Why job creation is the wrong policy: Ivo Vegter

Political parties in South Africa continually promise job creation, yet their approaches are flawed. Government-led initiatives often yield temporary, low-paying public sector jobs, failing to curb rising unemployment. Other proposals focus on small businesses and protectionism, overlooking the private sector’s role in efficient job creation through market liberalization and economic growth. Sustainable employment hinges on freeing markets, not artificial interventions.

Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.

By Ivo Vegter*

All political parties have promised, one way or another, to create jobs. They’re all misguided.

It will not be news to anyone that South Africa has a bit of a problem with unemployment. By “bit of a problem”, I mean the biggest problem in the world by a country mile. And it’s getting worse.

It is not surprising, then, that in election after election, we’ve heard political parties promise to create jobs. Despite this, the unemployment rate rose steadily from its minimum of 21.5% in the 4th quarter of 2008, to 30.1% by the time the pandemic struck in 2020, and 32.9% by the first quarter of this year.

Now we have a government of national unity (GNU), all of whose members promise to create jobs, albeit in strikingly different ways.

Read more: SA’s GNU is not a ‘social democratic consensus’: Ivo Vegter

Public sector

Some of these are pretty awful, like the ANC’s plan to “create and sustain 2.5 million work opportunities delivering public goods and services in communities”.

The ANC’s efforts to use the state to create public-sector jobs have a long history of achieving very little. Most of the “work opportunities” it creates are temporary and paid below the minimum wage, and they haven’t done a thing to reverse the worsening unemployment trend.

In general, using infrastructure spending to “create jobs” is tenuous, since infrastructure projects by their very nature are temporary.

Small business

The party has a better idea when it wants to “increase support for small enterprises, entrepreneurs and cooperatives, especially in townships and villages, providing additional one million work opportunities, with set-asides for women, youth and persons with disabilities”.

It doesn’t say how it will achieve this, but looking to small businesses for job creation is not an entirely dumb idea.

The IFP wants to reserve 80% of jobs for South Africans, as if immigrants are the problem. It has a better approach to small business than the ANC: instead of unspecified “support”, it wants to exempt SMMEs from stringent requirements and remove excessive red tape that holds back small businesses. That’s great.

Localisation

Both these parties also believe that localisation offers a solution to the unemployment problem. The belief that developing economies are harmed by free trade, and should persist with import substitution and protectionism in pursuit of a more self-sufficient economy, is a relic of the 1960s.

By simple logic, intervening in an economy to direct markets reduces efficiency and results in lower quality, higher prices, or both. These costs are ultimately borne by consumers, and hit the poor the hardest.

Less prosperous consumers means less economic activity, and less job creation, not more.

Liberalisation

The DA promises to create two million jobs, which seems pretty arbitrary, but it largely relies on labour market liberalisation and creating other conditions in which private enterprise can flourish.

It isn’t above some government intervention, but largely rejects notions of localisation and protectionism or state-driven public-sector job creation.

This is much better than the proposals from other parties, and is a major reason why I supported the DA in this election.

Even so, I’m not particularly interested in the job creation initiatives of the DA, either.

The thing

Here’s the thing. It isn’t the government’s job to create jobs.

And here’s another thing. It isn’t the private sector’s purpose to create jobs, either.

Think about it. Say you run a company, and you produce 100k widgets per year. Would you rather increase your production to 200k widgets without hiring new people, or would you prefer to double your staff complement in order to increase your revenue?

If you think you’d like to double your staff complement, you’re not going to survive long in business.

It is the job of business managers to minimise employment, not to create jobs. A company exists to produce maximal value from minimal inputs, and those inputs include not only raw materials and capital, but also labour.

Nobody wants to employ more people than they absolutely have to, and intervening in markets to effectively subsidise companies to employ people is merely redistributing wealth from productive uses to unproductive uses.

The same is true for the public sector. The more people the public sector employs, the less efficient and more expensive it becomes. That makes us poorer, not richer.

Industries

In The IRR’s Blueprint for Growth: Arming SA’s Pro-Growth Forces, John Endres proposes that in addition to using the manufacturing sector’s capacity to provide low-skilled jobs to the full, a prospective future government should also “revive and reinvigorate” three other sectors that have long employed large numbers of people, namely agriculture, mining and tourism.

That’s all true, as far as it goes, but of those, only tourism revenue is truly dependent on the number of people the industry employs. Tourism is a service industry, and service industries is, ultimately, where employment growth should come from.

In agriculture, mining and manufacturing alike, the way to increase efficiency, global competitiveness and profits is to reduce labour expenses, either by training individual workers to be more productive, or by replacing workers with more efficient automation.

In developed economies, the number of people employed in agriculture and mining, and even manufacturing, trends down over time. You want fewer people to be dedicated to producing food and the basic necessities of a comfortable life, not more.

You want more people to be freed from the constraints of having to produce basic needs, and instead get them involved in producing things higher up the Mazlow hierarchy of needs. You want more convenience services, and tourism, and entertainment, and health care, and wellness centres, and art studios, and media.

Growth

We don’t see extensive government job creation initiatives in countries with virtually full employment, so how do they reach and maintain full employment?

They do so by enabling and encouraging growth. While individual companies want to minimise their employment levels, growth increases both these minimum levels and the number of companies in the industry.

Economic growth broadens the base of economic activity, and that is what absorbs labour. As companies become more profitable and people become more prosperous, they spend more money, and a greater share of their money goes towards services, rather than manufactured goods.

Policy priority

Government policy shouldn’t – and doesn’t need to – focus on creating jobs for the sake of creating jobs. All things being equal, that just makes the economy less productive.

It should focus almost exclusively on promoting broad economic growth. And not by picking winners to subsidise, but by liberalising markets to let customers sort the winners from the losers.

Only with a rapidly growing, vibrant economy, in which the numbers and sizes and variety of companies continually increase, can we expect organic job creation – and that is the only type of job creation that is ultimately sustainable.

It is true that primary and secondary industries like mining, agriculture and manufacturing need to be revived in South Africa. They have been stifled for too long. They can and should all benefit from less restrictive laws and regulations, and an environment that is conducive to investment and growth. And that will create some employment.

But ultimately, the answer to the unemployment problem is to make it a policy priority to free the market to grow rapidly and with minimal constraints. Fix that, and job creation will look after itself.