Unemployment in South Africa Causes and Solutions free essay sample

Shortly after its appointment in May 2010, the NPC began working on its long term vision and strategic plan for South Africa – the National Development Plan (NDP). This essay will discuss the causes of youth unemployment in South Africa and, with the aid of economic theory, propose solutions to the problem. Of the 4. 5 million unemployed people in South Africa, roughly 86% are black while not even 3% are white (Stats SA, 2012). The uneven spread of unemployment in South Africa is said to be directly linked to its unique political history, specifically, the Apartheid regime (Harakas, 1970). Harakas (1970) simply describes Apartheid as the principle of geographic segregation of races. Such a system gave rise to many consequences, particularly the rigid reinforcement of non-white social, educational, economic and political inferiority (Harakas, 1970). Under the Apartheid regime, non-whites were denied the opportunity to attain quality schooling or to succeed financially which would assist them in affording quality schooling, which Anderson, Case amp; Lam (2001) found to be an important determinant of subsequent opportunities for employment. Stats SA (2012) found that in general, lower levels of education are associated with high unemployment. At the end of 2012, of the total unemployed population, 61. 3% did not have matric, 32. 1% had only matric and 6. 2% of the unemployed had tertiary qualifications (Stats SA, 2012). This empirical evidence paints a clear picture that receiving an education significantly increases the chance of finding employment. Anderson, Case amp; Lam (2001) also found it clear that higher parental schooling is associated with higher schooling attainment for children. Because Apartheid lasted for so long, it reached more than one generation, thus further reducing the quality of education a child may receive, directly reducing the chance of finding employment. Increasing a country’s standard of education has no short-term solution. For education to be improved, the teacher situation of South Africa needs to be addressed. Research found that South Africa needs 25000 new teachers every year in order to cope with pupil demand (Simkins, Rule amp; Bernstein, 2007). The report also concluded that 25% of newly qualified teachers immediately pursue other professions, or emigrate (Simkins et al. 2007). Unfortunately the profession is being shunned by South African students who are opting for more lucrative careers (Nthite, 2006). The CDE’s research also identified that society has poor perceptions about the teaching profession which detracts quality students from aspiring to join the profession (Simkins et al. , 2007). To improve the teacher s ituation the profession needs to be made more attractive with better incentives for good performance. The problem can be solved by increasing teacher salaries, improving teaching conditions and by improving the negative stigma attached to the teaching profession within society. Higher quality students will be attracted to the profession resulting in more high quality teachers available to educate South Africa’s students. By addressing the shortage of teachers, class sizes will drop resulting in even further increased quality of education experienced by learners (Cho, Glewwe amp; Whitler, 2012). In the long run, this increased level of education acquired by students will lead to a higher chance of attaining further education or employment (Anderson et al. , 2001). The downsides of such a solution are the increased costs to the state for increasing the salaries of teachers and improving teaching conditions. This burden will ultimately be financed through taxes. The pros of such a policy are that by increasing employment and the level of education, the population will become more productive, increasing aggregate demand. The pool of tax payers will also increase as employment increases, reducing the burden on tax payers to pay for social welfare. Another major factor contributing to unemployment in South Africa is the shortage of jobs. Kraak (2013) found that even though South Africa is experiencing economic growth and is creating jobs, the rate at which jobs are being created is slower than the rate that new entrants are joining the labour market. In simple economics, when the supply of something increases we expect prices to drop resulting in a new equilibrium supply and demand for it at a lower price. This is explained graphically in Figure 1 below. Figure 1: Supply vs Demand for Labour Figure 1 shows that when the supply of labour increased, the price of labour dropped and a new equilibrium is formed at e2. In South Africa however, the price of labour does not fall as easily due to the pressure from trade unions (Banerjee, Galiani, Levinsohn, McLaren amp; Woolard, 2008). This is known as â€Å"sticky wages†. Instead, when the supply increases, the price of labour does not fall which leaves the market in disequilibrium resulting in an excess supply of labour, or unemployment. Figure 2 below depicts this scenario. Figure 2: Supply vs Demand for labour with sticky wages Figure 2 shows that when the supply of labour shifts out from s1 to s2, the price of labour remains constant due to sticky wages. The market is therefore left at point B because there is no price drop to clear the market. The result is an excess supply of labour relative to the demand for labour at an amount of q2 – q1. Trade unions are organizations consisting of workers. The workers pay memberships to be a part of the union and in exchange, the union negotiates wages and working conditions on behalf of the workers. Negotiating higher wages would be understandable if the productivity of the labour increased, but Blanchflower amp; Bryson (2004) argue that in South Africa