Atypical, non-standard or that is regulated by a commercial contract.
contingent employment is a more flexible type This can include the employment of an
of employment, where the workers are not part independent contractor for a specific task
of the corporate family and do not have a long- and/or where workers are employed by
term relationship with an employer. This can an intermediary to work for someone else
include, for instance, casual or part-time work- (so-called “labour broking”).
ers, or some type of contracting arrangement (iii) Informalisation. This is the process whereby
(see accompanying box). employment is increasingly unregulated, in
part or altogether. This is closely related to
the other two processes.
What is atypical employment?
• Temporary or casual employment In most parts of the world there has been a
(employment for a short period of time) trend away from core workers or the standard
• Part-time employment (in which daily employment relationship towards atypical work-
hours of work are less than the norm) ers (Belous 1997: 13). It has been estimated that
between a third and a half of all jobs created in
• Outsourcing (where an outside enterprise
the USA, for instance, in the period 1980–1996,
runs a non-core activity of the enterprise,
could be described as atypical employment.
e.g. catering, cleaning and security, but
Furthermore, this sector is growing considerably
this increasingly also includes core activ-
faster than the entire labour force, and at least a
ities)
quarter of the American labour force is probably
• Dependent contractor (a person who is now atypical workers (Belous 1997: 6).
nominally independent but economically The labour market in the OECD countries
dependent on the “employer”) has become more segmented in the sense that
• Specialised subcontracting (the perform- employers explicitly differentiate between
ance of specialised functions by the sub- employees who are career orientated and those
contractors) with little career orientation and training (Stry-
dom 2003: 4).
Í
Australia has one of the highest levels of According to a survey undertaken in the
non-standard employment of developed coun- Greater Johannesburg Metropolitan Area in
tries. It is estimated that 60 to 80% of all newly 1999, the utilisation of part-time workers
created jobs in that country can be classified as increased by between 300 and 400% between
precarious (Department of Labour 2004: par 1995 and 1998 (Bhorat & Lundall 2004: 1031).
3.3). Similarly, part-time workers are used exten-
sively in the Netherlands, to such an extent that
it has become known as a part-time economy. Increasing use of atypical employment
This resulted from policy changes to enhance in certain sectors
flexibility. • Mining. Non-core functions such as cater-
Even though the nature of new jobs might be ing, security, cleaning and the mainten-
more non-standard, it seems as if the bulk of jobs ance of hostels have been outsourced, and
are still arranged in terms of the standard employ- in some cases mines have even subcon-
ment contract. Studies of the advanced industrial tracted their core activities, i.e. the mining
economies of the world revealed that in 1999 of certain shafts, to subcontractors.
no less than nine-tenths of employees were still
employed on open-ended contracts, and another • Construction. Labour-only subcon-
study even found that there has recently been a tracting is used extensively in this sec-
rise of 2% in the standard employment relation- tor, where firms provide unskilled or
ship (quoted by Maree 2003). semi-skilled workers on construction
sites, usually to perform a specific task.
The contractor is normally not required
S O U T H AFRICA
to supply any of the materials or even
In South Africa these new forms of employment equipment. According to the LFS, 63%
relationships are not properly reflected in official of workers in this sector are in atypical
statistics, and the statistics will be improved only employment (Department of Labour
by face-to-face interviews and extensive train- 2004: par 3.3).
ing of field interviewers (Department of Labour
2004: par 3.2). What the official statistics do • Retail. The majority of employees in this
sector can be classified as non-standard
show is that whites and males as well as highly
(Department of Labour 2004: par 3.2).
skilled workers are more likely to be “typically”
This is related to the efforts of retailers
employed. About 2% of all employees are paid
to staff their stores during peak periods,
by labour brokers, contractors and agencies. This
holidays and weekends, and for late-night
translates into about 167 000 employees. How-
shopping.
ever, serious misgivings have been expressed
about the accuracy of these data (Department of
Labour 2004: par 3.4) and it is estimated that the
real figure might be at least double. REA S O N S FO R TH E U S E O F A T Y P I C A L
Various surveys in South Africa have shown EM PLO Y M E N T
that the resort to temporary or casual labour Atypical employment has several advantages for
has been quite widespread, and a total of 82.5% the employer:
of enterprises in an ILO survey had employed
temporary or casual labour (ILO Review • Young, inexperienced people make use of
1996: 342). This increased to 89% in 2003 atypical employment to get into the labour
(Department of Labour 2004: par 3.5). Out- market for the first time. With high unemploy-
ment among young workers, and many of the
sourcing and subcontracting is the second most
unemployed persons being without a job for
prevalent form of atypical employment (79% of
lengthy periods of time, atypical employment
the firms in 2003). Part-time employment was
is thus an important element of any strategy to
used much less (only 26% of the firms), as was
address youth unemployment.
flexitime (only 10% of the firms) (Department
of Labour 2004: par 3.5). The ratio of subcon- • It reduces labour costs, in particular because
tracted labour to full-time employment increased fringe benefits are usually not provided, small-
from 11% in 2000 to 18% in 2003. er enterprises providing the services may pay

lower wages, and because contingents are paid • More flexibility of product markets and hence
only for the actual work required by the enter- increasing demands for flexibility by employ-
prise. The authors of the ILO Review (1996) ers
state that reduced costs seem to be the most • Increasing employment rates of women (who
important reason for the increased use of such require a more flexible work pattern)
labour. • Deregulation of the labour market
• In the past, employers often resorted to labour • A new mix of education and work
broking services in order to sidestep burden- • New lifestyle requirements of employees
some labour regulations, but changes to the
LRA and the BCEA have made this more dif- DISADVANTAGES OF ATYPICAL
ficult. Research conducted for the Department E M P L O YM EN T
of Labour suggests that labour legislation has
been the impetus for externalisation, both in Even though the utilisation of atypical employ-
that the avoidance of labour legislation pro- ees has a number of advantages, the increase in
vides a motive to externalise and the legislative atypical employment also has several disadvan-
provisions regarding temporary employment tages:
services provide the opportunity (Department • Research in South Africa seems to indi-
of Labour 2004: par 3.4). cate that the increasing use of non-standard
• Atypical employment allows the employer employment is eroding labour standards in
more flexibility in the utilisation of labour, the following manner (Department of Labour
especially if there are fluctuating levels in the 2004: par 6):
demand for labour, and to avoid the hassle –
Wages. The wages of temporary workers
factor often associated with employing work- employed by a temporary employment ser-
ers, especially those who are highly unionised. vice (TES) have been found to be lower than
• It can mean more freedom and flexibility for other employees. However, where a TES is
the workers. Parents with children at school not involved, this does not seem to be the
may, for instance, prefer to have some free- case.
dom to perform certain tasks with regard –
Conditions of employment. In theory all
to their children without having to ask the part-time and temporary workers are pro-
employer for time off. tected by most provisions of the BCEA, but
this does not always apply in practice.
In a study done for the Department of Labour
(Department of Labour 2004: par 4), it was –
Health and safety. In mining, the mine is
found that the determinants of the trend towards responsible for the health and safety of all
non-standard employment are in part econom- workers on the mine, but in other sectors,
ic, as a consequence of trade liberalisation and workers placed by a TES have to work
other factors creating an increasingly competi- under conditions determined by the client.
tive environment for firms. In part they are –
Training. There might be little incentive
also ideological, influenced by doctrines such to train temporary workers. Training and
as flexibility, lean production, focusing on the human resources development might thus
“core business” and the like. However, research be neglected, and equal opportunity goals
in this regard, especially if commissioned by might not to be met.
the Department of Labour, might not always
–
Social security. There is evidence that TESs
be valid. Such research needs to determine the
do not register all the workers with bar-
motivations of employers, and employers might
have a natural reticence to disclose certain gaining council social security funds in order
motives for externalisation to researchers from to save costs. If they are able to, employers
the Department of Labour, such as to cut wage are less likely to have such employees cov-
costs or evade labour legislation. ered by retirement provision and health care
Another international study identified five because of their temporary nature.
driving forces behind more flexible forms of –
E mployment security. The temporary
employment (Maree 2003): employee is in a more precarious position
µ BACK TO CONTENTS
with regard to unfair dismissals and the
BCEA notice periods. • TESs should not be used by clients to
employ temporary workers on an indefin-
–
Trade union rights and collective bar-
ite basis.
gaining. Even though such employees enjoy
the same rights in theory, in practice it is • There should be a regulatory body for
very difficult for a union to organise work- TESs.
ers whose workplace and hours of work are • Employees should also be able to exercise
frequently changed. rights against the employer controlling
the workplace.
• For the employer, atypical employment can
also be dysfunctional. Heavily flexible work- • There should be a Code of Conduct on
places lose their ability to attract, bind and atypical employment.
retain skilled workers. Long-term, secure
Cosatu is strongly opposed to one specif-
employment relations are reportedly seen “as
ic type of atypical employment, namely,
a necessary condition to develop sustainable
competitive advantages based on the tacit and employment by labour brokers, i.e. where
intangible knowledge embedded in the heads workers work (mostly on temporary con-
and hands of the workforce” (Dickens, as tracts) for one person, but are in the
quoted by Maree 2003: 2). employment of another person, the labour
broker. Cosatu argued that it was not
Because of these contradicting advantages and opposed to temporary employment, but that
disadvantages of atypical employment for differ- the practice of labour broking amounted to
ent stakeholders, policy makers face an import- slavery, and the federation wanted labour
ant policy dilemma (see accompanying box). brokers to be banned. The government’s
response at that time was to limit tempor-
ary employment to six months; thereafter
the worker would be a permanent work-
Policy issue: What to do about the
er, unless there were justifiable reasons for
increasing use of atypical employees?
a longer period. Furthermore, a policy of
Research undertaken for the Department equal pay was introduced, where employers
of Labour concludes that policy makers in had to ensure that the conditions of employ-
South Africa probably face the same kind of ment of permanent workers and those on
strategic choice that the European Union is temporary contracts were the same.
facing. On the one hand, there is the defence Although it is important to address
of standard employment at all costs, and the abuse of atypical employment, where
on the other hand, adaptation to address employers employ workers for lengthy per-
the challenges of unemployment and inter- iods of part-time employment in order to
national competitiveness (Department of reduce wages and employment security,
Labour 2004: par 3.3). This is related to the undue restrictions on atypical employment
relative priority given to the constitutional could make the labour market operate less
right to fair labour practices as opposed to effectively.
the constitutional right to work.
The priority area for policy intervention
should be labour broking because it has
In most parts of the world, including
clearly played a major part in accelerating
SUMMARY
South Africa, there has been a trend away

a process of externalisation. Some of the from employing regular, full-time workers
policy proposals made by the researchers towards employing so-called “atypical
are the following: workers”. The imperative of reducing the
• All temporary employment services cost of labour seems to be an important
(TESs) should be registered. reason for this development.
Í
6.6.3 Wage flexibility ant role in many Western European countries”.

However, whether or not decentralisation
Wage flexibility means that wages should be
actually leads to better economic performance is
responsive to economic and market conditions,
a subject of considerable controversy. It seems
whether in the country as a whole, a sector of
as if there is a so-called “U-shaped relationship”
the economy, or an individual enterprise. The
between a country’s economic performance and
question of wage flexibility is usually more rel-
the level of collective bargaining – meaning that
evant to the downward responsiveness of wages
both highly centralised and decentralised bar-
during difficult economic times, as unions play
gaining perform better than intermediate forms
an important role in ensuring that wages are
of bargaining (such as bargaining councils in
responsive in an upward direction under favour-
South Africa). It also seems as if decentralised
able economic circumstances or high inflation.
Wages are therefore usually rigid downwards but highly coordinated bargaining has a positive
and flexible upwards, i.e. responsive to price effect on economic performance. This issue is
increases and unresponsive to unemployment. discussed in more detail in section 5.6.
Wage flexibility also relates to the extent to Minimum wages seem to be one of the major
which wages are linked to the productive effort causes of unemployment among those groups
of the individual worker or a group of workers, they set out to protect, for example young
and to the productivity and profitability record people (Social and Labour Bulletin 1985: 159).
of the sector or the enterprise. This is referred If firms can get more educated or experienced
to as performance-related pay. The ILO (Ozaki workers at the minimum wage they are required
1999: 19) has found that the ability to do this to pay, they are unlikely to try out inexperienced
is much more limited in countries where union workers, especially if they find it difficult and
density is high. Employers have also experienced costly to undo the employment relationship with
certain disadvantages in linking pay to perform- such inexperienced workers.
ance, for example the high administrative costs Whether minimum wage would have an over-
involved, the difficulties in measuring perform- all negative impact on unemployment would
ance and the high probability that bonuses will depend to a large extent on the system of min-
become a permanent feature of pay, even when imum wage fixing, as discussed in section 5.7.
performance no longer warrants them. The ILO (Ozaki 1999: 17) states that sever-
Wage flexibility is important for job secur- al countries have taken measures to reduce the
ity because it has been found (see, for instance, effect of minimum wages. These range from
Elvira 1998) that where flexible wages constitute abolishing minimum wages to suspending min-
a large proportion of labour costs employees are imum wages or postponing periodic adjust-
less likely to be laid off. ments. Certain categories of workers have also
The levels of collective bargaining, and the been excluded, for example young people.
extent to which provision is made at such lev- In South Africa minimum wages laid down
els for flexibility arrangements, directly influence by the former Wage Board have in the past been
wage flexibility. Especially where bargaining particularly conservative and would have had
takes place at a more centralised level, for little, if any, negative influence on labour mar-
example in bargaining councils, there has been ket flexibility (see also ILO Review 1996: 146).
a tendency in the past towards the rigid appli- However, minimum wages determined by bar-
cation of agreements, subject only to inefficient gaining councils might, in some instances, intro-
and cumbersome exemption mechanisms. As duce rigidities in the labour market and can
discussed in section 5.6, the authors of the ILO therefore reduce employment creation among
Review (1996: 148–149, 194–196) question the lower-skilled and younger workers.
system of bargaining council agreements, includ-
ing the application of such agreements to parties
SUMMARY
who have not been part of the negotiations. As a result of the influence of trade unions
The ILO points out elsewhere (Ozaki and minimum wage regulation, wages
1999: 147) that “there has been a clear trend are usually rigid downwards and flexible
over the past decade towards decentralizing upwards. Bargaining councils and min-
wage bargaining, although sectoral and central imum wages increase wage inflexibility.
wage bargaining continue to play an import-

6.6.4 Working time flexibility Some countries have introduced legislative
changes authorising collective bargaining part-
Working time flexibility concerns the adjust-
ners to agree upon innovative working time
ment of total working time within a given period
arrangements (Ozaki 1999: 28), for instance
and the possibility of rearranging working time
Australia and New Zealand.
within a given period (Van Niekerk 1993a: 135).
Time flexibility can take various forms, such as
• overtime Policy issue: Balancing working time
• flexitime (flexible starting and finishing times) flexibility and worker rights
• the averaging of hours over a certain period, Whether the BCEA increases the flexibility
for example over 12 months of working arrangements in South Africa is
• shift work a moot point.
• a shortened work week. On the one hand, it can be said that the
BCEA does increase flexibility of working
Some countries have introduced a system where-
by overtime is paid only if the total number of time by making provision for the averaging
hours during a year exceeds a certain prescribed of ordinary working hours over a four-
limit (Ozaki 1999: 26), or the sum paid for over- month period, and for a compressed work-
time is fixed below a certain limit. Enterprises ing week (to work up to 12 ordinary hours
are also allowed to provide time off in lieu of per day, over a five-day, 45-hour working
payment for overtime, and in some countries the week).
overtime premium has been reduced. On the other hand, however, the BCEA
Many enterprises in South Africa and abroad also imposes various limits on hours of
have introduced flexitime arrangements. In this work, which impacts negatively on flexibil-
manner the needs of both the employer and the ity and which might or might not increase
employee can be met to a greater degree than in
productivity. The BCEA allows only limited
the past, and employers can more fully utilise
their employees’ productive capability. scope for collective agreements to deviate
from the limitations in the Act. These issues
We need to break a are discussed below.
mindset that sees
workers simply as hands
As far as the limitation on working time is con-
and legs to be supervised, cerned, most countries have a limitation on
rather than brains and hours of work in order to prevent the exploit-
emotions to be motivated. ation of employees through excessive working
Tito Mboweni hours. However, some important industrialised
countries have more lenient restrictions in this
Many overseas enterprises also apply a sys- regard. For instance, Australia and the USA
tem of averaging the hours of work (Gailen do not have a limit on working hours, and the
1991: 9). Workers have to work a specified European Union has a generic limit of 48 hours
number of hours over a certain “reference per- per week, compared to 45 hours in South Afri-
iod”, for example one year (this is referred to as ca. Individual European Union countries may
the “annualisation” of working time). How the have more stringent requirements and collective
number of hours is worked through the year is agreements in many sectors in the EU also pro-
subject to agreement between the employer and vide for a 40-hour or even less working week
employees. This is especially useful during sea- (see “Working Time Developments 2010” on
sonal peak activities, but is at present possible the website www.eurofound.europa.eu/eiro).
only to a limited extent in South Africa in terms Another big debate is whether reduced work-
of the averaging provisions in legislation (see ing hours increase productivity, which is dis-
accompanying box). cussed in the accompanying box.

