The inflexibility of the labour market has become a common scapegoat to explain the low rate of employment and the muted growth of (especially small) firms in South Africa. It is argued that employee-friendly labour laws put workers in a strong position vis-à-vis employers to bargain for high wages despite a crippling unemployment rate and a low growth of labour productivity (Fedderke 2012; Klein 2012). The World Competitiveness Report of the World Economic Forum (WEF) consistently rates the SA labour market among the least efficient in the world. Many argue that liberalizing the labour market to allow greater wage flexibility and to reduce the constraints on firing workers would go a long way towards solving the unemployment problem.

Yet the WEF rankings (which have been criticized in other contexts[1]) are based on the opinions of a small group of local business leaders – these ‘official’ statistics may poorly reflect the real importance of labour-market inflexibility. In addition, Magruder (2012) emphasizes that, whereas wage inflexibility may result in short-term job losses, it can hardly explain the long-run, structural inability of the labour market to absorb the jobless into the workplace.

Research evidence is mixed on whether wage inflexibility is the central constraint on the reduction of unemployment. For example, while bargaining councils appear to reduce employment creation (Magruder 2012), minimum wages do not necessarily destroy jobs in all industries (Bhorat et al. 2013). The Harvard group of economists[2] concludes that youths have been priced out of the labour market (Banerjee et al. 2008); nevertheless they show that there is substantial movement in and out of jobs over short time periods. And Kingdon & Knight (2006) show that wages moderate when regional unemployment is high; competition for existing jobs actually is pronounced, which weakens the wage-bargaining position of employees. These findings are not consistent with the view that wages are inflexible or that firms cannot readily adjust their workforces.

What should one then believe regarding the allegations of labour-market inflexibility and that excessive wage demands are a major cause of low employment growth? This article reports on striking new evidence.

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Written by Dieter von Fintel
Senior Lecturer, University of Stellenbosch

This article was first published on the Econ3x3 website – Accessible policy-relevant research and expert commentaries on unemployment and employment, income distribution and inclusive growth in South Africa.