this is often not the case. When the price of labour increases and is not joined by a relative increase in productivity, it is seen as a cost increase relative to profit for firms. The implication this has on employment is that employers have to let-off workers in order to pay the higher price of labour for other workers, resulting in employed union members enjoying higher wages at the cost of increased unemployment. The study conducted by Banarjee et al (2008) also established that individuals who have never held a job before are 35% more likely to be unemployed than those who have worked before. This highlights the importance of obtaining that first job. One proposal that solves the problem of job shortages, high cost of labour and the lack of skills to get that first job all in one is a tax incentive for employers to hire unemployed youths. By providing employers with a tax incentive to hire unemployed youths, it effectively reduces the cost of labour for employers thus increasing the demand for labour. Figure 3 below depicts this. Through employment, the tax incentive will improve the skills of employees and will help them gain that valuable working experience required to further their career. Figure 3: Figure 2 left the economy in a state where the supply of labour was in excess, resulting in unemployment. Figure 3 shows that when employers are given a tax incentive to hire young workers, the drop in price of labour increases the demand for labour, shifting the demand curve outwards to d2. The pros of such a solution are that many unemployed youths are exposed to the work place where they will acquire skills and training. Employers are able to hire more workers, decreasing unemployment and increasing output by firms. Increasing output by firms contributes to economic growth which further reduces unemployment. It is also a relatively short-term solution. The con of such a policy is that the state receives less revenue in the form of tax because of the tax incentive. It would also require a bit of administration to make sure it runs smoothly. A tax incentive has also been proposed in the National Development Plan. Another solution to unemployment is achieving further economic growth by encouraging foreign direct investment into South Africa. In a recent study by Borensztein, De Gregorio amp; Lee (1988), the effect foreign direct investment (FDI) flows from industrial, developed countries into developing countries was tested. The results suggested that FDI is an important vehicle for the transfer of technology, contributing more to growth than domestic investment. (Borensztein et al. , 1988). There is convincing empirical evidence from around the world to suggest that FDI has a positive effect on economic growth. In Malaysia, a study showed that a 1% permanent increase in the level of foreign direct investment caused the level of Malaysian GDP to increase by 49% (Bin Shaari, Hong amp; Shukeri, 2012). Governments can promote foreign direct investment by revising foreign investment policies towards creating an attractive investment environment. Such policies should aim to reduce investor costs and eliminate perceived investor risk. Investors will go to where they think they can make the biggest profit and where their interests are protected. Political and economical stability is important. In doing so FDI promotes economic growth which will in turn increase employment. Possible cons of FDI are that environments are susceptible to damage. Unemployment in South Africa is a problem and has been for a while (Lam et al. , 2007). Poor education, South Africa’s history, high wage costs due to trade unions and a lack of jobs and skills are all causes of unemployment in South Africa. There are solutions, however, which have been discussed. On a short-term scale the government could implement a tax incentive for employers, which will increase the demand for labour in the economy as well as provide workers with valuable training, skills and experience which makes them more productive and employable. Such a policy would be funded by a decrease in tax revenue. On a long-term scale, the government should look towards boosting the level of education in South Africa and by attracting foreign direct investment to increase economic growth. By increase teacher salaries, removing the negative stigma attached with the teacher profession and by improving teacher conditions, more students will be attracted towards a profession in teaching resulting in better quality teachers too. By addressing education the youth of South Africa will be able to find employment more easily. By promoting foreign direct invest through attractive foreign investment policies an inflow of resources, skills and knowledge will be enjoyed by the South African economy, stimulating economic growth ultimately reducing unemployment. REFERENCES Anderson, K. , Case, A. amp; Lam, D. 001. Causes and consequences of schooling outcomes in South Africa: evidence from survey data. Banerjee, A. , Galiani, S, Levinsohn, J. , McLaren, Z. , Woolard, I. 2008. Why has unemployment risen in the New South Africa? The economics of transition. 16(4):715. Bin Shaari, M. S. , Hong, T. H. amp; Shukeri, S. N. 2012. Foreign Direct Investment and Economic Growth: Evidence from Malaysia. International business research. 5(10):100-106. Blanchflower, D. amp; Bryson, A. 2004. What Effects Do Unions Have on Wages Now and Would Freeman and Medoff Be Surprised? Journal of labour research. 25(3):386-414. 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Simkins, C. , Rule, S. amp; Bernstein, A. 2007. DOUBLING FOR GROWTH: Addressing the maths and science challenge in South Africa’s schools. Johannesburg: The Centre for Development and Enterprise. Stats SA. 2012. Quarterly Labour Force Survey. Pretoria: Statistics South Africa