Policy issue: The impact of reduced
SUMMARY
The Basic Conditions of Employment Act
working hours on productivity (BCEA) is a blend of flexibility and inflex-
In section 4.7.1, the impact of reduced ibility as far as the flexibility of working
hours is concerned.
working hours on the cost of labour is dis-
cussed. However, one of the major argu-
ments when working hours were reduced
from 48 to 45 per week in South Africa was 6.6.5 Work organisation flexibility
whether it would have a positive or negative
The extent to which workers or conditions of
impact on the number of jobs available and
employment within an enterprise can adjust to
the impact on productivity. changing circumstances is also called internal or
As far as jobs are concerned, there are functional flexibility. Rules and agreements relat-
those who believe that reduced working ing to the workplace, conditions of employment
hours increase labour absorption. This is and the skills level of the workforce can affect
because, so the argument goes, existing this. Other measures that can inhibit internal
work is shared among more employees. flexibility have their origins in legislation (e.g.
As pointed out, this is the classic “lump of the prohibition in the mining industry to work-
labour” argument, and its fundamental flaw ing on certain days), bargaining council or col-
is that it regards the number of jobs avail- lective agreements on work rules, union rules and
work practices. The authors of the ILO Review
able as fixed, which can simply be divided in
(1996: 7) also refer to work-process flexibility,
different ways. In actual fact, reduced hours
which means that workers can be shifted between
of work will, in most instances, increase tasks relatively easily and working practices can
production costs, which is likely to have a similarly be changed easily and at low cost.
negative effect on the demand for labour. Bargaining councils established in terms of
This is discussed in section 4.7.1. the LRA might also have a negative impact on
Reduced hours of work might increase work organisation flexibility. There has been a
the productivity of individual workers tendency in the past to apply agreements rigid-
because workers are less fatigued. How- ly, subject only to inefficient and cumbersome
ever, a review of research on this topic (see exemption mechanisms. As discussed in section
sources quoted by Barker 1995: 55) general- 5.6, the authors of the ILO Review (1996: 148–
149, 194–196) question the system of bargaining
ly indicates that if there has been an increase
council agreements, including the exemptions
in productivity, such an increase will make
from such agreements. The link between wages
up less than half the reduction in produc- and productivity improvements is also severed
tion caused by the reduced hours and will by bargaining councils. Attempts to increase
therefore not compensate for the increased flexibility and productivity at enterprise level
production costs. This is confirmed by the will be very difficult for as long as wages are
Labour Market Commission (1996: 91). determined elsewhere.
It has been found that an increase in
productivity is more likely if the reduction 6.6.6 A skilled workforce
in hours is the outcome of collective bar-
New patterns of work often require flexible and
gaining in the workplace, but is much less
highly skilled workers. Workers are required, for
likely if the reduction is imposed through instance, to function without direct supervision
legislative decree. This is because the process and to be able to correct small interruptions in
of bargaining enables employers and unions the production process on their own initiative.
to make quid pro quo exchanges whereby a These new patterns, as well as job descriptions
reduction in hours is directly exchanged for that have become much broader and with less
increased flexibility or productivity in the strict demarcation between occupations, neces-
workplace (see Barker 1995). sitate the multi-skilling of workers. Highly cap-
ital-intensive production techniques and equip-

ment also require skilled workers to operate Trade unions organised strictly on a craft
such equipment successfully. union basis often resist the trend towards
Competitiveness is not and should not sim- multi-skilling and broader job descriptions, as
ply be based on cost, but should more import- these are regarded as a threat to the existence
antly be based on the effective and efficient of the union itself. Industrial unions, i.e. unions
utilisation of all productive resources. One that recruit workers irrespective of their craft,
of the most important of such resources is the occupation or grade, have a certain advantage
workforce, and a highly skilled workforce can from a flexibility point of view over craft unions.
do much to increase the flexibility and competi- Education and training have been neglected
tiveness of an organisation. Competitiveness is in the past in South Africa and this has inhibit-
also enhanced by quality, good design, on-time ed functional flexibility. Hopefully the Skills
delivery and rapid adjustments to consumers’ Development Act and other education and train-
requirements. All these elements require workers ing initiatives will in time increase the skills of
who are skilled, provide quality work and can the labour force and thereby enhance flexibility.
rapidly adjust to changing conditions. This can (This issue is discussed in greater depth in Chap-
be achieved only by skilled employees who are ter 9.)
properly training.
6.7 GENERAL CONSIDERATIONS REGARDING FLEXIBILITY

6.7.1 Achieving flexibility through substantial powers are given to the Minister
collective bargaining of Labour to vary the conditions of the BCEA
upwards or downwards. These go even fur-
The BCEA allows relatively little scope for the
ther than the powers of bargaining councils.
variation of its provisions through collective Although some of these powers might arguably
bargaining (unless within the confines of a bar- enhance flexibility, they might also be used in
gaining council) and even less through individual such a way that the opposite result is actually
contracts of employment between employer and achieved. Such wide powers will certainly not
employee. The BCEA introduces so many stan- help to create more legal certainty.
dards of best rather than minimum conditions Another method of introducing some flexibil-
of employment and allows so little scope for col- ity is the making of sectoral determinations for a
lective bargaining outside bargaining councils particular sector and area, although some might
that collective bargaining between a union and argue that such determinations are more likely to
an employer is relegated to a relatively minor introduce more onerous or additional provisions
role (see Barker 1999). than allow for greater flexibility. This is partly
This contrasts with the LRA, which was imple- because the new BCEA allows the Minister of
mented less than a year before the BCEA and Labour more discretion in relation to the pow-
which has as one of its primary aims the pro- ers of the Employment Conditions Commission
motion and facilitation of collective bargaining. than was the case with the former Wage Board,
Even the government’s own Labour Market and that the scope of sectoral determinations is
Commission (1996: 3) and the authors of the much wider than wage determinations under the
ILO Review (1996: 10) propound so-called previous Act.
“voice regulation”, i.e. regulating minimum A final issue in this regard is whether employ-
standards through bargaining between employers can change conditions of employment uni-
ees (and their unions) and employers (and their laterally for operational reasons. For instance, if
associations). The BCEA also contains certain an employer is experiencing financial difficulties,
“core rights” that may not be varied under any the question is whether the employer will be able
circumstances, for instance a maximum working to change certain conditions of employment in
week of 45 ordinary hours. spite of the employees or the union opposing
In contrast to the limited scope for variation such changes. The LRA states that it will auto-
through collective and individual agreements, matically be unfair to dismiss workers in order

to compel them to accept a change in working • High labour costs

conditions. This was the subject of a case in the • Lack of skills in labour market
Labour Appeal Court (so-called “Fry’s Metals”). • Productivity and reliability
In this case, the workers refused to work in terms
of the new conditions and were retrenched. The SBP project also indicated that after VAT,
The judgment found in favour of the employ- labour laws, the CCMA and bargaining councils
er, saying that in this case the retrenchment was are the most time-consuming and troublesome
not used as a threat to get employees to accept issues.
the changes, but as final in order to hire new On the other hand, a survey on flexibility
workers who would agree to the new condi- in South Africa initiated in 1995 by the ILO
tions. On the one hand, one could argue that (Macun 1997) concluded that the labour market
the judgment allows flexibility for employers to in manufacturing is reasonably flexible and that
adapt work practices to suit an evolving environ- there are signs that enterprises are able to adapt
ment, but on the other hand it could be seen to and to innovate in certain areas. But the ability
undermine collective bargaining, even though of enterprises to adapt is severely constrained by
this is subject to onerous conditions. Consider- the past, in particular by the disadvantages and
able management time is required to comply discrimination experienced by African workers,
with these conditions, which are to ensure that and by the resultant legacy of low trust between
all alternatives are considered, that the only pos- employees and employers. Other key constraints
sible option has been chosen, and that the option
are inadequate managerial skills and training
makes the best possible business sense (Mischke
and, in the external environment, inadequate
2003: 37).
transport, violence and a poor education system.
The question then is whether South African
labour laws are more complex and onerous than
The Basic Conditions of Employment Act
SUMMARY
those of “other countries”, however defined. A

(BCEA) allows little scope for variation comparison of labour laws in South Africa with
of minimum conditions of employment those in other countries is very difficult, if not
through individual or even collective impossible. A few points need to be made.
agreements.
• Firstly, the measures of rigidity, especially in
so far as firing rigidity is concerned, do not
measure the interpretation of labour legis-
6.7.2 Labour market flexibility lation by the relevant courts of law. An exam-
compared internationally ination of case law shows changing opinions
and views of Labour Court judges in the inter-
Employers in South Africa often argue that they
pretation of legislation relating to job secur-
are at a disadvantage vis-á-vis employers in
other countries because those employers (espe- ity (Bhorat & Cheadle 2009: 18). This might
cially in developing countries) face less oner- increase or ameliorate the practical impact of
ous labour standards. The impact of labour the relevant legislative provisions.
laws on the cost of labour and on flexibility in
The trouble about a free market
South Africa is discussed in sections 4.7 and 6.6
respectively. A survey of 1794 large and small economy is that it requires so
businesses in 2004 by the Small Business Project many policemen to make it work.
(SBP) (2004), for instance, gives an indication of Neal Ascherson
the extent to which employers state that labour
issues impact on job creation and business deci-
sions. The following were indicated as the most • Another factor that is very relevant to the
important constraints with regard to increased practical impact of labour legislation is the
employment, in order of priority: strength of employer and employee organisa-
tions. Strong trade unions, for instance, will
• Lack of confidence or demand in the economy be swift in ensuring that the maximum bene-
• Labour laws/government regulations in gener- fit of legislative provisions and court rulings
al accrue to their members (Bhorat & Cheadle

2009: 18). South Africa has experienced a system for a number of years, at least until the
sharp increase in the level of unionisation, role players have adjusted. Siebert (2001) says
and has one of the highest levels of union that we are at midpoint in the OECD rankings
density (see section 5.3.2 and Siebert 2001: 9). in so far as job security is concerned, but we
In addition, bargaining councils give unions have moved from a relatively unregulated sys-
additional power, as discussed in section 5.6. tem to this level, which inevitably has caused
This has an important effect – not only do an adjustment shock to many employers.
unions increase the general level of wages, but
they ensure far better compliance with labour
laws than might be the case in countries (espe- Policy issue: Addressing differences in
cially developing countries) with similar lev- labour standards between countries
els of regulation. Furthermore, as indicated in
section 5.4.1, the wage differentials between Another issue with regard to differences
unionised and non-unionised sectors in South in labour standards between countries is
Africa are higher than in other countries. whether labour standards should (or can)
be standardised internationally, and what
Siebert (2001: 6) has found a high correlation individual countries can do in this regard.
between high levels of unionisation and high This is usually discussed in the context of
unemployment. He refers to Australia, Ireland, the social clause (see section 7.6.4).
Korea and Poland as examples of countries that
have had real wage increases but unemployment
has declined because, according to his analysis,
RES EA R C H FI N D I N G S
trade union density has fallen.
Any firm conclusions about whether South Afri-
• The quality of human resources is also import- ca is flexible or not compared to other countries
ant. If a country has a legacy of poor educa- is thus rather difficult. Research findings present
tion and training, as is the case with South divergent outcomes, depending on whether
Africa, coupled with historic discrimination the research was based on the perceptions of
that aggravated skills shortages, it is very diffi- employers or on a comparison of complex legis-
cult for employers to be able to cope with the lative regimes, taking into account other factors.
same level of labour legislation as countries Benjamin and Theron (2007) have a useful
that operate with a highly skilled workforce. discussion of the difficulties of comparing labour
• It also needs to be borne in mind that there legislation across countries, and also have some
will always be one or more countries that have suggestions as to how better indicators to meas-
a provision in labour legislation that is similar ure the impact of various types of labour regula-
to or even more onerous than that in South tion could be developed, albeit under conditions
Africa. However, the burden of a single legis- of optimum data availability. The most import-
lative provision is not very significant – it is ant comparisons of labour regulation will be
more important to consider the whole range referred to briefly.
of labour laws. Therefore, the cumulative The World Bank does a comprehensive and
effect of all labour and labour-related policies regular survey of the cost of doing business. This
(against the background of issues such as the is based on the inputs received by respondents
management of HIV and AIDS, the risk profile with significant and routine experience of the
of the country, crime and other factors) needs particular regulatory issue. These are profes-
to be considered. This is practically impossible sionals or government officials who routinely
to do. administer or advise on the legal and regulatory
requirements covered in each Doing Business
• It is not always the level of regulation that is topic. Because of the focus on legal and regu-
important, but the change in that level. For latory arrangements, most of the respondents
instance, for South Africa to have come from a are lawyers (see www.doingbusiness.org). For
system of relatively little regulation of dismiss- a critical discussion of the shortcomings of the
als to a regulatory system found in some Euro- World Bank study, see Benjamin and Theron
pean countries will cause some shock to the (2007).

Bhorat and Cheadle (2009: 39), in considering flexible than those applicable in most OECD
World Bank data as well as some other research countries, specifically with regard to severance
findings, found that in most measures of labour pay, notice periods, probation periods, fairness
regulation South Africa is not extraordinarily criteria, reinstatement and temporary employ-
over-regulated or under-regulated. However, as ment. However, he adds that this does not
stated above, when comparing 1997 and 2006, deny that there are significant problems in rela-
there is an increase in rigidity in terms of hir- tion to the implementation of dismissal laws in
ing and firing but a decline in the cost of hiring this country, particularly in relation to dispute
and firing. According to these authors, South resolution structures and procedures. As stated
Africa has relatively low levels of regulation above, he argues that inappropriate procedures
with regard to individual employment relations, in particular may be the biggest cause of percep-
which is counterpoised by relatively higher levels tions of labour market inflexibility.
of regulation when it comes to collective rights.
In the case of legislative provision for firing
workers, South Africa possesses a particularly • An international comparison of labour
high level of regulation. They also refer to the laws is difficult because factors such
fact that union labour power in South Africa is as the cumulative effect of policies,
“extremely high” (Bhorat & Cheadle 2009: 10). a change in the level of regulation,
The World Economic Forum (WEF) (2005),
SUMMARY the level of unionisation and the skills
for instance, found that South Africa ranks level of the population will be import-
115th (out of 117 countries) in relation to the ant to determine the relative impact
ease of hiring and firing practices, 106th in rela- of labour laws on flexibility.
tion to flexibility of wage determination and
• Various studies on labour market
104th with regard to labour–employer relations
flexibility reach divergent conclusions
(indicating a confrontational relationship). On
with regard to whether the South
several other economic measures, this country is
African labour market is more or less
ranked quite positively. The WEF determines the
flexible than other countries.
competitiveness position of a country according
to 290 criteria of hard data as well as a survey of
the opinions of executives in different countries.
The survey is given a weighting of one-third in
6.7.3 Balancing the social costs and
the final result.
economic benefits of labour
The International Monetary Fund (IMF)
(2005: 20) also referred to the difficulties with market flexibility
regard to hiring and firing, but found in an Apart from the supposed or real effects of
empirical study that, compared to 75 other labour market rigidities on unemployment, there
industrial and emerging market countries, South is the danger that a distinct lack of flexibility
Africa was not more rigid than the average for might result in an increased differential between
these countries when measured by (i) existence the solid core of workers and those on the per-
of minimum wages; (ii) level of employment iphery, i.e. it might result in increased labour
protection and benefits; and (iii) trade union market duality (OECD 1986: 15). The solid core
density. However, the IMF could not consider of workers will be the privileged élite (usual-
the difficulties with regard to hiring and dismiss- ly urban union members) who are employed
al procedures in the study owing to “measure- permanently and who enjoy the full spectrum of
ment difficulties”. labour rights, while those on the periphery will
Finally, by comparing the South African unfair be non-unionised and little protected workers
dismissal regime with OECD data (2004: Chap- (e.g. in the informal sector) or the unemployed.
ter 2), Van Niekerk (2006) calls into question A delicate balance is therefore required
the conclusions reached in the World Bank and between protecting worker rights and ensuring
other studies. Benchmarking South African adequate labour market flexibility. Very sensi-
labour legislation against indices utilised in the tive issues are involved: not only basic human
OECD study, he concludes that South African and worker rights, but also the survival of enter-
unfair dismissal laws are not significantly less prises and the well-being of the economy. As

stated above, it is not simply a matter of a binary have become entrenched. Practices that are the
policy choice between flexibility and regulation norm in developed countries might not be suit-
(Bhorat & Cheadle 2009). able in a developing country such as South Afri-
Every measure that affects flexibility needs ca. However, it will not be appropriate to ignore
to be considered carefully, with regard to both such norms as well as recent developments in
its social value and economic cost. On the one these countries, especially as South Africa usual-
hand, it might be found that the social value ly uses the norms of the most developed coun-
of a measure, especially in a country such as tries as important guidelines for its own policies.
South Africa with its historical legacies, is such It should be firmly emphasised that labour
that there is no alternative but to retain it. The market inflexibility is not the only, or even the
economic and social cost of trying to remove major, reason for unemployment. Other factors
the measure might be higher than the cost of contributing to unemployment include low eco-
retaining it. On the other hand, an objective nomic growth rates and high population growth
evaluation might show that the economic cost is rates. There is a need for structural economic
unjustifiably high in relation to the social value, adjustment (e.g. in respect of international trade,
in which case there is a responsibility on the gov- the development of entrepreneurship, research
ernment, employers and unions to achieve a bet- and development) and other appropriate macro-
ter cost-benefit relationship. economic policies. Labour market flexibil-
Addressing this issue at a time when it has ity should be seen within this set of structural
never been more necessary to ensure basic work- and active labour market policies, and not as
er rights while simultaneously creating employ- an isolated measure to address unemployment.
ment opportunities is not easy. There is a great (Unemployment is discussed in greater depth in
deal of mutual suspicion between employers and Chapter 8.)
trade unions, and many labour market practices
Key concepts
labour market flexibility productivity
internal or functional flexibility labour productivity
external or numerical flexibility capital productivity
job security total factor productivity
atypical or contingent employment unit labour cost
averaging remuneration cost per unit produced
compressed work week efficiency wages
voice regulation workplace forums
efficiency wage hypothesis
For students
1. How is productivity measured and what are
4. Wage costs cannot be regarded in isola-
some of the shortcomings of this method of tion as labour productivity must also be
measurement? considered. What instrument is used to
determine the combined influence of these
2. Why is productivity improvement import-
variables, and what have been the recent
ant?
developments in this regard in South Africa?

3. Discuss the relationship and interaction
5. Use the efficiency wage hypothesis to discuss
between labour productivity, capital pro-
the statement: “Under certain circumstances
ductivity and the replacement of labour by
a wage increase could lead to an increase in
capital in South Africa.
productivity.”

6. Discuss some of the most important factors

9. Discuss the various types and increasing
that affect productivity in South Africa, and prevalence of atypical employment in South
suggest how productivity may be improved. Africa and other parts of the world.
7. While the Labour Relations Act was being 10. Discuss how working time can be made
finalised there was considerable controversy more flexible.
over whether workplace forums would have
11. Describe the possible positive and negative
a positive or negative effect on productivity.
effects of labour laws on flexibility.
What could be the main arguments on both
sides?
8. Define labour market flexibility and discuss
its most important elements.
Suggested reading*
Barker, F.S. 1999. Industrial Democracy Review, Vol. 6, No. 1,
On South African labour policies. The South African FebruaryApril.
Journal of Economics, Vol. 67, No. 1, March.
National Productivity Institute (Productivity
Bhorat, H. & Cheadle, H. 2009. SA). 2005.
Labour reform in South Africa: Measuring Productivity Statistics 2005. Pretoria: National
regulation and a synthesis of policy suggestions. Productivity Institute.
Development Policy Research Unit. Working
National Productivity Institute (Productivity
Paper 09/139. South Africa: University of Cape
SA). 2002.
Town
Productivity, economic efficiency and equity. A
Fallon, P. & Lucas, R. 1998. Nedlac occasional paper 1/2002. Johannesburg:
South African labor markets: adjustment and National Economic Development and Labour
inequalities. Washington, DC: World Bank. Council.
Gailen, A. 1991. Ozaki, M. (Ed.). 1999.
Flexible work patterns why, how, when and where? Negotiating flexibility: the role of the social partners
Bulletin of Comparative Labour Relations. and the state. Geneva: International Labour
Bulletin 22. Organisation.
Macun, I. 1997. * The bibliography contains the full list of
Restructuring and flexibility in manufacturing. references.

7.1 Introduction
7.2 South Africa’s links with the world
7.3 South Africa’s competitive position
7.4 The impact of international trade on the
7.5
labour market
The impact of trade liberalisation on the
Globalisation
7.6
South African labour market
Addressing the challenges of globalisa-
and the labour
7.7
tion
Deeper insight: Why do countries trade?
market
I’ve always had a weakness for foreign affairs.

