LABOUR MARKET POLICY

LABOUR MARKET POLICY AgangSA s Plan to Protect Vulnerable Workers, Remove Obstacles to Growing Employment, Restore Effective Collective Bargaining and Create a Healthy Labour Market in South Africa

Table of Contents 1. Introduction... 2 2. The State of the South African Labour Market... 4 3. AgangSA s Labour Market Policy Approach... 12 3.1 Principles to govern the labour market in South Africa... 12 3.2 AgangSA s approach to labour market reform in South Africa... 12 4. AgangSA s Plans to Improve the Labour Market in South Africa... 14 Sources... 17 1

1. Introduction Socio-economic development in South Africa continues to be hampered by persistently high levels of unemployment. Millions of people are without work in South Africa. Youth unemployment, in particular, is a major concern. Only one in eight young adults are employed in the country, well below the equivalent in comparable emerging economies (where, on average, two out of every five young adults are employed). The unemployment problem is accompanied by persistent wage inequalities and sluggish progress with respect to employment equity. These issues are exacerbated by non-wage pressures. The high and rising cost of transport, electricity, water and food in South Africa is felt disproportionately by low wage and vulnerable workers. Alongside these problems, strikes and violence threaten to stifle economic growth and much needed investment. The impact of strikes, in particular, on the performance of the South African economy is alarming. Between 2007 and 2012, 41.9 million man days were lost to strike action (up from 9.1 million between 2001 and 2006). South Africa s labour market institutions and regulations are actually contributing to the problem by failing to address unemployment. At the same time, the national government has shown itself to be incapable of leading the labour market out of this downward spiral. Government decision making and the formulation of labour market policies continues to be disproportionately influenced by the views and preferences of unions (especially Cosatu) and big business in South Africa. In the view of the Centre for Development and Enterprise, the current structure of the labour market and labour market policy in South Africa favours insiders 2

people who are already employed, members of established unions and big businesses over outsiders lower-skilled workers in smaller firms, and the unemployed. Current trends, driven by rising real wages, onerous labour regulation and the extension of bargaining council agreements, are not compatible with the large-scale creation of new jobs required to combat the unemployment crisis. Labour market policies in South Africa have placed a great deal of focus on ensuring decent jobs, potentially at the expense of higher rates of job creation. Furthermore, there is currently no coherent framework to link South Africa s labour market policies, strategies and institutions to the country s broader economic development policies and strategies. Within this context, it is clear that the South African labour market requires leadership, and it needs real change. Dealing effectively with South Africa s massive unemployment problem and the deleterious impact of frequent strikes on productivity and economic growth will require sweeping structural reforms to the South African labour market and its institutions. Unless these are undertaken, it is unlikely that the South African economy will be able to generate the number of new jobs especially unskilled jobs required to address the unemployment problem and tackle poverty and inequality in the country. 3

2. The State of the South African Labour Market Historically, white workers were afforded significant protection under apartheid. By and large, these protections were extended to all workers in the late 1980s and early 1990s. Despite this, many of the structural patters of the apartheid labour system have persisted in the post-apartheid era, particularly with respect to wages. Wage structures in South Africa remain highly stratified and unequal ; while the bulk of black workers are paid meagre wages and continue to live in poverty. In most sectors of the economy, low paid workers receive wages significantly below the household subsistence level. Many blame the persistence of these inequities squarely on the structure of the labour market, and the nature of South Africa s labour market policies and legislation. In the view of Sipho Pityana, the Chairperson of the Council for the Advancement of the South African Constitution and a prominent businessman: South Africa s labour market is inefficient and a negative factor to a redistributive, inclusive and equitable economic transformation trajectory of a post-apartheid dispensation. To be sure, the labour market in South Africa is currently beset by a number of problems. The most prominent of these problems are discussed in detail in the sub-sections below. South Africa faces a massive unemployment problem More than 4.6 million people are unemployed in South Africa, and a further 2.2 million people fall within the category of discouraged work seekers. When looking at the narrow definition of unemployment, the country s unemployment rate 4

