#2 Summer 2014

Breaking the deadlock: Tackling the South African labour market crisis

With South Africa reeling from the effects of its worst labour strike in history, the country needs its leaders to move beyond blame and pessimism towards lobbying for real change in the South African labour market in order to generate the jobs needed to tackle poverty and inequality in the country.

Dealing effectively with South Africa’s massive unemployment problem and the harmful effects of frequent strikes on productivity and economic growth will require major structural reforms to the 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.

South Africa’s unemployment problem is well documented. A major contributory factor to the unemployment challenge in South Africa is the current state of the country’s labour market institutions and regulatory environment. In this regard, a rigid labour market, the ongoing crisis in collective bargaining, the widespread prevalence of the controversial practice of labour broking, problems with the determination and implementation of minimum wages, and policies that actually hamper – rather than aid – efforts to achieve higher rates of job creation, are all to blame.

At the same time, the growing prevalence of strikes in key sectors of the economy, notably mining, threatens to stifle economic growth and much-needed investment. In the period between 2007 and 2012, 41.9 million ‘man days’ were lost to strike action, more than four and a half times the equivalent number of days that were lost between 2001 and 2006. The Department of Labour’s annual industrial action report for 2012 states that workers lost R6.6 billion in wages as a result of strikes (up from R1.1 billion in 2011). As of the end of March 2014, the wage strike in the platinum mining sector had, single-handedly, cost workers some R4.4 billion in lost wages and employers some R10 billion in lost production. This cycle of value destruction is a fundamental obstacle to tackling poverty, inequality and joblessness in South Africa.

Current labour market challenges

The efficiency of the South African labour market is currently undermined by a number of issues. One fundamental problem stems from the economy’s low capacity to absorb labour –the current employment to population ratio is just 41.9%. This modest labour absorption rate is primarily a product of the mismatch between the skills of the workforce and those demanded by industry. Owing to a lack of training and skills development, a large share of the country’s workers do not possess the skills required to fill the hundreds of thousands of job openings requiring highly skilled workers across South Africa. This problem has been exacerbated by changes in the sectoral composition of employment in the country, where a shift towards a more capital- and skill-intensive economy has meant that fewer and fewer new low-skilled jobs are becoming available. Inadequate vocational skills training and a poor quality education system have only worsened the skills deficit.

Access to higher education, in particular, remains a problem. In its August 2013 proposal for undergraduate curriculum reform in South Africa, the Council on Higher Education reported that despite significant improvement in access to higher education across all population groups, the growth is not sufficient to meet South Africa’s human resource needs. The National Plan for Higher Education has set a 20% target participation rate (the total enrolment across all ages expressed as a percentage of the 20- to 24-year old age group in the population) in higher education. The steady growth in the participation rate in South Africa – from 15% in 2000 to 18% in 2010 – suggests that the 20% target is likely to be met by 2015/16. In line with this, the Department of Higher Education and Training’s green paper published in 2012 revised the target participation rate to 23% by 2030, but this is still described as ‘modest’ compared to average participation rates in Latin America (34%) and Central Asia (31%), and well below the rates of between 40% and 50% that are common in developed nations.

A range of other factors are hampering job creation efforts in South Africa. Certain aspects of labour legislation are highly restrictive by global standards. Rigidities associated with arbitration processes and in policies and legislation governing the hiring and firing of workers serve as obstacles to hiring new workers. The growing incidence of abuse of the Commission for Conciliation, Mediation and Arbitration processes relating to dismissal, which has slowed down the arbitration and dispute resolution system, further discourage businesses from hiring new workers in South Africa.

A number of other impediments – both real and perceived – discourage businesses from taking on new employees. These include the lack of a clear probation period for new employees and limited rights of recourse to dismiss employees who do not meet expectations during the probationary period; as well as unduly onerous dismissal protection, particularly for executives and high earning employees. These factors have encouraged many employers in South Africa to opt for alternative, atypical forms of employment, such as employing workers through labour brokers.

To be sure, the practice of labour broking is widespread in South Africa, and has been the source of considerable controversy. While labour broking is an effective mechanism to assist workers to gain entry into the labour market, it also makes those employed in this way vulnerable to arbitrary or summary action, and undermines their ability to contest unfair labour practices or unfair dismissal. The national government’s response to address these issues – which includes the introduction of the notion of ‘deemed employment’ after a three month period – is likely to add further cost and complexity to the system and invite legal contestation. That, in turn, is likely to adversely affect the number of jobs available, and to increase unemployment.

Apart from these issues, one of the most visible problems in the South African labour market is the crisis in collective bargaining. The dominance of centralised bargaining in South Africa – at odds with the move towards decentralised bargaining arrangements internationally –favours large employers, institutionalises the power of trade unions and results in greater incidence of fixed wages across sectors. The main problem with centralised bargaining is that it does not adequately recognise differences across enterprises and stifles labour management relationships at the enterprise level. There is a body of empirical evidence to suggest that centralised bargaining also restrains wage levels in certain sectors – with financially stronger employers only required to pay the modest wage increases that can be afforded by smaller or weaker enterprises, while the weakest enterprises face the prospect of being squeezed out because they cannot afford the increases in wages that the majority of enterprises in the sector are prepared to pay.

In addition, the practice of extending collective bargaining agreements across entire industries places small businesses and entrepreneurs at a disadvantage. The push by trade unions for industry bargaining has also resulted, as a quid pro quo insisted on by employers, in the practice of setting actual wage increases rather than minima at the industry level, which has meant that employers are accommodated at the lowest levels of affordability.