MAE WEST
7.1 INTRODUCTION
New technological advances have led to a rapid and immigration. The imports of final, and to
increase in globalisation since the 1980s and a lesser extent intermediary, goods is the more
especially the 1990s. These advances include, important and faster-expanding channel, in large
for instance, greatly reduced transport, tele- part because immigration remains very restricted
communications and computation costs, which in many countries.
have helped to overcome the natural barriers of Countries are also becoming more closely
space and time that separate national markets connected as trade barriers are dismantled and
(El Toukhy 1998). Globalisation has also been import tariffs reduced. This puts workers in one
spurred on by large developing countries choos- country in competition with workers in another
ing to improve their investment climates in order country and increases the danger of a “levelling
to attract overseas investors and to open up to down” in wages and working conditions. The
foreign trade. flow of money and goods between countries has
Globalisation refers to the widening and deep- also increased substantially. Numerous multi-
ening of international trade, finance, information national corporations have annual sales totalling
and culture (e.g. movies) in a single integrated more than the GDP of many countries, including
world market (El Toukhy 1998). According to South Africa.
another description, globalisation is characterised, In pursuit of a more outward-looking econ-
in particular, by an intensification of cross-border omy, South Africa introduced a far-reaching
trade and increased financial and foreign direct trade liberalisation programme in the 1990s,
investment flows promoted by rapid liberalisation especially after the democratic elections in 1994.
and advances in information technology (Daouas The country reduced its average import tariffs
2001). It thus refers to the increasing integration on manufactured goods from 14% in 1994 to
of economies around the world. 5.6% in 1998 (ILO, as quoted by Bezuidenhout
Globalisation has an important effect on 2000: 1) to encourage export-led growth and to
the labour market. Research points to a sharp reap the benefits that globalisation provided for
increase in the effective global pool of labour many countries. This formed an important ele-
(International Monetary Fund 2007). This ment of the government’s economic policies to
global pool of labour is accessed (especial- create an environment conducive to economic
ly by advanced economies) through imports growth.

C H A P T E R 7 G L O B A L I S AT I O N A N D T H E L A B O U R M A R K E T
In some cases the liberalisation programme sidering the effective rate of protection (ERP).
even exceeded the requirements of the General They quote studies that maintain that even
Agreement on Trade and Tariffs (GATT) and though the average ERP has fallen in line with
the World Trade Organisation (WTO) nego- the fall in nominal tariffs, it still remains fair-
tiations. These included tariffs being simplified ly high, particularly in manufacturing where it
and reduced and other trade-related measures averaged about 24.3% in 2003. Despite signifi-
to abolish practices that contravene WTO rules, cant declines, ERP appears to remain quite high
such as local content requirements and export for the tobacco, textiles, clothing, footwear and
incentives. furniture sectors.
It should be mentioned from the outset that Various theories have been developed to
the government has been criticised sharply for explain international trade, but as these are
reducing tariffs more rapidly than required by mostly aimed at the economics-orientated stu-
our international obligations (see, for instance, dent or reader, they are discussed at the end of
the discussion in Nattrass 1998b: 2). This the chapter. Attention is first given to the open-
would, it has been said, contribute to a contrac- ness and competitiveness of the South African
tion in employment because of the structural economy. The impact of globalisation is then
adjustments required to compete with the prod- discussed, with specific reference to the labour
ucts of other countries, both within and outside market. Many countries, including South Afri-
South Africa. This issue is discussed later in this ca, face the question of how the challenges of
chapter. globalisation should be addressed. Some case
However, as pointed out by Bhorat et al. studies and a few other approaches in this regard
(2010: 6) there is disagreement about the degree are outlined. The chapter concludes with a dis-
to which trade has been liberalised when con- cussion of the theories on international trade.
7.2 SOUTH AFRICA’S LINKS WITH THE WORLD

South Africa has a relatively open economy with compared to other dynamic emerging economies
regard to trade, investment and the mobility of (Edwards & Schoer 2002: 1040). The share of
labour. Exports and imports form a large part unskilled labour-intensive products in total
of total domestic production, and foreign cap- exports has risen but remains low. This shows
ital is also important because South Africa does that South Africa has failed to make effective use
not save enough to finance the required level of of the comparative advantage that an abundant
investment. supply of labour provides. Edwards and Schoer
Together, South African exports and imports state that a combination of supply-side policies
form on average about 50% of its GDP. Some (lack of skills, lack of infrastructure, etc.) and
countries such as Malaysia, Singapore, Ireland labour market institutions (unions, bargaining
and Belgium are far more trade-dependent than councils, role of labour laws) played a role in
South Africa, whereas the least trade-dependent this regard.
countries are Japan, the USA, and the euro cur- Exports increased relatively sharply in the
rency area. 1990s, with the volume of exports (excluding
South Africa remains an important exporter gold) increasing on average by 6.4% per annum
of mineral products, such as platinum, coal, iron during this period. Some factors contributing to
ore and diamonds. However, exports of gold this growth were the favourable political climate
have declined substantially since the early 1980s. and the depreciation of the rand, although over
The largest imported products are machinery the medium to longer term this latter advantage
and high-technology products, oil and defence has been negated by the increase in domestic
equipment. labour costs (Bureau for Economic Policy and
However, manufactured exports from South Analysis 2001). This is probably an important
Africa are generally capital and technology inten- reason for South Africa failing to increase its
sive compared to other middle-income countries. stake in world dollar exports, with its exports
Furthermore, export growth has been mediocre still forming less than 1% of total world exports.

G L O B A L I S AT I O N A N D T H E L A B O U R M A R K E T 7
Owing to a shortage of domestic savings to With regard to the lower skills levels, the
finance investment, South Africa has had to southern African region is already rapidly inte-
rely heavily on foreign investment to close the grating with regard to labour, with substantial
gap between savings and investment. How- numbers of workers from neighbouring coun-
ever, much of the inflow of foreign investment tries working in South Africa legally and illegal-
has been in the form of short-term capital, for ly. In addition to the mobility of labour between
instance investing in shares on the JSE Limited, countries, jobs may in many cases also be quite
rather than direct investment (in productive cap- mobile. Employers may, for instance, move their
acity), which is likely to be more stable. businesses to neighbouring countries should the
Through the interlinking of product markets prospect of profits be better in the light of wage
and the high mobility of skills, labour mar- levels, taxation, political stability, etc.
kets too have become closely linked with those
of other countries. This applies to both skilled
and unskilled labour. As far as skilled labour is South Africa has a relatively open econ-
concerned, remuneration and taxation practices omy with regard to trade, investment and
in South Africa relative to other countries have labour markets. Exports and imports form
SUMMARY
an impact on the country’s ability to attract or a large part of total domestic production.
retain skills in high demand the world over. Sec- Foreign capital is also important because
tion 2.7.1 shows that in the past South Africa South Africa does not save enough to
could depend on a net immigration gain to com- finance the required level of investment.
plement its skills. However, this has turned into There is an outflow of skilled labour and
a net loss over the last couple of decades, which an influx of legal and illegal unskilled
means that the country is losing skills that have labour.
been developed at great cost to society.
7.3 SOUTH AFRICA’S COMPETITIVE POSITION

A country’s international competitive position 7.3.1 World competitiveness:
depends on a number of factors. Apart from the benchmarking South Africa
price of the product, factors such as the quality against other countries
of the product, the ability to produce customised
products, on-time delivery, general good service According to the World Economic Forum, South
to the customer and movements in the exchange Africa fares poorly in terms of its international
rate all play a role. With regard to the latter, a competitiveness (website: www.weforum.org).
depreciating currency, which South Africa has The competitiveness position of a country is
determined according to 290 criteria of hard
often experienced, made exported products less
data as well as a survey of the opinions of execu-
expensive and therefore more attractive to for-
tives in different countries. The survey is given a
eign buyers. The Labour Market Commission
weighting of one-third in the final result.
(1996: 21) argues that the depreciation of the
rand has lowered South Africa’s unit labour costs
The difficulty is that we
relative to those of its major trading partners.
have an industrial base with
However, a depreciating currency does not
have advantages only; it also poses certain so many characteristics of
threats. For instance, it leads to higher import an industrial museum or of
prices that might increase local inflation and an industrial hospital.
wipe out any benefit of a depreciating currency. Barry Jones
Taking account of various factors, it seems as
if South Africa’s competitive position does not In 2010/2011 South Africa occupied the 54th
always compare favourably with other coun- position on a list of 139 countries. Some of the
tries, as is discussed below. countries that regularly occupy the top spots are

Switzerland, Finland, the USA, Germany, Japan,

Sweden and Denmark, while Zimbabwe, Malawi Comparing labour laws internationally
and Ethiopia are among the lowest. Other coun- Employers often state that labour legis-
tries in sub-Saharan Africa that did reasonably
lation is an important reason for the lack
well included Botswana and Mauritius.
of flexibility and thus the low productivity
South Africa performed particularly poorly in
so far as its labour market is concerned, occupy- referred to above. However, it is important
ing the 97th spot. Some of the areas where South to emphasise that international compari-
Africa suffered the most serious competitive dis- sons of labour laws are always difficult. As
advantage according to the survey were the fol- discussed in greater depth in section 6.7.2,
lowing: such comparisons are influenced by a num-
ber of other factors:
• Cooperation in labour–employer relations
• Flexibility of wage determination • It does not make much sense to compare
• Hiring and firing practices individual labour law provisions, as it is
• Pay and productivity often the cumulative impact of laws that
have an effect.
SRI International (1998) compared South Afri- • The impact of legislation greatly depends
ca with 11 benchmark countries, which were on union strength: unions often bargain
selected on the basis of a set of criteria such as to increase benefits over and above the
similar economic structures and similar social minima required by law, thus they cause
conditions. The benchmark countries included, high wage differentials.
among others, Brazil, Egypt, Greece, Malaysia, • It is also often not only the level of legis-
Thailand and Mexico. lative burden, but the change in the level
The following emerged from the survey: that results in negative perceptions about
• Unemployment rate. South Africa had the the burden of labour laws.
highest unemployment rate of all 11 countries. • The quality of human resources, including
• Adult literacy rate. South Africa was ranked the quality of education, has an impact
second from the bottom, above Egypt only. on the extent to which the employer can
• Secondary school enrolment. The country improve productivity to compensate for
compared favourably and was ranked fifth. labour laws.
• Tertiary education enrolment. South Africa
was ranked near the bottom, just above Brazil.
• Availability of skilled labour. South Africa
was ranked last. South Africa’s competitive position is
weakened by factors such as the short-
SUMMARY
• Labour cost. With regard to wage levels,

South Africa was placed more or less in the age of skilled labour, the outflow of
middle of the competitor countries. However, skilled workers, high unemployment,
SRI International makes the point that when the education system (and various relat-
wages are adjusted for productivity, the coun- ed indicators of poor human resource
try fares much more poorly; in fact, compared development), and a lack of flexibility and
to other countries, labour accounts for the adaptability in the utilisation of labour.
highest percentage of the total cost of manu-
facturing in South Africa.
• Availability of competent senior managers.
South Africa ranked near the bottom. 7.3.2 Unit labour cost compared
• Strike activity. South Africa had the third internationally
highest level of strike activity after Chile and With rapidly increasing globalisation, producers
Greece. In these countries, however, most dis- face much stiffer competition than before from
putes were in the public sector while the private producers in other countries in both domestic
sector experienced relative industrial peace. and international markets. The prices of prod-

ucts therefore play a particularly important role of others. South African relative productivity
in determining competitiveness. Prices are deter- growth in the 1980s and 1990s was also weak,
mined by the interplay between cost and produc- especially when compared to other newly indus-
tivity, and this section is dedicated to the joint trialising countries in Asia and South America.
impact of cost and productivity. These findings are relevant to most manufactur-
In general, an increase in the cost of labour ing industries.
will impact negatively on a country’s inter- Van Dijk (2003) found that there is a con-
national competitiveness, unless compensated siderable gap in labour productivity between
for by an increase in productivity. The combined South Africa and the USA, which is widening
impact of wages and productivity is measured continuously over time. In 1970, labour produc-
by unit labour cost. As will be recalled from the tivity in South Africa stood at 32% of the USA
previous chapter (section 6.4), unit labour cost is level, while it was only 20% in 1999. When one
the cost of labour of one unit of output. As cap- also takes into account labour costs by compar-
ital moves more freely around the globe, labour ing unit labour costs, South Africa is competitive
costs are becoming increasingly important in vis-à-vis the USA, although some manufacturing
determining comparative advantage (Wood industries show higher unit labour costs than the
1994). USA.
An increase in wages and an increase in pro- The National Productivity Institute has indi-
ductivity might take place in tandem, and unit cated that unit labour costs in South Africa are
labour cost (and thus the competitive pos- increasing at a much more rapid rate than in its
ition) will remain unchanged. In some cases, major trading partners. Figure 7.1 compares the
an increase in wages might actually improve a increase in unit labour costs in South Africa with
country’s international competitiveness and that of the country’s main trading partners.
thereby promote economic growth and employ- The graph shows how much more rapidly unit
ment. This will happen where a situation of labour costs at current prices in manufacturing
efficiency wages exists, i.e. where wage increas- in South Africa increased compared with those
es result in productivity increases (see box in of its most important trading partners. The poor
section 6.4.3). However, productivity does not wage–productivity ratio in South Africa prob-
normally improve sufficiently (if at all) to fully ably contains an element of socioeconomic cor-
compensate for wage increases, and this leads to rection. This should be taken into account when
an increase in unit labour cost. making direct comparisons with other countries,
The research results regarding South African although this does not help to make the country
wages and productivity show mixed results. more competitive.
Golub (as quoted by Edwards & Schoer However, to compare unit labour cost at
2002: 1018), for instance, found that South Afri- current prices when inflation in South Africa
can labour costs in the 1990s were competitive is higher than in its major trading partners can
compared to industrial countries. Even though be misleading to some extent. One can expect
labour productivity was low, the relative wages increases in labour remuneration to keep up
were even lower. However, he also found that with inflation, i.e. if South Africa’s inflation is
South African labour costs were not competitive higher than that of its major trading partners,
compared to almost all developing countries that wages will also increase more rapidly.
were major exporters of manufactured goods. By comparing increases in unit labour cost
Even though labour productivity in South Africa in dollar terms, one takes account of inflation,
was relatively high compared to these countries, because the effect of inflation will eventually be
the relative wages were even higher. reflected in a depreciation of the national cur-
Edwards and Golub (2003: 668) also com- rency. This is precisely what has happened in
pared both the levels and the changes in produc- South Africa – there was a long-term depreci-
tivity levels in South Africa and a large number ation of the currency due to internal inflation.
of other countries, both developed and develop- If unit labour cost is consequently compared in
ing. They found that the South African labour US$ terms, a totally different picture emerges
and total factor productivity were well below from that outlined above – unit labour costs in
that of developed countries, and below that South Africa increase by about the same rate as
of some developing countries, but above that in other countries. However, this approach has

South Africa
250 UK
US
Japan
Netherlands
Index 1990 = 100
200
150
100
50
1990 1992 1994 1996 1998 2000 2002 2004
Year
Figure 7.1 Unit labour cost in manufacturing in various countries, in national currency
Source:
its own shortcomings since the depreciation may

have been caused by high increases in nominal ~ Labour costs are becoming increas-
unit labour costs, and this increase in costs is ingly important in determining inter-
not taken into account when all comparisons are national comparative advantage.
made in US$. In addition, the depreciation of the
~ Unit labour cost at current prices
national currency will in itself have a negative
SUMMARY
in manufacturing in South Africa

effect on the economy, because imports become
increased much more rapidly than
more expensive and the consequent higher cost
those of its most important trading
of fuel, machinery and other necessities further
partners, which damaged the coun-
increases inflation, which again has a negative
try’s international competitiveness.
impact on competitiveness.
However, international comparisons
The Labour Market Commission (1996: 40)
should be approached with caution
illustrates the difficulty of international compari-
owing to the complex interaction of
sons by referring to two studies. The one shows
many factors.
that by international standards South African
wages (especially unskilled wages) are high rela-
tive to productivity, and the other draws more
favourable conclusions with respect to the coun-
try’s unskilled and semi-skilled wage rates.

7.4 THE IMPACT OF INTERNATIONAL TRADE ON THE LABOUR

MARKET
7.4.1 Introductory remarks powerful feedback on the effectiveness of pro-
ductivity and growth policies, and exposes
Trade liberalisation can affect the economy and
inefficient policies.
the labour market in various ways, including the
following:
This section is a summary of the most import-
• Trade liberalisation can increase national wel- ant research findings regarding the issue at hand.
fare if countries succeed in exploiting their However, a number of methodological problems
comparative advantage. Increased welfare must be considered when trying to determine the
and economic growth can lead to an increase impact of trade liberalisation on the labour mar-
in employment. However, countries may also ket.
fail to compete successfully, leading to higher
unemployment and poverty. 7.4.2 Methodological problems and
• Trade liberalisation may affect labour stan- issues
dards. On the one hand, labour standards may Measurement of openness. The openness of an
improve if higher production leads to a high- economy is the degree to which foreigners and
er demand for labour and higher productiv- nationals can transact without government-im-
ity leads to higher wages. On the other hand, posed costs (including delays and uncertainty)
labour standards will be negatively affect- that are not levied on a transaction between
ed if trade liberalisation leads to pressure on two domestic citizens (Berg & Krueger 2002).
enterprises to reduce labour costs in order to Measures such as trade tariffs, additional health
remain competitive. requirements for foreign products and so forth
• Trade liberalisation has a distributional effect raise the cost of buying abroad. Some of these
because it increases the demand for some pro- are very difficult to assess accurately, with the
duction factors (those used more intensive- result that it is difficult to determine changes in
ly in domestic production) and reduces the openness over time.
demand for others. The demand for skilled Dynamic or static analysis. There is a differ-
labour may, for instance, increase, while the ence between opening and openness – a country
demand for unskilled labour may reduce. This may be quite closed, but by opening up trade it
can increase inequalities. On the other hand, may increase economic growth for a time. On
inequalities may be reduced by the positive the other hand, a country may have been open
effects of higher economic growth on job cre- for a very long time, so it will be very difficult
ation and the living standards of lower-skilled to detect the impact of “openness” on econom-
employees. ic growth. What may be possible to measure
is whether the openness has had an impact on
• Trade helps spread knowledge and this con-
income levels, equality and so on compared to
tributes to productivity, partly through access
relatively closed countries.
to imported inputs. It also increases innova-
Cross-country or time analysis. A further
tion. Productivity in enterprises producing for
problem is whether different countries should be
the local market increases because of import
compared with each other, or whether a specif-
competition, and similarly in those producing
ic country should be compared over time as it
for foreign markets because of the prefer-
becomes more or less open. Studies have been
ence for high-quality production often found
done using both methods.
among foreign (more discerning) consumers.
Correlation or causation. Openness and eco-
• Because an open economy increases com- nomic growth may show a correlation, but this
petition among countries, it can also have a correlation may be caused by a third factor that
positive impact by reducing monopoly rents has an impact on both openness and economic
and the influence of bureaucratic connections growth. In such a case it would be difficult to
and political power. Furthermore, it provides separate the effect of openness and of this other

factor on economic growth. One such possible income per capita are systematically and import-
factor, as is pointed out below (section 7.4.3), antly related to openness.
is institutional quality, for instance the effective- However, the research has also found that
ness of government. Good institutional quality institutional quality is another important deter-
may have a positive impact on both openness minant of the differences in income per cap-
and economic performance. There may also be ita between countries. Institutional quality is
other factors that correlate with both economic defined broadly as factors such as the rule of
growth and openness, for instance education and law, the effectiveness of government and so
skills development. Heavy investments in human forth. If this institutional quality is better, it is
capital may promote both growth and great- likely that per capita income will also be higher.
er openness, but not because greater openness It may be that institutional quality and openness
caused more growth. are also related. This may happen if, as part of
Feedback loop. An increase in income or eco- improving institutional quality, the country has
nomic growth will increase disposable income, implemented a package of beneficial reforms
and this may result in an increase in trade. This such as opening up the economy to achieve
will create the impression that there is a correla- objectives such as higher efficiency, technologic-
tion between growth and openness, whereas the al development, etc. It would then be difficult to
direction of causality will actually have been in separate the impact of openness from the impact
the opposite direction. Several studies incorpor- of institutional quality on income per capita.
ate controls for this “feedback loop”.
Population size. As is pointed out below, if
C H A N G E S O V ER T I M E W I TH I N
different countries are compared without taking P A RTI C U L A R C O U N T R I ES
into account the size of their populations, then
the results are quite different from when account This type of research examines the relation-
is taken of population size. To determine wheth- ship between changes in openness and changes
er “mankind” is benefiting from trade liberalisa- in income per capita over time within coun-
tion, it is more appropriate to determine if the tries. The advantage of this approach is that the
world population as a whole is benefiting, rather impact of institutional quality on the research
than individual countries. results is reduced – institutional quality within
Measuring consumption. A final measurement a country normally changes only very gradually,
problem raised by The Economist (13 March which will more effectively isolate the impact of
2004) is that different methods of measuring openness.
consumption show consistently different results. The general conclusion from the research
To measure the impact of globalisation on living studies is that changes in trade volumes are
standards, it is necessary to determine what hap- important determinants of changes in economic
pens to consumption patterns. However, nation- growth. Dollar and Kraay (see Berg & Krueger
al accounts data tend nearly always to give a 2002) estimate that, if the share of trade in GDP
much more optimistic view of trends in poverty increases from 20 to 40% over ten years, it will
than do household survey data. According to increase real GDP per capita by 10%.
The Economist, much of the “frequently acri- China and India are probably the most well-
monious debate” about the impact of globalisa- known examples of countries that have bene-
tion revolves around this technical issue and also fited hugely from opening up their markets. At
explains why some studies show a rapid decline the beginning of the 1980s these countries were
in poverty across the world over the last few among the poorest in the world. Once they
decades and others show little, if any, decline. opened up their markets – both externally and
internally – their per capita incomes increased
7.4.3 Impact on economic growth sharply. Between 1980 and 2000, India’s real
and income per capita GDP per capita more than doubled, whereas
China experienced a rise in real income per head
C R O S S-COUNTRY COMPARISONS
of well over 400% during this period (Wolf, as
Berg and Krueger (2002) refer to various quoted by the CDE 2005b: 15). They are no
research studies that have found that the huge longer among the world’s poorest countries, and
differences between countries in the level of have reduced poverty dramatically.