stands at 24.7%. If discouraged work seekers are included, the unemployment rate climbs to nearly 37%. Much of South Africa s unemployment is structural rather than cyclical. In 2012, the South African Reserve Bank Governor, Gill Marcus, noted that the natural rate of unemployment in South Africa appears to be in excess of 20%, and significant structural changes will be required in order to make inroads into this. Given that a large proportion of unemployment in South Africa is structural, it is unsurprising that many South Africans remain unemployed for a long time. Almost two thirds (65.2%) of the unemployed in South Africa fall in the long-term unemployed category; meaning that they have been unemployed for more than a year. Even more worrying is the fact that more than half of South Africa's youth are unemployed. Individuals between the ages of 15 and 34 years account for 69.3% of the unemployed in South Africa. Furthermore, around 40% of the unemployed are new entrants into the labour force. The high levels of youth unemployment in the economy are exacerbated by a poorly performing education system and a flagging share of employment provided by small enterprises, which have both served to reduce opportunities in the labour market for young workers There is a clear mismatch between the skills of the workforce and those demanded by industry The labour absorption capacity of the South African economy is very low. At present, South Africa s labour absorption rate which represents the employment to population ratio is just 41.9%. This is the result, in a large part, of the welldocumented mismatch between the skills of the bulk of the labour force and the demands of industry in South Africa. South Africa faces crippling skills shortages 5

and a large share of the workforce has not been trained to do the jobs our industries need: there are hundreds of thousands of job openings requiring highly skilled workers across South Africa that could be filled with a trained workforce. Changes in the sectoral composition of employment in South Africa have left many low skilled workers behind. While there has been a large increase in employment in the financial services sector since the 1990s and rapid growth in employment in the community, social and personal services sector in recent years, the shift towards a more capital- and skill-intensive economy has acted as a break on the creation of new low-skilled jobs. The lack of adequate vocational skills training and a failing education system has also contributed to the problem. The problem of linking workers and employers has been compounded by insufficient focus on public employment services (PES). South Africa spends 76 times less on PES than Brazil. Furthermore, the ratio of PES staff to unemployed people in South Africa is much higher than in many other countries 483 in South Africa versus 42 in Germany, 80 in the United Kingdom and 150 in Hungary. Labour broking is widespread and the subject of much controversy At least some of the void created by inadequate PES has been filled by labour broking. In South Africa, the practice of labour broking has been an important entry point into the job market for many employees. That said, employees engaged in this way, particularly lower paid workers, have been very vulnerable to arbitrary or summary action, and have not been able to assert protection against unfair labour practices or unfair dismissal in the same way as other workers. At the same time, the national government s proposals to address this problem by introducing the notion of deemed employment after a three month period, and 6

the full package of changes in this area, introduce cost and complexity that are likely to lead to ongoing legal contestation and, as the government s own impact assessment concludes, to significantly reduce the number of workers in employment. In simple terms, this is likely to come at the expense of jobs. Collective bargaining in South Africa is in crisis The current structure of collective bargaining in the South Africa is also problematic. While there has been a clear movement towards decentralised bargaining arrangements internationally, centralised bargaining continues to dominate in South Africa. The centralised bargaining system in South Africa fixes wages, tends to favour large employers and institutionalises the power of unions. The practice of extending collective bargaining agreements to all businesses in a sector has been particularly damaging to small businesses and entrepreneurs in the country. The prominence of collective bargaining and unionisation in South Africa has actually been highlighted as a potential contributor to the high levels of unemployment in the country. A previous empirical estimate of the unemployment impact has suggested that collective bargaining and unionisation may contribute one percentage point to South Africa s unemployment rate. Furthermore, there is evidence of a high wage premium paid to workers that enjoy union membership. According to one estimate, workers that are both members of a union and covered by a bargaining council earn up to 16% more than workers that do not hold either of these affiliations. This only exacerbates wage inequality in the economy. At the same time, collective bargaining at the industry level eliminates the possibility to link wage increases to productivity. Since 1994, South African workers have registered wage increases far in excess of output growth, leading to 7