Furthermore, industry bargaining precludes the option of linking wages to productivity. A productivity-linked wage system could address the problem of a combination of rising unit labour costs and falling productivity, which threatens job creation and undermines the competitiveness of the South African economy.

What and who is to blame for these problems? Major trade unions must accept responsibility for their failure to achieve real gains for workers through effective collective bargaining over the past decade. The Congress of South African Trade Unions (Cosatu) has strongly promoted industry bargaining. For their part, business organisations and employers have, until recently at least, also been content to leave bargaining to industry representatives, while paying little attention to workplace relations. This has come at the expense of meaningful engagement at the enterprise level. Consequently, industrial strikes and deadlock have become the norm rather than the exception. A key cause of instability in the labour market over the past few years has been the growing distance between trade union representatives and workers, as well as the absence of a meaningful social wage. Well-grounded concerns that employers have pursued high levels of profit for owners, shared with top managers, at the expense of lower paid workers, have also been a source of much consternation for trade unions and workers alike.

Moreover, there has been poor leadership from government. The government’s decisionmaking and labour market policies remain heavily influenced by the views of trade unions –particularly Cosatu – and those of big business; to the detriment of medium-sized and small businesses. The South African minister of labour has floundered and the African National Congress has said different things to different stakeholders, attempting to please all but doing little in practice to chart a way forward out of the crisis. The government has publicly committed to implementing the National Development Plan (which means, among other things, improving the social wage and growing jobs by cutting the cost and complexity of doing business) but has pushed through labour law amendments that will – according to its own policy impact assessment – have the opposite effect.

There is a way out

Amid this chaos, there is a clear need for change. First, there is an urgent need to tackle the abuse of temporary workers, including through labour broking arrangements. Even so, although the protection of vulnerable workers is non-negotiable, this must occur without unnecessarily increasing the cost and complexity of doing business or destroying jobs. One way to balance these competing interests would have been for the law to hold the clients of labour brokers jointly and severally liable, together with the labour brokers, for dismissal. It is difficult to see how the highly complex notion of deemed employment, recently introduced in the Labour Relations Amendment Act, will provide more accessible protection to workers.

Second, there is a need to remove the obstacles to taking on employees that are currently encountered by businesses. The removal of these obstacles will require reining in the highly inflexible and expensive system for protection against unfair dismissal. The current system is a significant barrier to job creation, and carries enormous cost internally (for businesses and government) and externally (in administering the dispute resolution system). A sensible policy response would be to introduce a qualifying period for dismissal protection that would not affect those already in employment. For lower paid workers, this might, for example, be six months. For higher earning employees a qualifying period of 12 or 24 months would be more appropriate. Additionally, there should be no protection (other than against discrimination and similar serious violations of employment standards) for top executives and high income earners, provided that a prescribed notice payment is made. Changes of this kind would significantly increase flexibility in employment, encourage job creation and free up much-needed resources which can be invested in the collective bargaining system.

Third, the collective bargaining system needs a radical overhaul. What is required is a move away from the preoccupation with industry level bargaining in favour of re introducing two-tier bargaining at both the industry and plant level. The most effective way of restoring meaningful plant level bargaining would be to reintroduce a duty on employer and representative trade unions to bargain in good faith in appropriate bargaining units. Interest arbitration, in which a properly trained arbitrator or panel of arbitrators (typically with an independent arbitrator assisted by one assessor nominated by the employer and trade union, respectively) decides on the final outcome of collective bargaining, should be strongly promoted as a means of resolving disputes at deadlock without loss of wages through strike action or the corresponding harm caused to the employer’s enterprise.

The reintroduction of bargaining at the enterprise level has the potential to restore much-needed rationality and credibility to the collective bargaining system. It also gives workers a far better opportunity to gain an equitable share of the value generated by the businesses in which they work. Moreover, a move towards two-tier bargaining, in which only minimum wage levels or a basic framework are set at industry level, and actual wage levels at plant level, would facilitate wage settlements that far better reflect the current economic realities in South Africa.

Finally, skills shortages within the labour force – which represent a binding constraint to economic growth and development in South Africa – should be addressed as a matter of priority. This will require a rethink of the country’s existing vocational training system. As a first step in this process, the largely ineffective Sector Education and Training Authorities should be replaced by industry colleges focused on training artisans and other similar vocations, while greater emphasis needs to be placed on improving the link between existing vocational training programmes and actual opportunities in the workplace.

It is clear that the South African labour market is in the midst of a prolonged and worsening crisis. This is most evident within the existing collective bargaining system. That said, casting blame for the crisis – as both trade unions and business are wont to do – does little to identify a way out of it. The South African labour market requires leadership, and it needs real change.

Dealing effectively with South Africa’s massive unemployment problem and the harmful effects of frequent strikes on productivity and economic growth will require major structural reforms to the 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.


The authors are grateful to Chris Todd, labour lawyer and director at Bowman Gilfillan, for sharing some of the insights and thoughts contained in this article.

One Response to Breaking the deadlock: Tackling the South African labour market crisis

  1. Jo Kruger 14th March 2017 at 2:52 pm #

    Why is it that unemployment is seen as being addressable by making it easier to employ people? It is already very easy to employ people – it is just impossible to remove those who don’t work! And as long as this problem exists and is exacerbated, potential employers will become more and more reluctant to establish any business based on a high labour input. Because that business is potentially doomed by the alliance of labour positive and capitalist negative government and impractical pseudo liberals

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