Dollar and Kraay (2001) considered the 7.4.4 Impact on inequalities
experience of 24 developing countries (with
There is a substantial body of evidence that
a combined population of 3 billion people)
shows that inequalities between countries have
that have doubled their ratio of trade to GDP
become more skewed over the last five decades.
since 1980. This group of post-1980 globalisers
Furthermore, there is also evidence that inequal-
excludes the East Asian tigers. The combined
ities within countries have similarly increased.
per capita GDP growth rate of these countries
These two effects (inequalities across countries
increased from below 3% in the 1960s and
and inequalities within countries) have resulted
1970s to 3.5% in the 1980s and to 5% in the
in greater global inequality throughout much of
1990s. This was not only due to the growth in
the post-Second World War period (although
China and India – a total of 18 of the 24 coun-
there are signs that this may have stabilised since
tries experienced strong economic growth. One
about 1990) (see Masson 2001: 11).
can compare these rates with the growth experi-
ence of the non-globalisers, where the annual
economic growth rates dropped from 3.3% in IN EQ U A L I TI E S BETW EEN C O U N TRI E S
the 1970s to only 1.4% in the 1990s. Dollar To determine whether the greater inequalities in
and Kraay also undertook time-line studies of the world can, in fact, be ascribed to globalisa-
the same countries to reduce the impact of coun- tion, one should compare like with like as a
try-specific factors, and still found a statistically result of trade liberalisation, i.e. what has hap-
significant and economically meaningful effect of pened between the globalising countries as a
trade on growth: an increase in trade as a share group. Masson (2001: 11) has found that if only
of GDP of 20 percentage points increased eco- globalising countries are considered, globalisa-
nomic growth by between 0.5 and 1 percentage tion has probably led to a greater convergence
point a year. in per capita income of rich and poor coun-
However, the rest of the developing world, tries, and not greater inequalities. The per cap-
representing some 2 million people, actually ita income of countries that opened their econ-
trades less today than 20 years ago. This has omies grew at a much faster rate than those that
resulted in them becoming marginalised, show- did not open up to international trade – in fact,
ing a decline in average GDP per capita. the per capita income in countries that did not
A few years ago the ILO gathered a group globalise barely increased at all. The increas-
of 26 individuals from diverse backgrounds ing inequality in the world is thus not directly
and affiliations to set up an independent linked to globalisation, although it is important
World Commission on the Social Dimension of to emphasise that it may be indirectly linked if
Globalisation. This Commission recognised in some countries’ economies are disadvantaged
a positive way that the global market had gen- because they have been unable to open up to
erated many significant benefits and had great international trade.
productive potential in terms of economic, pol- Subject to this proviso, the general conclu-
itical and social development. However, it also sion seems to be that globalisation has reduced
found (World Commission 2003: 36) that the inequalities between globalising countries. There
income gap between the richest and poorest seems to have been a reduction in the extent of
countries had increased significantly. One reason inequalities between rich and poor globalising
was that the richest countries were well placed countries. One reason for this phenomenon is
to gain substantial benefits from the increas- that the globalising developing countries have
ing globalisation of the world economy. Only been growing more rapidly than the developed
a minority of developing countries were able to countries (for instance, an average of 5% per
be highly successful in terms of increasing their annum in the 24 globalising developing coun-
exports and in attracting large inflows of foreign tries compared to 2.2% in the rich countries).
direct investment (FDI). The foremost among Another reason is that the per capita incomes in
these were the newly industrialised countries some of the developing globalisers were initially
(NICs) of East Asia, some other middle-income very low, meaning that the increase from the low
countries in Asia, the European Union accession base has contributed substantially to the reduc-
countries, and some Latin American countries. tion in inequalities between countries (Dollar &
Most of the sub-Saharan African region was Kraay 2001). This relates especially to India and
excluded from the benefits of globalisation. China.

The developments in these two huge countries, tries. This means that developing countries can-
which together account for a third of the world not fully exploit their competitive advantage.
population, have certainly skewed the results. Developing countries have since the beginning
The massive increase in economic growth in of the 21st century begun to stand together to
China and India means that even if inequality address this injustice (Wolf, as quoted by the
within each country in the world is increasing, CDE 2005b: 18).
and even if inequality between the richest and
poorest countries in the world is increasing, I N E Q U A LI T I ES W I TH I N C O U N TRI E S
global inequality, as measured across all the
world’s individuals, is not necessarily increasing. When it comes to research about inequality with-
Because these two countries, both of which have in countries, the results are inconclusive. Some
a high proportion of poor people and which also studies have found that inequality has increased
form a very large part of the world population, as a result of trade liberalisation, and others that
are growing so rapidly, the sharp increase in it has reduced or not changed substantially (see
the average incomes in these two countries will sources quoted by Kohler & Bruce-Brand 2001).
result in inequality as measured across all indi- In some countries, such as the Philippines and
viduals in the world actually falling. Malaysia, inequality has in fact declined. In
The success of India and China can probably Latin America, trade liberalisation has further
be ascribed directly to their commitment to widened wage inequalities, although this is prob-
move towards a market economy, one in which ably due to earlier extreme inequalities in edu-
private property rights, free enterprise and com- cational attainment (World Bank, as quoted by
petition increasingly have taken the place of the Institute for Futures Research 2002a). Also,
state ownership, planning and protection. They in China inequalities have increased, but this
chose, however haltingly, the path of econom- may also have been due to other factors such as
ic liberalisation and international integration a general liberalisation of the economy, neglect
(Wolf, as quoted by the Business Day, 1 Septem- of the rural areas and so forth (Dollar & Kraay
ber 2004). 2001).
Even though globalisation can and has Dollar and Kraay (2001) researched a total of
greatly benefited numerous developing coun- 100 developing and developed countries. They
tries, the fact remains that there are still many looked at changes in trade and in inequality meas-
poverty-stricken countries. However, many of ured over periods of at least five years in order
these seem to have failed because, as the World to capture the medium to long-run relationship
Commission on the Social Aspects of Globalisa- between trade and inequality. Their conclusion
tion puts it (2003: 55), they are “dysfunctional is that there is little evidence of a systematic ten-
states torn apart by civil strife, authoritarian dency for inequality within countries to either
governments of various hues, and states with increase or decrease with increased trade.
democratic governments but severe inadequacies However, the ILO (2005a) found that the
in terms of policies and institutions required to impact of globalisation was not always positive
support a well-functioning market economy”. for all workers. It states that the positive impact
Many African countries, furthermore, do not is biased towards the high-skilled occupations
have the prerequisites to be able to trade success- and has less impact on the unskilled.
fully, such as a well-developed transport infra- Whether this is purely the result of globalisa-
structure, functioning ports, functioning finan- tion or only due to technological change is open
cial and credit markets, and skilled workers (see for debate. There are many potential reasons
Bhorat, Mail & Guardian, 4–10 July 2003). for those already in low-skilled jobs not bene-
At the same time, these countries also face fiting much. The ILO (2005a) speculates that
further obstacles – in particular their current even though low-skilled wages may not have
unfavourable trade position vis-à-vis developed increased, the initial impact of globalisation and
countries. Developed countries protect their growth may have resulted in more jobs being cre-
labour-intensive industries, especially their agri- ated; in other words, rather than wages increas-
culture, against competition from developing ing, previously unemployed or underemployed
countries. In particular, subsidies to European people will have obtained jobs in the formal
farmers undercut imports from developing coun- labour market. According to this hypothesis, for-

al employment will thus have increased, as has The International Monetary Fund has found
een the case in South Africa from the start of (2007) that, contrary to fears that globalisation
he 2000s. If this were the case, individual work- is driving down wages, total labour compensa-
rs might not be better off, but the population as tion has grown by a cumulative 60% on average
whole would be better off because employment since 1980. This is in part due to globalisation
as increased and unemployment declined. as export opportunities have risen, while pro-
The impact of trade liberalisation on equality ductivity and output have benefited from lower
bjectives also depends on the manner in which input costs and better production efficiencies
he affected country deals with the adjustment arising from globalisation. Manufacturing wages
rocess. In the USA, for instance, labour stan- in emerging economies, especially in Asia, have
ards were flexible. The adjustment process also increased and often converged to the United
onsequently took the form of a significant States levels.
ownward movement in unskilled wages. This However, the share of income accruing to
esulted in rising inequality but also a sharp labour (as opposed to capital) has fallen due
ncrease in employment. In Europe, on the other to the negative impact of globalisation on the
and, unskilled wages were relatively better pro- demand for unskilled labour in many coun-
ected. The adjustment process consequently tries (International Monetary Fund, 2007). The
ook the form of a sharp contraction in employ- point of impact has varied between countries,
ent but no increase in inequality (see section with some countries experiencing a fall in the
.6.2). employment of unskilled workers, and others
The ILO (2005a) has found that globalisation an increase in inequality between skilled and
as reduced the gender pay gap in lower-skilled unskilled labour.
ccupations, especially in those occupations Countries adopting reforms to lower the cost
here women are widely represented. However, of labour to business (by lowering the tax wedge
ecause skilled male workers probably benefit – the difference between the payroll cost to a
ore from globalisation than female workers, firm and the net take-home pay of workers) and
his again increases the overall gender pay gap. improve labour market flexibility have general-
ly had a smaller decline in labour share. Other
.4.5 Employment and wages policy priorities are to strengthen access to
education and training, and to adopt adequate
fter analysing a number of studies, the ILO social safety nets.
2005a) concludes that “globalisation initially
as a negative impact on wages, but this effect
7.4.6 Reduction in poverty
issipates over time and eventually the impact of
lobalisation on wages becomes positive”. This Poverty reduction and reducing inequalities
ositive impact generally occurs within three are not the same and, even if inequalities have
o four years of openness. The initial negative increased, it does not necessarily mean that the
mpact can be as a result of import penetration poorest people have become even poorer as a
nd a move of producers to more profitable sec- result of globalisation.
ors, with resultant job losses in some sectors. The World Commission on the Social Aspects
The World Commission on the Social Aspects of Globalisation (2003: 44) has found that the
f Globalisation (2003: 38) refers to studies that number of people living in absolute poverty
how sharply contrasting results of the impact of worldwide declined significantly between 1990
rade on employment and wages, and concludes and 2000. However, it found that most of this
hat the relationship between trade liberalisa- decline can be accounted for by the sharp reduc-
ion and employment is likely to be a contingent tion in poverty in two very large globalising
ne, dependent on a host of country and exter- economies, India and China.
al characteristics. With regard to the impact Having considered the vast microeconomic lit-
f FDI, the conclusion is that, on the whole, erature in this regard, Berg and Krueger (2002)
DI does increase economic growth. However, found that there is no systematic relationship
mpirical evidence on the employment impact of between openness and the income of the poorest,
DI is sparse and does not permit simple gener- beyond the positive effect of openness on over-
lisation. all growth. The evidence shows that on average

the income of the poorest tends to grow one-for- social protection is therefore very important for
one with average income, although in some cases the renewed welfare of affected workers. A good
the poverty stricken may do better, and in other education system that provides opportunities for
cases worse. all is critical for success in the globalising world.
The number of poverty-stricken people may Dollar and Kraay (2001) say the following:
thus decline at the same time as inequalities
The experiences of the post-1980 globalizers
increase; this will happen if there is a general
show that the process (of globalisation) can
increase in incomes but the incomes of the rich
increase more than those of the poor. have great benefits, contributing to rising
This seems to have been the case in China incomes and falling poverty and enabling
and India. In both these countries there has some of the poorest countries in the world
been a massive increase in incomes as a result to catch up with richer countries. The real
of globalisation. This has significantly reduced losers from globalization are those devel-
poverty, even though inequalities have increased. oping countries that have not been able to
Because the populations of these countries form seize the opportunities to participate in this
such a large part of the world population, it process.
affects average trends in the world.
Dollar and Kraay (2001) have found that the The latter remark applies in particular to sub-Sa-
combination of increases in growth and little haran Africa, which for the most part has not
systematic change in inequality in the global- seen any benefits of globalisation.
isers has considerably boosted efforts to reduce
poverty. In Malaysia, for example, the average
income of the poorest fifth of the population ~ Developing countries that have
grew at a robust 5.4% annually. Even in China, been globalising (the majority of the
where inequality did increase sharply and the world population) have benefited
income growth rate of the poorest fifth lagged significantly from trade liberalisa-
behind average income growth, incomes of the tion in terms of per capita income.
poorest fifth still grew at 3.8% annually. Non-globalising countries are trading
less today than before, and have
Protectionism is the sacrifice experienced low growth in per capita
of the consumer to the producer, GDP.
– of the end to the means.
~ The impact of trade liberalisation
Frédéric Bastiat on inequalities within countries is
SUMMARY
indeterminate – there is no systematic

increase or decrease in inequalities.
7.4.7 Conclusion In some cases it seems to have had
a negative effect on the demand for
The World Bank’s conclusion is that work- unskilled labour.
ers seem to gain from global integration in the
long term (as quoted by the Institute for Futures ~ Trade liberalisation has reduced
Research 2002a). Wages have grown twice as inequalities between the rich and
fast in more globalised developing countries poor globalising countries, with sharp
than in less globalised countries. There is also increases in per capita incomes in
evidence that an open economy, especially in so China and India contributing substan-
far as foreign investment is concerned, increases tially to this reduction.
the return on education, and thereby encourages ~ Trade liberalisation has, because of its
more investment in education. However, in the positive impact on per capita income,
short term, formal sector workers (especially also contributed to an overall reduc-
older ones) in protected industries may suffer tion in poverty.
job losses and more job insecurity. Government

A
7.5 THE IMPACT OF TRADE LIBERALISATION ON THE SOUTH

AFRICAN LABOUR MARKET
Several decades of relative economic isolation As pointed out by the authors, there were
meant that enterprises in South Africa were other factors that had a much greater impact on
ill-prepared to take advantage of the opportun- the labour market than international trade, such
ities arising from trade liberalisation, while the as certain within-sector developments (such as
potential adjustment costs were correspondingly the increasing preference of employers for higher
high. skilled employees). In addition, the between-sec-
Trade liberalisation has certainly resulted tor developments also played a significant role,
in a sharp increase in exports, especially in the in particular the relatively higher growth of
manufacturing industry. Manufactured exports the tertiary sectors which resulted in a higher
increased by an average annual nominal rate of demand for skilled labour, whereas the primary
more than 10% between 1990 and 1994, and sectors, which employ most of the production
this already high growth rate was much higher workers, experienced a relative decline.
in the period thereafter, i.e. after trade sanctions Globalisation therefore seems to have shifted
were lifted (Tsikata 1999: iv). However, as far production in favour of capital- and skills-inten-
as employment in particular is concerned, the sive sectors to the detriment of labour-intensive
available research shows that trade liberalisation sectors (Nattrass 1998a: 13). Those subsectors
did not have the positive effect that might have that are classified as most capital intensive
been expected on the basis of the good export account for more than 50% of all manufactur-
performance (Nattrass 1998a: 3). ing exports. Within manufacturing imports, by
Rangasamy and Blignaut (2005) point to the contrast, less than one quarter falls into this cat-
potential positive impact of trade. Even though egory (Hayter, Reinecke & Torres 2001: 39).
the study was based on data up to 2000, it found The largest export expansion therefore occurred
that those sectors that became more externally
in the relatively capital-intensive sectors, where-
oriented had lower inflation rates and higher
as the unskilled labour-intensive sectors have
growth rates than the other sectors in the econ-
performed poorly in terms of exports.
omy for the period 1994–2000. In particular,
This reflects the fact that South Africa special-
the average growth rate for the externally ori-
ises in capital-intensive products, which is a leg-
ented sectors was 4.0% compared to 2.5% for
acy of past industrial policies (see section 3.4).
the other sectors. The difference in the inflation
Another reason is that South Africa’s competi-
rate was less marked, i.e. 8.3% for the external
tiveness may be hampered by high wages, espe-
sectors and 9.7% for the others.
However, Bhorat et al. (2010: 48) point out cially those of low-skilled workers, which exceed
that the impact of trade on the demand for corresponding productivity levels (Tsikata
labour has been relatively small. Even though 1999: vi). This puts the country at a competitive
changes in relative demand for labour due to disadvantage in low-wage, unskilled labour-in-
trade flows in the period 1970–1995 had a posi- tensive activities. The destruction of low-produc-
tive impact on all skill levels, the positive impact tivity, low-wage jobs is related to the fact that
was smaller for African and coloured workers South African manufacturing wages are high in
and for male workers. Since 1995, these categor- relation to productivity, as Nattrass (1998b: 2)
ies of employees were again the losers (being found in a study of 18 countries. All develop-
over-represented in the production categories ing countries in the Nattrass sample had a lower
of employment), with highly skilled and certain wage to productivity ratio than South Africa.
semi-skilled employees benefiting most from South Africa is thus rapidly moving away from
international trade. Overall, the impact of inter- a labour-intensive growth path as envisaged in
national trade on employment has been relative- GEAR, and high wages certainly play a role in
ly benign, with only (semi-skilled) production this regard.
workers experiencing actual job losses between There seem to be a number of reasons why the
1995 and 2005. The impact on unskilled ele- employment of less skilled workers might have
mentary workers was positive but almost negli- been negatively affected by trade liberalisation,
gible in terms of magnitude. and these can be summarised as follows:
165
• Exporting firms have been found to be rela- I M PA C T O N W A G ES A N D