rising unit labour costs and flagging productivity. The net result is that each year South Africa is paying more and more for less and less, which undermines job security and the potential to grow jobs in the country. Taken together, these factors threaten to weaken the competitiveness of the economy. To make matters worse, the collective bargaining system in South Africa is in crisis. The country s collective bargaining institutions are highly fragmented. In addition, the current system places too much emphasis on the part of both employers and the trade union movement on industry bargaining. This emphasis has not served workers well. Industry bargaining, which has focused on setting actual wage increases rather than minima, has inevitably accommodated employers at the lowest levels of affordability. The collective bargaining system in South Africa has been further undermined by a lack of worker economic literacy. Demonstrating a clear lack of understanding of business economics, there have been numerous examples in recent years in which workers and unions across the country have called for exorbitant wage increases that typically range between 15% and 20% and substantially exceed inflation. Even Cosatu, a staunch advocate of collective bargaining, has noted that the operation of collective bargaining, and the entire wage fixing system in South Africa, is not able to respond to these challenges, and needs to be re-evaluated. While employers and trade unions continue to blame each other for the current crisis, there is no sign of leadership from government, nor any credible legislative or policy initiative to improve the situation. 8

The determination and implementation of minimum wages remains problematic A key problem with the existing minimum wage structure in South Africa is the presence of multiple, fragmented, minimum wages. The lack of a coherent wage policy to govern minimum wages has resulted in the absence of a reference point from which to set a minimum wage floor. At the same time, the level of enforcement of minimum wages is generally low. Many employers reportedly evade bargaining council agreements: 45% of workers covered by sectoral determinations are said to earn below the minimum wage. Wages are not linked to productivity Labour productivity in South Africa has plummeted to its lowest level in four decades. Yet, workers wages are not linked to productivity. This has meant that wages have exceeded output growth and resulted in increasing unit labour costs. Not only does this undermine competitiveness, but it can also contribute to job losses. Indeed, there is evidence that South African wages are less responsive to productivity changes than in comparator countries, often rising at a greater rate than productivity, and encouraging firms to shed labour. There is a lack of flexibility in the labour market The World Economic Forum (WEF) has stated that certain aspects of labour legislation in South Africa count among the most restrictive in the world. The labour market rigidities are most evident in a lack of flexibility with respect to arbitration, and in policies and legislation governing the hiring and firing of workers. In hiring and firing processes, South Africa was ranked 3 rd last out of 142 9

countries in the WEF s 2011 Global Competitiveness Report. In many instances, these rigidities act as obstacles to firms hiring new workers. The proper functioning of the labour market has also been affected by a growing number of cases of abuse of the Commission for Conciliation, Mediation and Arbitration (CCMA) process relating to dismissal. The CCMA tends to be used disproportionately by low-skilled workers, and is often regarded as burdensome for employers of these workers. Many cases lacking merit are brought before the CCMA simply for workers to generate bargaining power or extract payments from employers, which only serves to slow down the arbitration and dispute resolution system and, in some cases, even disincentivises businesses from hiring workers. Some labour market policies act as impediments to employment growth A number of impediments both real and perceived are frequently cited by employers in South Africa as reasons for not growing employment by taking on new staff. They also provide reason for employers to pursue alternative atypical forms of employment, including through labour brokers. In this regard, the three most prominent of impediments are: The absence of a genuine trial period for employment (commonly known as probation), with limited rights of recourse for dismissal of employees who do not succeed during the trial period. Unduly onerous dismissal protection, with no cost to employees of claiming remedies for dismissal. This results in a very high rate of referral of disputes, including among higher paid employees who are not vulnerable. The cost of the dispute resolution system necessary to administer this, both internally among employers and externally in the CCMA, is unrealistically high, and 10

has become the focal point of labour relations, at the expense of investment in, and support for, the collective bargaining system. The unnecessary enjoyment by executives and high earning employees of the same protections against dismissal as vulnerable lower paid workers. This unnecessarily impedes employer flexibility to make valuable changes at managerial level, and in effect supports or entrenches inequality. 11

3. AgangSA s Labour Market Policy Approach 3.1 Principles to govern the labour market in South Africa AgangSA s vision of a well-functioning labour market in South Africa is grounded in the following principles: Create an environment for jobs rich growth. Promote opportunities for those both inside and outside the formal employment sector. Encourage innovation and flexibility to ensure that the labour market responds effectively to changes in the economy. Protect vulnerable workers and ensure that all workers enjoy substantially the same rights. 3.2 AgangSA s approach to labour market reform in South Africa At a fundamental level, AgangSA believes that labour market policy must protect vulnerable workers. This relates, in particular, to workers hired through labour brokers. Such workers should enjoy substantially the same rights as directly employed workers, and be able to enforce these rights. They must also enjoy the same access as all other workers to a package of improved social services. More generally, we believe that a key focus in efforts to reform labour market policy should be on the removal of obstacles or perceived obstacles to taking on new employees. This is urgently required in order to accelerate employment growth in South Africa. 12

Finally, AgangSA believes that the existing bargaining council system in South Africa must be restructured in order to create a system that facilitates wage settlements that far better reflect economic realities in the country. This restructuring must centre on a move away from the preoccupation with industry level bargaining in favour of the re-introduction of two-tier bargaining at both the industry and plant level. 13

4. AgangSA s Plans to Improve the Labour Market in South Africa It is widely acknowledged that there is a need to implement sweeping structural reforms to the South African labour market and its institutions. To this end, AgangSA plans to undertake the following: RESTRUCTURE THE BARGAINING COUNCIL SYSTEM: Reintroduce two-tier bargaining at both the industry and plant level. This would involve Bargaining Councils negotiating centrally for wage ranges while allowing for plant-level negotiations to set actual wages. Under this system, strikes would be allowed at the national level during negotiations of a wage range, but the right to strike on plant-level negotiations would not exist. The latter would be replaced by compulsory interest arbitration as a mechanism to resolve deadlocks in bargaining negotiations. This will be accompanied by significant investment in dispute resolution institutions, employer organisations and trade unions to make interest arbitration effective. AgangSA believes that such a system would facilitate wage settlements that far better reflect economic realities. LINK WAGES TO PRODUCTIVITY: Introduce productivity bargaining at the plant level to ensure a greater link between productivity and wage increases in South Africa. PROTECT VULNERABLE WORKERS: Ensure that workers hired through labour brokers enjoy substantially the same rights as directly employed workers. To this end, in cases where lower paid workers are hired through labour brokers, the labour broker and its client will be jointly and severally liable for unfair labour practices or unfair dismissals. 14

IMPROVE MONITORING AND ENFORCEMENT OF LABOUR PROTECTIONS AND STANDARDS: through increased investment in the labour inspectorate. REMOVE OBSTACLES TO BOOSTING EMPLOYMENT: Remove obstacles to taking on new employees by: o Introducing a qualifying period for dismissal protection. This period will be shorter for lower paid employees. Specifically, it will be set at six months for workers earning below the threshold set by the Minister of Labour in terms of the Basic Conditions of Employment Act; and 12 months for workers earning above that level. o Excluding executives and higher earning employees from ordinary dismissal protection (except discrimination dismissals and other similarly serious categories of dismissal) subject to payment of a specified notice or severance payment. IMPROVE WORKER ECONOMIC LITERACY: to eliminate unrealistic wage demands. REVISE THE SECTIONS OF THE LABOUR RELATIONS ACT THAT DEAL WITH STRIKE ACTION: The revisions will create provision for: o Secret strike ballots. o A bilateral Unfair Labour Practice and good faith bargaining provision. o Loss of protected status for strikes which become violent. o Union liability for damages in civil law. 15

PROMOTE GREATER FLEXIBILITY IN THE LABOUR MARKET: by preventing abuses of the CCMA; revisiting the proposed legislation on labour brokers; and introducing a six month statutory probation period. REFOCUS SKILLS DEVELOPMENT: Abolish Skills Education Training Authorities and introduce a tax rebate system for demonstrated training and development; reintroduce industry colleges training artisans and similar necessary skills. 16

Sources Centre for Development and Enterprise. (2013). Rethinking South Africa s labour market: Lessons from Brazil, India and Malaysia, Number 22, June 2013. Coetzer, P. (2013). South African labour reform: Reform to lift employment SA s most pressing challenge, Leadership, 9 July 2013. Development Policy Research Unit. (2010). Addressing the plight of vulnerable workers: the role of sectoral determinations, Report to the Department of Labour. Mail & Guardian. (2011). South Africa s labour market in shambles, 8 December 2011. Pityana, S. (2011). Current State of the Labour Market, Speech delivered on the occasion of the 15 th Anniversary of the CCMA, 10 November 2011. Statistics South Africa. (2013). Quarterly Labour Force Survey Quarter 3, 2013, Statistical Release P0211, 29 October 2013. 17