tively skills intensive. A large proportion of I N E Q U A LI T I ES
South Africa’s exports, for instance, origin- Edwards and Behar (2005) have found that
ate from natural resource-based production, trade liberalisation has had the biggest negative
which has become relatively capital and skills impact on the wages of semi-skilled workers and
intensive. artisanal workers, with the wages of unskilled
• There is increased competition from low- workers being affected least. However, because
wage, labour-intensive export production in of wage rigidities, these wage effects have most
other developing countries. Firms that experi- likely been translated into employment effects.
ence high tariffs are less skills intensive, and What this means is that in a freely functioning
they will thus lose more market share from labour market, wages of lower-skilled work-
trade liberalisation. This, combined with high ers have declined owing to trade liberalisation.
unskilled wages relative to productivity in However, because bargaining councils and
South Africa, has had a negative impact on the collective wage agreements ensure that wages
employment of unskilled workers in this coun- cannot really decline, trade liberalisation then
try. impacts negatively on employment levels.
Although there is relatively little empiric-
• Firms that import a large percentage of their al evidence, trade liberalisation in South Africa
raw materials are more skills intensive. As might thus have increased inequalities, at least
they will benefit more from trade liberalisa- over the short term. This is mostly because the
tion, trade liberalisation increases the skills employment of lower-skilled workers might have
structure of the economy. been negatively affected, as outlined above, and
• Trade liberalisation often induces “defensive an increase in such unemployment will have
innovation”, which is more skills intensive. increased inequalities. However, once the posi-
The drive to increase productivity has resulted tive effects of trade liberalisation on economic
in less demand for unskilled workers and a growth starts filtering through to the economy
greater demand for skilled workers. (as might have started to happen from the begin-
ning of the 2000s), employment and also equal-
South Africa, as a middle-income country, has ity objectives may be more favourably affected.
in effect been squeezed from both ends – on the
one hand it cannot really compete with low-
wage countries such as China or India because ~ Trade liberalisation has resulted in
its wage levels are too high; on the other, it can a sharp increase in South African
also not successfully compete with the high- exports, especially in the manufac-
wage, high-productivity countries because of turing industry. However, it did not
skills shortages and lack of technological know- initially have the positive effect on
how and the latest equipment. (There are some employment that might have been
significant exceptions to this generalisation.) expected, even though this might
So even though there have been sectoral shifts have changed after 2000.
SUMMARY
away from unskilled labour, this is not necessar- ~ Trade liberalisation has shifted pro-
ily due to trade liberalisation, but may be due duction in favour of capital- and
to other factors such as changes in domestic skills-intensive sectors to the detri-
demand, technology or relative wages. Edwards ment of labour-intensive ones, and
(2001: 13) also refers to the adverse effect of thereby had a negative impact on the
labour regulation making adjustment more dif- employment of unskilled labour.
ficult, with the result that adverse demand or
other shocks show up in the form of unemploy- ~ The employment losses in
export-orientated sectors have been
ment rather than in other forms of labour mar-
relatively greater than in import-com-
ket adjustment.
peting ones, at least in the initial years
after trade liberalisation.
7.6 ADDRESSING THE CHALLENGES OF GLOBALISATION

South Africa has moved from being a relatively • Some countries suffer from the intrinsic dis-
closed economy to a relatively open one. Some advantages of adverse geography and climate.
other countries have also made this transition, • Some countries may have permanently missed
but apparently with more success than South the opportunity to industrialise as a result of a
Africa in terms of addressing the unemploy-
temporary phase of poor policies.
ment consequences of such a transition. This is
discussed below. These countries have adjusted
The World Commission on the Social Dimen-
their labour market policies in various ways.
sion of Globalisation (2003) strongly emphasis-
However, since 1994 South Africa seems to have
es that the manner in which countries manage
gone in the opposite direction by firstly increas-
their internal affairs will influence the extent
ing non-wage labour costs; secondly by introdu-
to which people will benefit from globalisation
cing various measures that increase wage costs;
and be protected from its negative effects. “The
and thirdly by introducing measures that often
reduce rather than increase flexibility. These are response to globalisation can be said to begin at
discussed in sections 4.7 and 6.6. home” (2003: xi). In particular, the report states
The opening up of South Africa’s borders to that there is wide international agreement on
international competition has had a significant the essentials which all countries must urgently
impact on several industries that are covered by strive towards:
bargaining councils. Many of these industries • Good political governance based on a
suddenly faced competitive forces that did not democratic political system, respect for human
exist before and the pressure on employers to rights, the rule of law and social equity
reduce costs and increase productivity increased
• An effective state that ensures high and stable
greatly. This is an example of tariff reform out-
economic growth and raises the capabilities of
pacing labour market reform, with negative
people through education
consequences for employment creation and
unemployment. • A vibrant civil society, with strong represent-
ative organisations of workers, employers and
other interest groups
7.6.1 General principles
Before considering some of the success stories The report calls for a fair and inclusive process of
of countries that have managed globalisation, it globalisation. There should be more institutions
may be useful to recall what the World Bank has to ensure the smooth and equitable functioning
said about failures. It identified the following of global markets and to address the asymmetric
reasons for some countries, especially in Africa effect on rich and poor countries. Among others,
and the former Soviet Union, not being able to core labour standards should provide a min-
improve living conditions and alleviate poverty imum set of global rules in the global economy.
as a result of globalisation: However, demanding that poor countries adopt
the standards of the rich countries may also be
• These countries rely heavily on the export of a counterproductive and may increase poverty in
narrow range of primary commodities, which these countries, as discussed in section 7.6.4,
makes them very vulnerable to declining which deals with the social clause.
export prices relative to import prices.
• Some countries have poor policies and infra- 7.6.2 Some case studies of how
structure, weak institutions and corrupt gov-
countries have succeeded in a
ernments. Good government is particularly
important to ensure correct macroeconomic
globalised world
and microeconomic policies, a predictable Nattrass (1998c) points out that countries
environment, and the absence of crony cap- undergoing trade liberalisation must be par-
italism (i.e. where friends and family are ticularly concerned about their labour market
bestowed benefits such as state contracts, policies. Where high tariff barriers provided the
licences and so forth). space for both profitable investment and labour

market protection, trade liberalisation reduces flexible forms of work. High direct and indirect
that space dramatically. Reforming countries labour costs have meant that European employ-
thus face a dilemma if they are to avoid the ers have been unable or unwilling to expand
possible negative employment consequences of employment, whereas wages in the USA have
globalisation: either the labour market must be been sufficiently flexible to “clear” the labour
made more flexible by reducing non-wage labour market, i.e. to keep unemployment to a min-
costs and/or allowing wages to fall, or produc- imum.
tivity must rise dramatically if enterprises are to The European Commission (1997: 10–12)
remain competitive. The latter, however, takes has highlighted the increasing burden of tax on
time and may even involve job losses over the labour in member states, and the negative effect
short and medium term. Greater openness makes this has had on employment. Social security
the economy increasingly subject to global com- contributions, for instance, now represent more
petitive forces. Competition on the basis of than 20% of total labour costs. This has sub-
labour costs seems to have become increasing- stantially increased the indirect cost of labour,
ly prevalent in international trade, which means while the opposite has happened to the indirect
that appropriate labour policies play a critical cost of other factors of production, such as cap-
role in a country’s ability to adjust to and face ital, energy and natural resources. Some mem-
international competition. ber states have reduced the starting wages and
social security contributions of young workers to
There is nothing Japan really encourage their recruitment.
wants to buy from foreign However, the lower wages in the USA
countries except, possibly, occurred at the lower end of the skills spec-
neckties with unusual designs. trum, with the result that wage differentials,
and consequently inequality, increased signifi-
Yoshihiro Inayama cantly (Wood 1994: 460–462). Furthermore, the
real wages of unskilled workers often actually
declined, resulting in a growing phenomenon of
(A) M
ORE JOBS OR BETTER JOBS: THE the working poor (Buckberg & Thomas 1995).
U SA VERSUS EUROPE
In Europe, there was practically no increase in
If the experience of other countries is anything inequality.
to go by, countries face a choice in address- The growing inequality in the USA and
ing the challenges of globalisation – either increasing European unemployment have gener-
to allow greater wage flexibility, which will ated much controversy. For instance, it has been
increase inequalities, or to protect the wages argued (Wolf 1997) that Europe has been able
of the unskilled, which will increase unskilled to generate remunerative employment for the
unemployment. At the risk of oversimplifying male breadwinner and that most unemployment
through generalisation, the USA and Europe are is found among what Wolf calls “outsiders”, i.e.
examples of countries that opted for opposing women, the young and older workers. Further-
policy choices. more, wage flexibility alone is not sufficient to
In the five years to 1997 some 12 million jobs create more jobs, although it seems to be a neces-
were created in the USA, while there was almost sary condition for this (The Economist 1996).
no net increase in jobs in continental Europe It is also said that even though the newly creat-
over the same period. In 1997, unemployment ed jobs in the USA may not be quality jobs, the
fell to a 24-year low in the USA, while it reached wages paid in these jobs are mostly higher than
a post-war high in Germany, for example. the average wage and allow people to acquire
Most observers agree that the fundamental skills and experience.
reason for this has been more flexible labour Some observers state that the reason for the
markets in the USA, and wage flexibility in par- USA’s performance does not lie with wage flex-
ticular, as opposed to highly regulated labour ibility, but with less rigid regulations governing
markets in Europe. The European Commission output-related matters such as working hours,
(1997: 38) maintains that social security systems planning and zoning, combined with the more
and taxation policies in European Union mem- effective channelling of capital to start-up enter-
ber states have not yet been fully adapted to prises (Baker 1997).

Overall, however, these findings suggest that if • Unemployment benefits were reduced and it
countries respond to competition from low-wage was made harder to qualify for such benefits.
countries by allowing greater wage flexibility, This reduced the reliance of the unemployed
then wage differentials will increase (as in the on unemployment benefits during a spell with-
USA), whereas if they respond by protecting the out work and served as an incentive for them
wages of unskilled labour, then unemployment to find a job.
will rise (as in Europe). However, one country • Unemployment benefits were actively used to
in Europe seems to have succeeded in creat- promote work experience.
ing jobs while retaining the basic principles of
• There was a radical reform of sickness benefits
social democracy and the protection of working
to ensure that they were more cost-effective
standards, and that is the Netherlands. Another and prevention was emphasised.
apparently successful example is Ireland.
• The number of young people combining work
and training was sharply increased through
(B) M
O RE AND BETTER JOBS: THE
the availability of part-time work and a reduc-
N ETHERLANDS
tion in study grants.
The experience in the Netherlands has been dif-
ferent from that of both the rest of continental However, the Dutch economy, which is high-
Europe and the USA. Employment in the Neth- ly dependent on an international financial sec-
erlands increased quite rapidly from the latter tor and international trade, did not escape the
part of the 1980s and into the 1990s. Unemploy- ravages of the 2008 financial crisis. The Dutch
ment was halved to 6.2% in 1997, and fell to financial sector in particular suffered, due in part
even less thereafter. It occurred with little con- to the high exposure of some Dutch banks to
flict and without sacrificing the national goal of US mortgage-backed securities, and the govern-
redistributing money from the rich to the poor ment had to pump massive amounts of money
(Mayer & Grillet-Aubert 1997). The country into the financial system to prevent a collapse.
also succeeded in increasing the employment of Unemployment increased, but after three years
young people. of recession, the unemployment rate still stands
With the support of social partners, the Neth- at only 5.25%.
erlands introduced the following measures to
improve its economic and labour market per- (C ) F
R O M R U RA L BA C KW A T E R TO
formance (Mayer & Grillett-Aubert 1997; Euro- C E L T I C TI G ER: I R E L A N D
pean Commission 1997: 9; Auer 2000; Ozaki Ireland is one of the economic success stories of
1999): the 1990s. Economic growth and employment
• Wage restraint was introduced through increases have far exceeded those achieved else-
national centralised bargaining. Auer where. For instance, the Irish economy expanded
(2000: 40, 59) refers to wage moderation as by almost 70% in the ten years from 1987, com-
a “crucial part of macroeconomic policy” and pared to an expansion of only 27% in the USA
“the core target of the social pact”. (Barry 1999: 2). The number of jobs increased
by 23% over the same period, outstripping even
• Minimum wages were initially cut and there- the USA, the “job creation dynamo”, which cre-
after frozen. ated 17% new jobs in this time. The result was
• Public spending was cut sharply. that the unemployment rate dropped from 17%
in 1987 to 4% in 2000.
• The social security contributions of employers
It all started in the mid-1980s when the gov-
were reduced from 20 to 7.9%.
ernment, labour and business realised that they
• Part-time work was made easier (by permit- had to develop new ways of working or face a
ting part-timers to be paid less than full-timers continuing spiral of unemployment, debt and
for the same job). This resulted in the propor- economic decline. This led to a number of social
tion of part-time workers increasing sharp- pacts which were negotiated in a national col-
ly, by over 65% between 1985 and 1995, lective bargaining forum. They addressed a wide
which meant that two-thirds of the country’s range of economic and social policy issues cov-
employment growth was in part-time jobs. ering tax reform, wages and a commitment to

health, education, job creation and social secur- The parties agreed to various trade-offs.
ity issues. Labour agreed to a form of wage restraint with
The ILO (Auer 2000: 89) selects only three wage increases equal to or less than inflation.
factors to explain the relative success in the Increases were also to be linked to productiv-
labour markets in both Ireland and the Nether- ity improvements with the approach that there
lands. These are macroeconomic policy, social would be a “change for pay rather than pay for
dialogue and labour market policy (including change”. This simply meant that labour agreed
labour market reforms). to changes in work practices, which could in
With regard to the first, macroeconom- turn lead to productivity and wage increases,
ic policy, Auer refers to price, interest and rather than employers granting the unions wage
exchange rate stability, as well as to providing increases to “buy” changes in work practices.
fiscal stimuli to the economy against a general In exchange, employers and the government
background of fiscal consolidation. agreed to reduce weekly working hours from 40
The government agreed to create an enabling to 39. Employers also agreed to become more
environment for job creation by, among other competitive and create jobs. The social partner-
things, bringing government expenditure under ship approach since the mid-1980s also resulted
control. This, together with financial support in industrial peace, which together with other
from the European Union, allowed for tax policy initiatives attracted foreign multinationals
reductions, which were also traded in wage into Ireland.
negotiations for wage moderation on the part of The third factor is the introduction of labour
trade unions. One-third of the increase in Irish market reforms aimed at making the labour mar-
real after-tax wages since 1987 has therefore ket more flexible (Tille & Yi, as quoted by Stry-
come in the form of tax reductions, especially dom 2003: 5). This included passive, income-re-
employment taxes (Barry 1999: 4). In addition, placement schemes as well as active labour
the Irish government cut corporate taxes to a market policies such as labour market train-
mere 12.5% compared with 30% or more in ing, adjustment flexibility for enterprises and
European Union and OECD countries. improved delivery of employment services. The
Another important factor that contributed to ILO (Auer 2000: 54) as well as Barry (1999: 3)
Ireland’s success story is that the economy was emphasise the importance of the centralisation
substantially opened up and the protectionist of wage bargaining at national level for the suc-
barriers dismantled. Dependence on primary cess of both Ireland and the Netherlands. Three
product exports (agricultural products) was bargaining models seem to produce positive
reduced, partly by opening up the economy and outcomes, i.e. highly decentralised bargaining,
partly by policy initiatives. Ireland also chan- highly centralised bargaining, and moderately
nelled substantial resources into education, by decentralised but highly coordinated bargaining
among other things providing free secondary (Calmfors & Driffill 1988; sources quoted by
education to everyone. Tille and Yi (as quoted Auer 2000: 54). Negative outcomes seem to be
by Strydom 2003: 12) maintain that Ireland’s produced by a position in between, which is the
economic boom was directly related to invest- model in South Africa (see section 5.6).
ment in people. About 80% of the population Labour productivity increases in Ireland in the
have an upper secondary level of education. The 1990s were nothing short of astounding – at the
increase in the supply of skilled people through same time the capital to labour ratio was declin-
reforms in education was probably one of the ing (in contrast to sharp increases in South Afri-
most important reasons for the sharp increase in ca) and labour productivity and the total factor
FDI in Ireland. productivity were increasing very rapidly. This
The second factor, social dialogue, has facili- has resulted in Ireland currently being the richest
tated wage moderation, and has also assisted country in the European Union after Luxemburg
with reforms of social security, the labour mar- in terms of per capita GDP.
ket and labour market policy. Auer refers to the However, there has also been some criticism
fact that these reforms have not always been of the “Irish model”. Allen (Business Report 25
easy for the partners, especially trade unions, May 2005), for instance, argues that the coun-
to accept because they were not always in the try’s success was not the result of a social part-
short-term interests of their members. nership, but a particular set of circumstances
that would be difficult to repeat. For instance, union structures, the social welfare system, skills
US companies needed a platform inside the development and significant wage moderation
European Union to gain access to that market, (Kyloh 1989).
and Ireland offered an English-speaking, highly It is important to note that most of these chan-
educated workforce that was relatively cheap. ges were initially implemented with the implicit
The counter-argument is that although access to or explicit support of the trade unions in terms
the European Union might have been a unique of a 1983 accord between the government and
factor, many other factors such as the high- the unions (the Prices and Incomes Accord).
ly educated workforce, labour at low cost, low Initially, the system of wage determination was
corporate taxes and the elimination of industrial radically centralised. This allowed the Accord to
strife were very much part of the strategy for be given force by the Arbitration Commission
building the economy. (later called the Industrial Relations Commis-
It is true that the Irish success story also has a sion) by fully indexing wages to inflation. Two
darker side – real wages lagged behind and the years later, however, wage increases below the
economy has more inequalities than many other rate of inflation were granted and the outcome
European countries. The environment has also of the Accord was a significant fall in real wages
become less union friendly, and there is currently – by anything between 2 and 10% (Bramble &
an absence of legislative compulsion to recognise Kuhn 1999: 9). In 1988, another requirement
unions. was added, in terms of which wage increases
The strongest criticism against the success of would be granted in exchange for productivity
the Irish model is that the global recession that increases.
started in 2008 had a massive negative impact In 1991, these changes had the eventual effect
on Ireland. The high economic growth rates up of all parties supporting enterprise bargaining
to that stage had resulted in increasing inflation, rather than the awards system of the Indus-
and this led to a property price bubble. The Irish trial Relations Commission. This resulted in a
economy was skewed towards the construction significant liberalisation of the labour market,
industry, and the high property prices were among others by encouraging even individual
financed by the banks. The result was that when contracts of employment. In 2005, the Minister
the property bubble burst, the banks were at for Employment and Workplace Relations again
the forefront in experiencing the impact of the referred to the significant legislative reform of
recession, resulting in the government having to the system, which had the objective “to make
step in to support the banks. Ireland was con- the primary focus of the system [as] agreement
sequently the first EU country to enter a reces- making at the workplace” (www.mediacentre.
sion. At the time of writing, the Irish economy dewr. gov.au).
had not yet showed firm signs of escaping from The advantage of enterprise bargaining and
the recession that commenced in 2008. More- workplace agreements (i.e. contracts between
over, unemployment is relatively high at a rate an employer and a single employee) is that they
of 14%. provide for much more specific linkages between
productivity and pay. The government argues
that the outcome of these agreements has been
(D) F
REEING UP THE LABOUR MARKET:
positive for all stakeholders, with the average
A US TRALIA
weekly pay for workers covered by a work-
In the 1980s the Australian government intro- place agreement being about 35% higher than
duced a wide-ranging set of policies to help for workers on collective agreements. However,
foster the internationalisation of that econ- not all analysts are as positive about the impact
omy. This related in particular to liberalising of the changes to the Australian labour policies
the economy by substantially reducing protec- on workers (see, for instance, Bramble & Kuhn
tionist measures, abolishing exchange control, 1999).
and introducing significant tax reforms and a Further significant labour policy changes were
more liberal foreign investment policy (Kyloh implemented in 2005, this time without the sup-
1989: 116). However, far-reaching labour mar- port of the unions. The 2005 changes included
ket reforms were also implemented, for instance making agreements much simpler by elimin-
with regard to wage-setting mechanisms, trade ating overly prescriptive provisions; allowing
171
agreements between employers and individual

employees to vary federal awards containing inequalities (as in the USA), or to pro-
minimum employment standards; excluding tect the wages of the unskilled, which
small and medium-sized businesses (with fewer will increase unskilled unemployment
SUMMARY
than 100 employees) from unfair dismissal (as in Europe).
laws, and requiring employees in enterprises ~ However, two countries, Ireland and
with more than 100 employees to have been the Netherlands, achieved relative
employed for six months before they can enjoy success with their policies by giving
protection against unfair dismissals (see various attention to macroeconomic policy,
documents on www.workchoices.gov.au and social dialogue and labour market
www.australianbusiness.com.au). policy, particularly wage moderation
These policy changes were intended to fur- and active labour market policies.
ther enhance the ability of the Australian econ-
omy to adjust rapidly to international compe-
tition. Australia has created nearly one million
new, permanent, full-time jobs since 1996, and 7.6.3 Economic growth and
the unemployment rate in 2005 dropped to a development: Nepad
30-year low of 5%. Labour productivity has It goes without saying that all countries want
been increasing at an average of 2% per annum to improve their economic growth performance
since the early 1990s. Industrial unrest has been in order to address the challenges of globalisa-
greatly reduced – from 171 working days lost on tion. In Africa, a new economic initiative was
average per 1000 employees in the 1980s to the launched to improve economic performance. It
current level of less than 20. is called Nepad.
There were further significant changes in 2010, The New Partnership for Africa’s Develop-
with the introduction of the National Employ- ment (Nepad) is a framework that sets out cer-
ment Standards, the Fair Work Act, a national tain conditions that will ensure the socioeconom-
minimum wage order and the modern awards ic development of Africa. It was endorsed by
system (see www.fwa.gov.au). The National the participating heads of state in 2001 (www.
Employment Standards introduced minimum nepad.org).
standards in respect of employment conditions By 2015, Nepad hopes to demonstrate growth
such as working hours, leave, notice periods, rates averaging at least 7% across the entire con-
severance pay and the like. These apply to all tinent. It seeks to set African countries on a road
employees and cannot be displaced, even if an to sustainable development and targets areas of
enterprise agreement includes terms that have debt relief, poverty reduction, the provision of
substantially the same effect. In fact, enterprise health care and the reduction of mortality rates.
agreements are subject to approval, and provision It aims to promote the role of women in all
is no longer made for individual agreements. activities.
Importantly, Nepad has the support of the
eight largest economies in the world and of the
European Union. What is crucial to note is the
~ Countries undergoing trade liberalisa- objective to materially shift the nature of inter-
tion must be particularly concerned national support. In the past there has been
about their labour market policies, plenty of intellectual and verbal support for the
because the reduction of high tariff regeneration of the African continent, but finan-
SUMMARY
barriers will eliminate the space pre- cial support has been limited. Now, the objective
viously available for both profitable is to create an environment that will be condu-
investment and high labour market cive for such financial assistance as well.
standards. Nepad contains some preconditions for
~ Countries seem to face a choice sustainable development. The first, which is
in addressing the challenges of “Peace, Security, Democracy and Political Gov-
globalisation either to allow greater ernance”, emphasises political stability, institu-
wage flexibility, which will increase tional reform and capacity building, as well as
good governance. These are all seen as critical
172
to assuring investor confidence. The peer review tic savings ratios are insufficient to drive the
mechanism will be critical to ensure that indi- required capital investment to achieve the
vidual leaders are encouraged to conform and Nepad target of 7% annualised GDP growth.
adhere to Nepad’s governance principles. How-
ever, developments with regard to human rights • The “Market Access Initiative” seeks the
abuses in Zimbabwe and South Africa’s failure diversification of eco
to unequivocally condemn such abuses will not al linkages and the re
be conducive to meeting this precondition and straints. It stresses the
may very well damage the objectives of the pro- urity of tenure, good
gramme as far as South Africa is concerned. partnerships and reiter
Secondly, as part of “Economic and Corpor- analysis by task teams
and competitive areas
ate Governance”, Nepad recognises that the pri-
in order to achieve s
vate sector is a critical element in leading eco-
access is to ensure th
nomic growth, the latter also providing capital
Africa are reciprocate
for governmental projects for poverty alleviation
and multilateral and
and national upliftment. The Nepad framework
giving African countr
document recognises the need to “organise dia-
developed markets an
logue between the government and the private
of resources in the for
sector to develop a shared vision of economic
cing.
development strategy and remove constraints on
private sector development”. Good public finan- • Finally, the “Human
cial management is also referred to under this Initiative” examines
precondition. poverty reduction, e
Policy and regulatory frameworks must facili- brain drain and health
tate and enhance rather than hinder this growth, the problems faced by
recognising the need for real returns for both
domestic and foreign investors. This, in turn,
should contribute to the lowering of risks for
investors. It is recognised throughout the Nepad Nepad is a framew
framework that the risk profile of doing business tain conditions tha
SUMMARY
in Africa can be reduced only through transpar- economic develop

ency and predictability, and that creating con- refers to some pre
able developmen
ditions conducive for investment is a critical
Peace, Security, De
priority. It is essential to reduce the cost of doing
Governance; Econ
business in Africa, and to ensure that Nepad is
Governance; and
not simply a programme of projects limited to a
and Integration.
group of bureaucrats.
The third precondition is “Regional Cooper-
ation and Integration”, which refers to the
importance of the countries working together to
achieve synergies and thereby their objectives. 7.6.4 The social cla
This will help the countries pool their resources international
and expand markets. Some of the priority sectors rights
identified for development are infrastructure,
information and communications technology, As outlined above, coun
human development (including health), agri- have an absolute or co
culture and diversification of production and the production of certai
exports. can be determined by f
Some of the other key points contained in the tive abundance of prod
labour and capital and t
Nepad framework are the following:
Because capital has bec
• The “Capital Flows Initiative” identifies the of labour has increasing
critical need to attract FDI as the domes- determinant of competiti
µ BACK TO CONTENTS
The price of labour is in turn determined by • A further argument in favour of a social clause
a range of factors. Fundamental among these is that low labour standards violate the human
is the extent to which the government protects rights of workers in developing countries. The
basic labour rights such as freedom of associ- international community has a duty to ensure
ation and the right to bargain collectively. In decent labour standards and should pressurise
some countries these and other labour standards countries that ignore decent labour standards
do not enjoy significant protection in law, with by using international trade policy, and in par-
the result that these countries compete unfairly ticular trade sanctions.
on the basis of very low labour costs.
Over the past few years there has consequently • Countries whose comparative advantage lies
been an intense debate on how these countries in low labour costs will only be able to com-
can be compelled to ensure basic labour stan- pete in the long run by continuously depress-
dards. One such mechanism is the linking of ing labour standards at the cost of a long-
international trade with minimum labour stan- er-term loss of productive efficiency and job
dards. A so-called “social clause” has been pro- quality (Feys 1999: 1459).
posed, i.e. the inclusion of provisions in bilateral
or multilateral trade agreements by which trade However, there is also much opposition to such
is conditional on the respective countries ensur- a social clause, and not necessarily from coun-
ing that acceptable labour standards and basic tries or parties intrinsically opposed to the pro-
worker rights are maintained in their countries tection of basic labour standards. The following
(Barker & Holtzhausen 1996). A social clause in are arguments against the social clause:
any agreement on trade will therefore tie trade
• The opponents of a social clause argue that
to acceptable labour standards and workers’
international trade is not the root cause of
rights in both countries.
poor labour standards. In fact, the oppos-
Arguments in favour of the social clause
ite seems to be the case – international trade
include the following:
has strongly encouraged growth and poverty
• The advocates of a social clause argue that it reduction (Dollar & Kraay 2001). To use
will promote fair competition between export- trade policy to improve labour standards is
ers of the relevant countries, and that without simply dealing with the symptoms of a prob-
it conditions of work all over the world may lem.
very well deteriorate. Labour costs form an
• The social clause is used as a smokescreen for
important element of the total cost of produc-
raising protectionist trade barriers, because
tion, with the result that international com-
it is designed to increase the costs associated
petitiveness to an important extent depends
with the most important source of compara-
on the labour costs in one country relative
tive advantage in developing countries – cheap
to those of another. If one country applies
labour (Kohler & Bruce-Brand 2001).
relatively high labour standards and ensures
favourable conditions of employment, while • The social clause will not achieve its object-
another country applies practically no labour ive as it is more likely to hurt people from
standards, even to the extent of allowing developing countries than improve their living
slavery or child labour, the first country will standards. Such countries cannot improve the
obviously be in a disadvantageous position working standards of their workers merely by
with regard to international trade. deciding to pay higher wages or by providing
better working conditions. Low wages and
• In addition, unfair international competition
poor working conditions are a reflection of
will increase the pressures for increased pro-
low productivity, not an independent source
tectionism, which will not be in the long-term
of comparative advantage (Golub 1997: 21).
interests of the world as a whole. The charge
In order to improve working conditions, coun-
is that some developing countries are engaged
tries must first produce and earn more, and
in “social dumping”, i.e. competing unfair-
ly by denying their workers basic rights and the best way to spur growth is to reduce rather
decent conditions. This forces down wages than increase trade barriers.
and conditions of employment and threatens • Another reason why the social clause may
living standards. aggravate poor socioeconomic conditions in

S O C I A L D I A L O G U E A N D C O D E T E R M I N AT I O N 11
transition to democracy than would otherwise such as Nedlac enable the labour movement to
have been the case. In addition, it was comfort- shape the direction of policy, or whether they
ing to all parties to be involved in policy mak- merely “institutionalise” the labour movement
ing in one way or another, and this also helped to accept, for instance, the government’s macro-
ensure investor confidence. The fact that it was economic strategy. In other words, whether the
an agreement-making body helped to entrench situation can be described as state corporatism
stability, and also prevented the new govern- rather than bargained corporatism.
ment, which had relatively little experience at The labour movement initially achieved sever-
that time, from experimenting with populist al successes through its involvement in Nedlac.
policies that would have been very damaging to These include (see Bezuidenhout 2000: 20)
the economy (Parsons 2001).
• achieving a relatively progressive Labour Rela-
Grawitsky (2005: 32) lists the following
tions Act, despite certain weaknesses
achievements of Nedlac:
• a degree of success in putting human and
• It has created a forum where the social part- labour rights on South Africa’s trade agen-
ners have been able to work on their relation- da, by convincing the government to require
ship and build some level of trust. It is through trade partners to sign a “side letter” to trade
informal relations that the consolidation of agreements in which they commit themselves
democracy has been strengthened. to respect human rights and to commit them-
• It has been an important instrument to selves to work towards the ratification of core
strengthen democratic governance and trans- international labour conventions
parency in the decision-making process. • through the Social Clause Framework Agree-
• It has given birth to a range of tripartite bod- ment compelling the South African govern-
ies and has thereby extended the concept of ment to ratify certain core international labour
social dialogue. conventions.
• It has created a central place where greater
consensus has been achieved among key stake- However, the refusal of the government to dis-
holders on a diverse range of issues. cuss the GEAR macroeconomic policy in Ned-
lac has curtailed the extent to which the labour
Friedman’s conclusion (2000) is that Nedlac will movement has been able to use the Council to
continue to face severe obstacles and wield lim- influence the national developmental policy
ited influence. Parties will continue to attempt to framework. Instead, according to some observ-
impose their will on the other parties, and will ers, Nedlac has become an institution in which
repeatedly be constrained by the need to take the the implementation of liberalisation can be nego-
others’ views into account. However, he remains tiated (Bezuidenhout 2000: 20).
optimistic that, in time, parties might find a con- As far as the business community is con-
structive form of “concertation” more attract- cerned, Handley (2002) finds that the South
ive than grudging recognition of the others as an African business community is probably the lar-
unpalatable reality. gest and most independent-minded private sector
in the continent, yet its ability to lobby govern-
ment successfully does not reflect this.
I M P A CT OF BUSINESS AND LABOUR ON
Handley (2002) also examines the way in
G O V ERNMENT POLICY
which business in some other African countries
As stated by Bezuidenhout (2000: 20), the very has influenced its respective governments, con-
advent of political democratisation opened up cluding that while corporate South Africa has
space for the labour movement to influence done better than its counterparts in Ghana or
policy making. Also, its position in society is Zambia, the business community in Mauritius
recognised through the formalisation of work- has been more successful than business in South
ers’ rights as human rights that are protected Africa.
in the Bill of Rights enshrined in the Constitu- She concludes that the major weakness of the
tion. However, with the establishment of Ned- South African business community is that it has
lac at the same time as the advent of democracy, put too much emphasis on building consensus
commentators differ as to whether institutions with organised labour. This approach
275
C H A P T E R 1 1 S O C I A L D I A L O G U E A N D C O D E T E R M I N AT I O N
caused big business, time and time again, to private sector has had to adapt its lobbying
concede to organised labour on SA’s indus- strategies to a new democratic environment,
trial relations framework, instituting a rigid and its response has been slow and uncertain in
system that prices the unemployed out of many areas. A number of mainly left-of-centre
the job market. It is an approach to policy organisations have been much quicker off the
mark and are having an impact on the legislator.
making that attempts to minimise potential-
These groups are often funded with international
ly damaging conflict, and this had been of
money.
great value. It may be, however, that there
are some issues important enough to risk a
scrap over (Handley 2002).
• Nedlac was formed early in 1995 to
facilitate cooperation and seek con-
She points out that in spite of concentrating
sensus between organised business,
its efforts on labour policy, most of business
organised labour, the development
SUMMARY
appears unhappy with the outcome.
constituency and the government on
While the government has, since the elections
economic, labour and development
in 1994, radically shifted its macroeconomic poli-
policy issues.
cies, and has adopted a macroeconomic policy
that has pleased business, Handley argues that • Even though Nedlac is much
this has been mainly because of the influence of maligned, it does remain the only real-
“that amorphous entity the market”. The busi- istic alternative to build consensus on
ness community does not seem to have had much policy issues among major stakehold-
influence in formulating economic policy. ers in the country.
The CDE (1999: 23) has also found that the
11.4 OTHER NATIONAL CONSENSUS-SEEKING BODIES

11.4.1 Millennium Labour Council Nactu. The business representation is more ad
hoc, and consists of a number of individuals,
The Millennium Labour Council (MLC) was
as well as the chief executives of some busi-
formed in 2000 as a bilateral structure between
ness associations, specifically the South African
business and labour. The objective of the MLC
Chamber of Business (Sacob), the Afrikaanse
is to develop a shared analysis of the crisis of
Handelsinstituut (AHI), Nafcoc and the Foun-
unemployment and poverty in the country and
dation for African Business and Consumer Servi-
to pursue potential solutions with the govern-
ces (Fabcos). More fundamentally, the business
ment and Nedlac.
representatives on the MLC are not elected or
In the infancy of societies, appointed by any business organisation, not
least the overarching business lobbying body,
the chiefs of the state shape
BUSA. The business representatives on the MLC
its institutions; later the
thus not only function without a mandate from
institutions shape the chiefs business, but also without the implicit support of
of state. a large part of business.
Baron de Montesquieu In his address at the launch of the MLC,
President Thabo Mbeki referred to the MLC
The MLC comprises 12 members each from as a forum to explore innovative solutions at a
business and from trade union constituencies. bilateral level, a think tank. The President added
The trade unions are generally represented by that the significance of the MLC did not lie in it
the leadership of the three main trade union fed- being an institution of negotiation, because for
erations in the country, i.e. Cosatu, Fedusa and that there is Nedlac.

One of the most important reasons for the not delegates or formal constituency represent-
MLC coming into being was probably the fact atives, it undermines the principle of worker
that some key leaders, especially senior busi- control. In addition, the MLC discussions are
ness leaders, were not actively participating in confidential and unmandated, which further
the social dialogue taking place in the country. undermines trade union democracy.
The labour leadership corrected this by involv-
ing some individual decision makers from both Jansen (2001) also makes the telling point that
the white and the black business communities in the rationale for the MLC’s existence in rela-
negotiations with them in this new body. How- tion to Nedlac has never been fully explained.
ever, the fact that these business leaders are not The Millennium Agreement simply states that
specifically elected nor mandated by organised the MLC will be “associated with” Nedlac as a
business is a serious shortcoming. When the bilateral council and will operate with full policy
MLC became involved in negotiations regarding autonomy.
the labour law amendments in 2001, it resulted
in a deal that was not supported by a large part
of the business community.
It was also never envisaged that the MLC The Millennium Labour Council (MLC) is
would become involved in the nitty-gritty of a non-statutory bilateral structure con-
SUMMARY
negotiations on labour legislation. Its objective sisting of individuals from the business
was to develop a shared vision to address cur- and labour constituencies. The objective
rent unemployment, job losses and lack of job of the MLC is to develop a shared analy-
creation, together with alleviating the current sis of the crisis of unemployment and
levels of poverty and inequality. poverty in the country and to pursue
The MLC and the outcome of the labour potential solutions with the government
law negotiations were also sharply criticised in and Nedlac.
labour circles. Jansen (2001) for instance criticis-
es the MLC processes on the following grounds:
• Compromising trade union independence. By Information deteriorates
agreeing to a joint vision about the econom- upward through bureaucracies.
ic future of the country, he accuses the trade Rule of defactualization
union representatives of having taken on
Arthur Bloch
board the agenda of “monopoly capital”. The
MLC vision refers to capital and labour act-
ing together to make South Africa the leading 11.4.2 Other bodies with a more
emerging market and the destination of first focused role
choice for both domestic and foreign invest-
• The National Skills Authority (NSA) was
ment. Jansen argues that this can be achieved
established in 1999 to advise the Minister of
only by lowering wages, shedding jobs and
Labour on policies and strategies related to
allowing working conditions to deteriorate
skills development and to report to him on
in order to be able to compete with countries
progress made in their implementation. The
such as China, Indonesia and Vietnam, which,
24 members of the NSA represent organised
according to him, is the capitalist agenda.
labour, organised business, the community,
• Damaging trade union unity. The MLC agree- government, education and training provid-
ment on the labour law amendments entrench- ers, experts on employment services, and
es a two-tiered labour market in legislation. SAQA (website: www.saqa.org.za) (see section
It provides for distinctly different rights and 9.6.1).
remuneration for workers, depending on
• The Unemployment Insurance Board advis-
numerical thresholds, in the areas of retrench-
es the Minister on matters concerning the
ments, payment for Sunday work and workers
Unemployment Insurance Act, hears and
on probation.
determines appeals regarding unemploy-
• Ignoring principles of trade union democracy. ment insurance from benefit committees, and
Because the MLC consists of “members” and considers applications for the payment of
277
unemployment benefits for periods in excess and other matters incidental to the LRA. The
of the prescribed period (see section 8.7.5). CCMA will conciliate most disputes and will
Benefit committees operate in all the provinces also arbitrate certain types of dispute if they
and consist of equal numbers of employer and remain unresolved. It also has other functions,
union members. for example to assist with the setting up of
workplace forums, conduct ballots and facili-
• The Compensation Board for Occupational
tate retrenchment consultations. This body
Injuries and Diseases advises the Minister of
is governed by a tripartite body and operates
Labour on matters related to the compensa-
with funds allocated by Parliament. The gov-
tion of injured employees. It must also be con-
erning body consists of ten members (chair
sulted on the maximum and minimum com-
and three representatives each from the state,
pensation for temporary and total disability,
organised business and organised labour).
as well as increases in benefits (website: www.
wcomp.gov.za). • The LRA also makes provision for the estab-
lishment of an Essential Services Committee
• The Advisory Council for Occupation-
under the auspices of the CCMA. It deter-
al Health and Safety advises the Minister of
mines whether a service is an essential service
Labour on matters relating to occupational
or a maintenance service, and deals with relat-
safety and health in terms of the Occupational
ed disputes, hence it has an effect on the right
Health and Safety Act. It consists of 20 mem-
of employees in such services to strike, as well
bers, among others six representatives each
as the right of employers to appoint replace-
from business and labour.
ment labour. Labour, business and govern-
• The Mines Health and Safety Council was ment representatives serve on this committee.
established in terms of the Mines Health and
• Certain disputes (usually of major import),
Safety Act. It has a number of standing com-
if not resolved by the CCMA in conciliation,
mittees dealing with safety research, mining
may be referred to the Labour Court. Cases
regulations and mining occupational health.
can be taken on appeal to the Labour Appeal
• The Employment Equity Act makes provision Court. Rules to regulate the conduct of pro-
for the Commission for Employment Equity ceedings in the Court are made by a multipart-
(CEE). It advises the Minister on issues related ite Rules Board.
to employment equity, relevant codes of con-
• The Employment Conditions Commission
duct and regulations. It may also do research
(ECC) is involved in setting minimum wages
and make awards recognising the achieve-
for unorganised sectors, and is discussed in
ments of employers in furthering the purpose
section 5.7.
of the Act. It consists of a chair and eight other
members representing the state, organised
The principal participants in all the bodies
business, organised labour and organisations
referred to above, with the exception of the
representing community interests, although
Labour Court and the Labour Appeal Court, are
these are sometimes found to be labour repre-
business, labour and government. Other con-
sentatives in another guise.
stituencies or individual experts are also some-
• The Commission for Conciliation, Mediation times involved to a greater or lesser extent, for
and Arbitration (CCMA) (website: www. example education authorities, the providers of
ccma.org.za) was formed in terms of the LRA education and training, experts on health and
to deal with disputes in the world of work safety matters, attorneys and advocates, etc.
11.5 CODETERMINATION IN THE WORKPLACE

Whereas corporatism in some form or another at the level of the workplace. Analysts often dis-
aims to improve cooperation and even joint deci- tinguish between collective bargaining relations,
sion making at national policy level, mechanisms which are more antagonistic and adversarial,
have also been proposed to improve cooperation and participative relations, in terms of which
µ BACK TO CONTENTS
conflict can be reduced to the minimum through highly centralised with large industrial unions;
regular consultation, joint decision making and the other has codetermination playing the princi-
compromises by both parties – this is a more col- pal role. The German model of codetermination
laborative approach. consists of two parts (see Müller-Jentsch 2004;
However, a more sophisticated view recognis- Halbach, Paland, Schwedes & Wlotzke 1991):
es that the relationship between collective bar-
(a) At the production unit level, workers elect
gaining and participatory structures is not a
a works council, which has its legal basis
simple one (see, for instance, Klerck 2000). Four
in the Labour-Management Relations Act
different models have been identified in this
originally enacted in 1952 and extensively
regard: amended in 1972. Works councils are meant
• Participative structures that are regarded as to be established at every enterprise with
an alternative to collective bargaining and are five or more employees. They are elected by
often used by employers to avoid negotiations all the employees and have a range of legal
with unions. rights that force employers to consult or to
reach consensus with the works council on
• Participative structures that are marginal to col-
numerous matters affecting labour in the
lective bargaining – most of the activities and
enterprise.
developments are determined through collective
bargaining, and there is little commitment to (b) The workforce in medium-sized or large
voluntary participation in other structures, and companies can influence company policy
low levels of trust between the parties. through their representatives on supervisory
boards. All labour members on supervisory
• Participative structures that compete with col-
boards are elected by direct ballot or, in
lective bargaining, for instance where union
some cases, by delegates. Workers in com-
shop stewards are opposed to such structures
panies with more than 2000 workers have
because of the role that non-union members
a 50% representation on the supervisory
might be playing in such structures or where
boards, but the chairperson of the board,
management attempts to displace issues from
who is normally an employer representative,
collective bargaining to such “common inter-
has a second, casting vote. In companies
est” forums in the hope that the commer-
with between 500 and 2000 workers, work-
cial interests of the enterprise can become an
ers have a 30% representation. This codeter-
important focus. mination in supervisory boards extends to
• Participative structures that are regarded as all company activities. Thus the supervisory
an adjunct to collective bargaining – the two board, for instance, appoints the members of
approaches complement each other rather the management board. It may also revoke
than compete with each other. Integrative and their appointment, demand information
distributive processes are each recognised as on all company matters, and have the last
playing an important role for both parties, and word on important business decisions, for
are pursued in different, separated forums. example with regard to major investments or
rationalisation measures.
One of the most successful and also well-known
forms of linking collective bargaining and par- In large enterprises, the two pillars of codeter-
ticipative structures is found in Germany, in the mination, that of the enterprise and that of the
form of its dual structure of workplace forums production unit, have a complementary relation-
and supervisory structures. These are discussed ship. Codetermination at enterprise level con-
first, after which South Africa’s attempts to tributes to transparency and to an orientation
introduce similar structures in its legislation will seeking the long-term sustainability of the enter-
be discussed. prise, while the works council is increasingly
recognised as a positive contribution to the pro-
duction process, as a source of trust, and even as
11.5.1 Codetermination in Germany
a sort of social-political co-manager.
Germany has a dualistic labour relations system: The political implementation goes back to the
one part consists of collective bargaining that is measures decided upon by the Allies, particular-
279
ly the British, with a view to breaking up and (1) The works councils represent all employees
reconstituting the formerly highly concentrated (not only union members).
coal and steel sector of the German economy (2) They are bound by a peace obligation (they
after the Second World War. About 25 years cannot call a strike).
later, in 1976, codetermination was extended,
(3) They have a problem-solving approach rath-
with some modifications, to the rest of the econ-
er than a distributive bargaining role.
omy as part of the social-liberal reform pro-
gramme. (4) They do not engage in wage conflicts.
Published opinion concerning codetermination
is beginning to veer in a negative direction. For As a result, works councils have probably
decades it was considered a success story, but become the most stable institutions in the Ger-
now it is beginning to be questioned. Along with man labour relations system.
area-wide wage agreements, supplementary wage Available research literature also shows that
costs and protection against wrongful dismissal, in past decades the German economy has had
it is allegedly responsible for Germany’s current a positive experience with codetermination (see
economic weakness. In addition, it is said to be Müller-Jentsch 2004). Empirical studies of a
an obstacle to the harmonisation of corporate law possible negative effect of codetermination in
in the European Union. With every new step to the enterprise on profits or on the price of shares
extend codetermination, business has formulated do, however, yield ambiguous results (stud-
massive criticism of the legal arrangements relat- ies pointing to negative effects are contradicted
ed to it. One of the main thrusts of the criticism by other studies tending to show the opposite).
concerns the limitations imposed on the rights Nevertheless, there is considerable evidence that
of business to dispose freely of the assets of the codetermination does tend to slow down the
enterprise (Müller-Jentsch 2004). decision-making process. But there is a positive
However, practice and research results do not side to this: although the decisions are reached
seem to support this criticism. Employers have more slowly, they are more stable, because they
certainly also benefited from codetermination – provoke less resistance from the employees.
the great crises in mining, in the steel industry, Experience shows that the employees’ represent-
the periods of recession in the motor car indus- atives on supervisory boards tend to resist the
try, the profound restructuring in any number temptation to orient their decisions to short-term
of large enterprises would have involved much income considerations at the cost of the long-
greater conflict and would have been much less term existence of the enterprise.
consistent with social welfare had it not been Above and beyond the questions related to the
for the moderating influences exercised by the economic efficiency of codetermination, there
institutions of codetermination and the atmos- are the social and political aspects. These include
phere of trust that they promote (Müller-Jentsch issues such as social recognition and democratic
2004). culture, with employees being recognised in their
Recent surveys carried out among business role as participants in the economy and in the
leaders and managers also show that only a min- production unit. Participation is thus not only
ority advocates a cutting back or the abolition of the right of a citizen in the political sphere, but
the codetermination institutions. also a right that can be claimed within the enter-
The fact that the German economy has prise. The enterprise is not considered simply as
become static of late is in part due to the trade a private institution with a profit motive, but
unions that have remained too inflexible in an rather as a production cooperative which has a
age where flexibility has become essential (see range of stakeholders. This is in contrast to the
Maree 2003). The works councils, on the other Anglo-Saxon “shareholders’ model”.
hand, have come to play an important role in the
improvement of enterprise performance and the
11.5.2 Workplace forums in South
codetermination system has become what can be
Africa
described as a system of regulated flexibility. The
situation has been reached where works councils The LRA introduced a new concept, the
are the least controversial institution of labour workplace forum, in an attempt to facilitate
relations in Germany. This is due to four factors: a movement away from distributive collect-
µ BACK TO CONTENTS
ive bargaining towards integrative bargaining that a majority union initiates the establishment
(Bezuidenhout 2000: 22). It was hoped that of a forum. The Labour Market Commission
these forums would provide for codetermination (1996: 86–87) has expressed its concern on this
at the workplace and that bargaining over wages issue. While the Act intended to prevent unions
and conditions would gravitate towards the from being bypassed, it has resulted in the
centre. The LRA envisaged a transformation of forums being union based, which will probably
adversarial industrial relations at the workplace reintroduce hostility in these forums.
into a regime of codetermination, where unions There is also the question of whether the dis-
would actively take part in efforts to improve tinction between collective bargaining and the
productivity through their involvement in work- organisation of work is not simply artificial
place forums. (i.e. whether wage bargaining and productiv-
The broad objectives of workplace forums ity enhancement can, in fact, be institutionally
were to promote the interests of all employees, separated), especially if unions initiate work-
irrespective of union membership, to enhance place forums. The forums might also result in
efficiency in the workplace, and to consult and factionalism between unions and other groups
participate in joint decision making with the of employees, or between employees them-
employer. Workplace forums were designed selves, because the whole workforce must elect
to perform functions that collective bargaining representatives to the forum. Furthermore, the
could not easily achieve, which was the joint employer is obliged to provide resources for the
solution of problems and the resolution of con- forum, which might result in these forums hav-
flicts over production. ing more resources than collective bargaining
The workplace forums are intended to encour- forums, and possibly undermining the union
age joint problem solving and participation on (ILO Review 1996: 178).
matters related to productivity and production. Klerck (2000: 12) refers to the concern in
Essentially these forums are structures for meet- union circles that workplace forums could
ings between elected representatives of work- undermine the alternative of militant unionism
ers and the employers, with the intention of that has been quite successful in South Africa.
“increasing efficiency in the workplace” (section Because of the extensive requirements regarding
79 of the LRA). For this purpose the workplace consultation, joint decision making and disclo-
forum is entitled to sure of information, the concern for employers
is that the forums could inhibit and delay deci-
• be consulted on a number of workplace issues sion-making processes, which might negatively
(e.g. the introduction of new technology, job affect productivity.
grading, changes in the organisation of work, It is probably thus not surprising that since
education and training, partial or total plant the LRA was adopted only a very limited num-
closures, mergers and transfers of ownership, ber of workplace forums have been established.
retrenchments and job grading) Their net effect is thus indeterminable. Instead
• participate in joint decision making on a lim- of establishing such forums, there is evidence of
ited number of identified issues (e.g. disciplin- a trend towards lean production based on the
ary codes, affirmative action and changes to casualisation of work and attempts to bypass
social benefit schemes). unions, instead of involving them in restructur-
ing initiatives.
Workplace forums are not entitled to negotiate
wages and conditions of employment, which are
SUMMARY
seen as part of collective bargaining. Cooperation and joint problem solving

Although some of the principles embodied in Germany is compulsory, whereas in
in the Act are sound (e.g. that the workplace South Africa the statutory mechanisms to
forum should seek to enhance efficiency in the promote this can only be triggered by a
workplace), other approaches in the legislation majority union.
are questionable. The biggest shortcoming is
281
A
11.6 INTERNATIONAL CONSENSUS SEEKING IN THE LABOUR ARENA:

THE INTERNATIONAL LABOUR ORGANISATION
The last institution that needs to be briefly retariat. Each member country has two govern-
referred to in the context of social dialogue is ment delegates and one employer and one work-
the International Labour Organisation (ILO) er delegate to the Annual International Labour
(website: www.ilo.org). The ILO is a tripartite Conference. The governing body of the ILO is
body and its purpose is to promote social jus- elected every three years and consists of 56 mem-
tice in the context of the world of work. It has bers (28 government, 14 employer and 14 work-
its headquarters in Geneva, Switzerland. The er representatives). It meets three times a year.
ILO adopts conventions and recommendations, The ILO also conducts an extensive pro-
which can be regarded as international standards gramme of international technical cooperation
on labour matters. Through ratification by mem- to help promote national economic and social
ber states, conventions are intended to create an development. This is another way in which the
obligation on these states to put the provisions ILO might influence the South African labour
of the conventions into effect. South Africa lost market and assist the country in overcoming
its membership of the ILO in 1964, but rejoined some of the labour market problems highlighted
in 1994. in this book.
One of the obligations on members is to sub-
mit all conventions adopted by the ILO to their
appropriate legislative authority (which is the Par- The ILO is a tripartite body and its pur-
liament in South Africa) within a specified time. It pose is to promote social justice in the
SUMMARY
is in this sense that the ILO will affect the South context of the world of work. The ILO
African labour market. There were numerous adopts conventions and recommenda-
conventions in the past that had a bearing on the tions, which can be regarded as inter-
labour market and it is probable that the ILO will national standards on labour matters.
adopt similar conventions in future. A country subscribes to conventions
The ILO has about 170 member states and through ratification.
employs approximately 2000 people in its Sec-
Key concepts
corporatism Millennium Labour Council
state corporatism codetermination
bargained corporatism workplace forums
Nedlac International Labour Organisation
For students
1. Discuss corporatism as a model for involv- 3. Discuss the structure, functions and effect-
ing stakeholders in decision making. iveness of the National Economic Develop-
ment and Labour Council (Nedlac).
2. Discuss the merits and demerits of involving
tripartite consensus-seeking bodies in policy 4. Discuss the pros and cons of workplace
formulation on labour matters. forums in the context of the codetermina-
tion model used in Germany.

ggested reading*
lmfors, L. & Driffel, J. 1988. Handley, A. 2002.
gaining structure, corporatism and Business and economic policy: South Africa and
macroeconomic performance. Economic Policy. three other African cases. Johannesburg: South
April. Africa Foundation.
tre for Development and Enterprise. 1999. Parsons, R. 2001.
icy-making in a new democracy: South Africa’s Steps towards social dialogue and the development
challenges for the 21st century (abridged). of Nedlac in a democratic South Africa 1979–
Johannesburg: Centre for Development and 2001. The South African Journal of Economic
Enterprise. History. Vol. 16, Nos 1 & 2, September.
partment of Labour. Annual.
nual Report. Pretoria: Government Printer.
edman, S. 2000.
partite policy negotiations in South Africa.
Stalemate or productive compromise? Indicator * The bibliography contains the full list of
SA. Vol. 17, No. 1. references.
283
INDEX
A workplace forums 280–281

active labour market policies 201–203 collective bargaining 66–67, 90–91, 147–148
Advisory Council for Occupational Health and flexibility of work force, and 147–148
Safety 278 outcome, factors that determine 90–91
affirmative action 261–265 Commission for Conciliation, Mediation and
Employment Equity Act, and the 264–265 Arbitration (CCMA) see CCMA
age/experience 76 Commission for Employment Equity (CEE) see
AIDS see HIV and AIDS CEE
atypical employment 45, 140–143 communes/communism 67
definition 45, 140 Compensation Board for Occupational Injuries
Australia 171–172 and Diseases 278
competitive labour market see perfectly com-
B petitive labour market
bargaining councils 50, 107–114, 118 Confederation of South African Workers’
agreements, and 111–112 Unions (Consawu) see Consawu
definition 107 Congress of South African Trade Unions (Cos-
employers, special circumstances of 113–114 atu) see Cosatu
impact of 109–111 Consawu 97
impact on labour costs 50 contingent employment see atypical employ-
importance of 108–109 ment
wages/productivity, and 114 corporatism 270–271
bargaining power see collective bargaining definition 270
Basic Conditions of Employment Act 75 of 1997 Cosatu 97
(BCEA) see BCEA cost of labour 63–87, 98–102, 199–200
basic income grant 213–214 fixed cost of labour 81
BBBEE 265–266 job creation, strategy 199–200
BCEA 80–83 non-wage labour costs 70–71
BCEA hours of work 80–83 trade unions 98–102
BCEA minimum wages 83 South Africa, in 101–102
birth rate see fertility rate variable cost of labour 81
brain drain see immigration/emigration cyclical unemployment 186–187
Broad-based Black Economic Empowerment Act definition 186
53 of 2003 (BBBEE) see BBBEE
budget constraint 32 D
definition
C atypical employment 45, 140
capital intensity 48–49 bargaining councils 107
capital productivity 128 capital to labour ratio 48
capital/labour ratio 48 corporatism 270
definition 48 cyclical unemployment 186
CCMA 274, 278 discrimination 244
CEE 274, 278 dual labour market 64
census see population census EAP 10
classification of occupations 224 employment coefficient 45
codetermination 278–281 frictional unemployment 186
Germany, in 279–280 globalisation 153
INDEX
income effect 33 wages, and 77–80

income policies 73 demand-deficient unemployment 186
indifference curve 30 derived demand 37, 54
inflation 72 discouraged work-seekers 184–186, 190
informal sector 51–52 discrimination 74–75, 243–266
invisible underemployment 187 addressing 255–259
labour market 2 definition 244
law of diminishing marginal product 55 legislation/government policy 247–248
LFPR 13 theories of 244–248
literacy 223 types 244
marginal product of labour 54 dual labour market 64–66, 222, 247
marginal revenue product (MRP) 56 definition 64
migrant 28 primary segment 65
minimum subsistence level 119 secondary segment 65–66
monopsony labour market 64
output effect 57 E
perfectly competitive labour market 3 EAP definition 10
primary segment 65 earnings see wages
productivity 124–125 ECC 274, 278
secondary segment 65 economic growth 45–47, 49, 80, 160–161,
social clause 174 172–173, 197, 255–257
social plan 211 demand for labour 45–47
spill over effect 99 exports 197
structural unemployment 187 globalisation, impact of 160–161
substitution effect 33, 57 Nepad 172–173
superior worker effect 99 rate/nature of 49
TFR 19 unemployment, and 197
threat effect 99 economically active population (EAP) see EAP
unemployed person 183 education 75, 258
unemployment 183–186, 190–191 Education and Training Quality Assurers
expanded definition 190–191 (ETQAs) see ETQAs
unemployment rate 183 education in South Africa 226–231
unit labour cost 130 shortcomings 226–231
visible underemployment 187 addressing 230–231
demand for labour 37–61 educational level 248–249
capital/labour intensity 48–49 EEA 84, 259, 264–265, 278
deriving the demand for labour 54–61 EEA affirmative action, and 264–265
economic growth, and 45–47 efficiency wages 131–133
in South Africa 40–45 elasticity of demand 99–100
absorption capacity 42 emigration see immigration/emigration
atypical employment 45 employees 53
changes over time 41–42 employment 38–47, 49–54, 77–80, 163, 196–
factors influencing 49–50 204, 244
formal/informal sectors 41 absorption capacity 42
population group/gender 44–45 atypical employment 45
sector, by 43 changes in over time 41–42
skills, demand for 44 coefficient 45–46
total employment 40–41 discrimination 244
informal sector 51–54 economic growth, and 45–47
importance of 52–54 globalisation, impact of 163
measurement of 51–52 in South Africa 40–45
market 59–60 factors influencing 49–50
measurement of employment 38–40 labour legislation 50
285
INDEX
population group/gender 44–45 employment/wages 163

informal sector 51–54 inequalities 161–163
job creation strategy 196–204 poverty reduction 163–164
measurement of 38–40 South Africa 165–166
sector, by 43 South Africa, impact on 154–158, 165–166
skills, demand for 44 theory 175–178
wages, and 77–80 Heckerscher-Ohlin theory 177–178
employment coefficient 45 government involvement/influence 67
definition 45 Growth, Employment and Redistribution strat-
Employment Conditions Commission (ECC) see egy (GEAR) see GEAR
ECC
Employment Equity Act 55 of 1998 (EEA) see H
EEA hiring, restrictions on see restrictions on hiring
employment programmes 204–211 HIV and AIDS 21–24, 229
public works 204–207 consequences of 22–24
wage subsidies 208–211 incidence/causes 21–22
young people, for 207–208 hours of work 80–83
employment/unemployment inequalities 249– human capital 217–239
250 future demand 238–239
enterprise, size of 75–76 skilled labour shortages 236–239
equal pay 260–261 South Africa, in 237
Essential Services Committee 265 South Africa, in 223–236
ETQAs 232 education 226–231
Europe/USA 168–169 educational level 223–224
experience/age 76 occupational structure 224–225
skills 225
F skills development 231–236
Federation of Unions of South Africa theory 218–222
(Fedusa) see Fedusa criticisms of 221–222
Fedusa 97 human resource development see skills develop-
female labour force 12, 44–45, 192 ment
employment 44–45
unemployment 192 I
fertility rate 19–21 ILO 282
factors influencing 21 immigration, cost-benefit analysis 26
fixed cost of labour 81 immigration/emigration 26–27
flexible labour market see labour market flex- factors causing 27
ibility income see wages
formal sector, average salaries and wages 68–70 income effect 33
formal/informal sector employment 41 definition 33
frictional unemployment 186 income grant see basic income grant
definition 186 income policies 73
definition 73
G income/wage inequalities 252–254
GEAR 196, 198, 199 indifference curve 30–32
Germany 279–280 definition 30
globalisation 153–178 individual labour supply curves 33–34
challenges 167–175 industrial action see strike action
Nepad 172–173 inequalities 161–163, 243–266
definition 153 affirmative action 261–265
labour market, and the 153–178 Employment Equity Act see EEA
labour market, impact on 159–166 Broad-based Black Economic Empower-
economic growth 160–161 ment see BBBEE

INDEX
equal pay for work of equal value 260–261 labour market 1–6, 90–91, 134, 135–151, 153–
South African labour market, in 248–254 178, 201
addressing 255–259 characteristics 2–6
educational level 248–249 collective bargaining 90–91
employment/unemployment 249–250 definition 2
income/wage 252–254 discrimination 243–266
occupational 250–252 theories of 244–248
inflation 72–74 types 244
definition 72 flexibility * 134, 135–151, 201
informal employment 52 collective bargaining 147–148
international comparison 148–150
informal sector 51–54
social costs/economic benefits 150–151
definition 51–52
types 135–147
importance of 52–54
functions of 3
measurement of 51–52
globalisation, and 153–178
in-service training 234–236 impact of 159–166
learnerships 235 graphic analysis of 4–5
skills development levy 235 inequalities 243–266
international competitiveness 155–158 South African, in 248–254
International Labour Organisation (ILO) see perfectly competitive 3–4
ILO productivity 201
invisible underemployment 187 Labour Relations Act (LRA) see LRA
definition 187 labour supply see supply of labour
Ireland 169–171 law of diminishing marginal product 54–56
isocost curve 59 definition 55
isoquant curve 59 learnerships 232–233, 235
legislation/government policy
J discrimination 247–248
JIPSA 234 inequalities, addressing 258–259
job security 137–139 LFPR 13–16
Joint Initiative on Priority Skills Acquisition definition 13
(JIPSA) see JIPSA female 14–16
male 16
L LFS 39–42, 52
labour cost 129–133, 156–158 literacy 223
international comparisons 156–158 long-run demand for labour 57–58
labour force 10–16, 223–225 LRA 83–84, 278, 280–281
EAP 10
educational level 223–224 M
female 12, 44–45, 192 marginal product of labour
occupational structure 224–225 definition 54
participation rate 13–16 marginal revenue product (MRP)
female 14–16 definition 56
male 16 market supply of labour 34–35
skills 225 measurement of employment 38–40
South African 11–13 population census 38
age, by 12–13 surveys 38–40
female 12 business 38
labour force participation rate (LFPR) see LFPR comparing 40
Labour Force Survey (LFS) see LFS household 39
labour intensity 48–49 migrant 25–26, 28–30
labour legislation 50 benefits and costs 25–26
negative impact of 50 definition 28

INDEX
South/southern Africa 28–30 growth rates 17, 19

internal 29–30 factors determining 19
neighbouring countries 28–29 size 16
Millennium Labour Council (MLC) see MLC population census 38, 188
Mines Health and Safety Council 278 primary segment
minimum subsistence level 119–120 definition 65
definition 119 productivity 103–104, 123–135, 201
minimum wages 83, 114–118 capital 125
MLC 276–277 definition 124–125
monopolist 60–61 efficiency wages, and 131–133
monopsony labour market 64, 85–87 employment, and 126–127
definition 64 factors influencing 133–135
importance/measurement of 124–127
N job creation 201
Nactu 97 labour 125
National Council of Trade Unions (Nactu) see labour cost 129–133
Nactu multifactor 125
National Economic Development and Labour South Africa, in 127–129
Council (Nedlac) see Nedlac trade unions, and 103–104
National Qualifications Framework (NQF) see
NQF Q
National Skills Authority (NSA) see NSA QES 38, 41, 68
National Skills Development Strategy QLFS 39, 41–42, 52–53, 68
(NSDS) see NSDS Quarterly Employment Statistics (QES) see QES
National Skills Fund (NSF) see NSF Quarterly Labour Force Survey (QLFS) see
Nedlac 269–271, 272–276 QLFS
Nepad 172–173
Netherlands 169 R
New Partnership for Africa’s Development recession, 2008 42
(Nepad) see Nepad registered unemployment 188–189
non-wage labour costs 70–71 restrictions on hiring 139–140
NQF 231–232
NSA 231 S
NSDS 234 SACOTU 97
NSF 233 SALC 28
SAQA 231, 232
O seasonal unemployment 187
occupational differentials 76–77 secondary segment
occupational inequalities 250–252 definition 65
October Household Survey (OHS) see OHS Sectoral Education and Training Authorities
OHS 39, 42, 52 (SETA) see SETA
output effect 57 SEE 38
definition 57 SETA 231, 233, 234
overtime pay 82 short-run demand for labour 56
skilled labour shortages 236–239
P future demand 238–239
perfectly competitive labour market South Africa, in 237
definition 3–4, 64, 84–85 skilled workforce 146–147, 225
Phillips curve 197–198 skills 95, 225, 238–239
population 16–21 future demand 238–239
age 17–18 skills base 203
fertility rate 19–21 skills development in South Africa 231–236
factors influencing 21 funding 233

INDEX
in-service training 234–236 Survey of Employment and Earnings (SEE) see

Joint Initiative on Priority Skills Acquisi- SEE
tion see JIPSA Survey of Total Employment and Earnings 38
learnerships 232–233 surveys 38–40
National Qualifications Framework see NQF business 38
National Skills Fund see NSF comparing 40
quality assurance 232 household 39
Sectoral Education and Training Author-
ities see SETA T
targets 236 TFR 19–21
skills development levy 235 definition 19
small enterprise sector 203 factors influencing 21
social clause theory of comparative advantage 176–177
definition 174 theory of demographic transition 20
social dialogue 269–282 threat effect 99
consensus-seeking bodies 272–278 definition 99
Millennium Labour Council see MLC total fertility rate (TFR) see TFR
National Economic Development and Labour trade liberalisation 49–50
Council see Nedlac trade unions 50, 89–120
corporatism as a form of 270–271 bargaining councils 107–114, 118
International Labour Organisation see ILO agreements , and 111–112
social plan 211 employers, special circumstances of 113–114
definition 211 impact of 109–111
Solidarity 97 importance of 108–109
South African Confederation of Trade Unions wages/productivity, and 114
(SACOTU) see SACOTU collective bargaining 90–91
South African Qualifications Authority impact of 98–104
(SAQA) see SAQA cost of labour, on 50, 98–102
Southern African Labour Commission equality, on 104
(SALC) see SALC flexibility/productivity, on 103–104
spill over effect 99 wages, on 98–102
definition 99 internationally 95–96
strike action 105–107 management-union cooperation 135
South Africa, in 106–107 minimum subsistence levels, and 119–120
structural unemployment 187 minimum wages, and 114–118
definition 187 South Africa, in 118
substitution effect 33, 57 South Africa, in 95–97
definition 33, 57 federations 97
superior worker effect 99 strength/influence 93–95
definition 99 strike action 105–107
supply of labour 9–35 South Africa, in 106–107
HIV/AIDS, impact of 21–24 training see skills development
consequences of 22–24 training authorities 234
incidence/causes 21–22
immigration/emigration 26–27 U
factors causing 27 UIF 212–213
labour force 10–16 underemployment 187
migrant 25–26, 28–30 unemployed person
benefits and costs 25–26 definition 183
South/southern Africa 28–30 unemployment 79–80, 181–214
population 16–21 basic income grant 213–214
fertility rate 19–21 definition 183–186
worker preference 30–35 employment programmes 204–211

INDEX
public works 204–207 V

wage subsidies 208–211 variable cost of labour 81
young people, for 207–208 visible underemployment 187
frictional 186 definition 187
job creation, strategy 196–204
active policies 201–203 W
cost of labour 199–200 wage flexibility 144
economic growth/exports 197 wage increases 77–79
labour absorption 198–199 wage subsidies 208–211
labour flexibility/productivity 201
wages 63–87, 98–102, 131–133, 163
Phillips curve 197–198
determination of 63–68, 84–87
skills base 203
collective bargaining 66–67
small enterprise sector 203
communes/communism 67
measurement of 188–189
competitive labour market 64, 84–85
registered 188–189
government involvement/influence 67
social implications 211–212
monopsony labour market 64, 85–87
South Africa, in 189–194
characteristics of 192–194 segmented labour market 64–66
expanded definition 190–191 differentials 74–77
reasons for 191–192, 195–196 efficiency, and 131–133
total 189–190 employment, and 77–80
types 186–187 economic growth 80
cyclical 186–187 unemployment 79–80
frictional 186 wage increases 77–79
seasonal 187 globalisation, impact of 163
structural 187 inflation, and 72–74
unemployment insurance 212–213 labour laws, and 80–84
Unemployment Insurance Board 277 Basic Conditions of Employment see BCEA
Unemployment Insurance Fund (UIF) see UIF Labour Relations Act see LRA
unemployment rate 183 South Africa, in 68–72
definition 183 graduates income 71
unionisation, degree of 75 non-wage labour costs 70–71
unions see trade unions part of national income 71–72
unit labour cost 129–133, 156–158 trade unions, and 98–102
definition 130 work organisation flexibility 146
internationally 156–158 working environment 76
USA/Europe 168–169 working time flexibility 145
utility maximisation 32–33 workplace forums 280–281

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EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 7/17/2018 2:31 AM via UNISA

No part of this publication may be reproduced, stored in a retrieval system, or trans-

First edition 1992

Print ISBN 978 0 627 03337 7

Commissioning editor Julia Read

Website addresses and links were correct at time of publication.

Preface to the fifth edition

List of abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii

Chapter 2 The supply of labour

Chapter 3 The demand for labour

Chapter 4 Wages and the cost of labour

Chapter 5 Unions, collective bargaining and minimum wages

Chapter 6 Productivity and labour market flexibility

Chapter 7 Globalisation and the labour market

Chapter 8 Unemployment in South Africa

Chapter 9 Human capital and the demand for skilled workers

Chapter 10 Labour market inequalities and discrimination

Chapter 11 Social dialogue and codetermination

ABET Adult basic education and training

Business Unity South Africa www.busa.org.za

active labour market policies

segmented labour market

total fertility rate

unit labour cost

The worker sells his work, but he himself remains

1.1 WHY STUDY THE LABOUR MARKET?

1.2 UNIQUE CHARACTERISTICS OF THE LABOUR MARKET

1.3 WHY THEORY WITH UNREALISTIC ASSUMPTIONS?

supply and demand graph is deduced from dif-

.4 IMPORTANT CHARACTERISTICS OF THE LABOUR MARKET IN

1.5 STRUCTURE OF THE BOOK

Chapter 11: Social dialogue

Figure 1.2 Structure of the book

2.2 THE LABOUR FORCE AS THE SUPPLY OF LABOUR

Figure 2.1 graphically illustrates the various fac-

Labour force Births

Deaths (e.g. due

Quality of labour Hours of work Net migration

Figure 2.1 Determinants of the labour force

Table 2.1 The labour force of South Africa by population group (‘000)

Black Indians/ Proportion

Total 10 953 1 642 593 2 144 15 358 100.0

Total 14 960 2 071 579 2 139 19 749 100.0

F E M ALE LABOUR FORCE Men Men

2.3 LABOUR FORCE PARTICIPATION RATE

2.4 POPULATION AND POPULATION GROWTH

Africans 20 608 21 676 42 284 79.8

Coloureds 2 307 2 459 4 766 9.0

Indians/Asians 669 660 1 329 2.5

White 2 240 2 363 4 602 8.7

Total 25 823 27 159 52 982 100

(a) African age groups

MALE 80+ FEMALE

(b) White age groups

Figure 2.3 Population pyramid of the African and white population, 2006

2.5 TOTAL FERTILITY RATE

rate of population growth that this could bring

Most of the time I don’t have

2.6 THE IMPACT OF HIV AND AIDS

estimates a smaller impact. The difference

2.7 IMMIGRATION, EMIGRATION AND MIGRANT LABOUR

1994. However, a net loss of skilled

• Rural communities have become used to

1.1 WHY STUDY THE LABOUR MARKET?

1.2 UNIQUE CHARACTERISTICS OF THE LABOUR MARKET

1.3 WHY THEORY WITH UNREALISTIC ASSUMPTIONS?

.4 IMPORTANT CHARACTERISTICS OF THE LABOUR MARKET IN

1.5 STRUCTURE OF THE BOOK

Figure 1.2 Structure of the book

2.2 THE LABOUR FORCE AS THE SUPPLY OF LABOUR

Figure 2.1 Determinants of the labour force

Table 2.1 The labour force of South Africa by population group (‘000)

2.3 LABOUR FORCE PARTICIPATION RATE

2.4 POPULATION AND POPULATION GROWTH

Figure 2.3 Population pyramid of the African and white population, 2006

2.5 TOTAL FERTILITY RATE

2.6 THE IMPACT OF HIV AND AIDS

2.7 IMMIGRATION, EMIGRATION AND MIGRANT LABOUR

2.8 DEEPER INSIGHT: FROM THE INDIVIDUAL DECISION TO WORK TO

Figure 2.7 Preferences of the workaholic versus the leisure lover

2.8.4 The individual labour supply

3.2 EMPLOYMENT IN SOUTH AFRICA

3.2.6 Demand for skills manufacturing, utilities, finance and commun-

3.3 JOBS CREATED PER UNIT OF PRODUCTION

3.4 CAPITAL AND LABOUR INTENSITY

3.5 SOME FACTORS THAT INFLUENCE THE DEMAND FOR LABOUR IN

3.6 THE INFORMAL SECTOR

3.7 DEEPER INSIGHT: DERIVING THE DEMAND FOR LABOUR 1

.3 The long-run demand for labour W1 Dl

4.2 THE DETERMINATION OF WAGES

4.2.1 The determination of wages in 4.2.3 The determination of wages in a

4.3 EARNINGS IN SOUTH AFRICA

Figure 4.3 Compensation of employees compared to net operating surplus of enterprises, 1970–2011

4.4 WAGES AND INFLATION

4.6 THE TRADE-OFF BETWEEN WAGES AND EMPLOYMENT

4.7 THE IMPACT OF LABOUR LAWS ON THE COST OF LABOUR

earchers have put this differential at between 4.7.3 Other laws

4.8 DEEPER INSIGHT I: DETERMINATION OF WAGES IN A PERFECTLY

4.9 DEEPER INSIGHT II: DETERMINATION OF WAGES IN A

5.2 COLLECTIVE BARGAINING AND THE LABOUR MARKET

5.3 THE UNION MOVEMENT

5.4 THE IMPACT OF UNIONS

Figure 5.2 The influence of unions on wages