Creating Jobs Where Institutions Matter: Addressing South Africa’s Unemployment Problem

The South African think tank the Development Policy Research Unit (DPRU) at the University of Cape Town recently conducted some thoughtful analysis on what exactly occludes employment in South Africa. According to DPRU Director Haroon Bhorat, “Institutions matter and nowhere more so than within the labor regulatory environment.” Under the auspices of South Africa’s Labor Relations Act, the Commission for Conciliation, Mediation, and Arbitration (CCMA) is charged with handling all employment disputes in the country. Each year, this group manages nearly 5,300 such claims, with cases ranging allegations of wrongful dismisals to contract violations and requests for wage increases. DPRU’s analysis of these claims indicates empirically that the faster these disputes can be resolved, the more jobs created in the market. In contrast, when these are drawn out, employment rates suffer severely. Indeed, according to the DPRU working paper, Do Industrial Disputes Reduce Employment? Evidence from South Africa, even slight changes with the efficiency of CCMA processes can produce dramatic results. For example, DPRU estimates that a 1 percentage reduction in the agency’s own efficiency index effectively terminates employment for nearly 2,702 South Africans.

Fortunately, the CCMA is actually quite capable. A majority of cases are adjudicated within approximately one month, and the high usage rates of the system demonstrate “the accessibility and legitimacy of the institution”. Unfortunately, despite the crucial role the CCMA plays in South Africa’s labor market, the entity is under-resourced. CCMA is currently funded on the “basis of previous financial year’s caseload”, which allow for little flexibility when the volatility of the current world economy precipitates increase layoffs or other unforeseen market action. Either way, more secure funding and better support of the CCMA seems almost a prerequisite for increased employment in South Africa. The DPRU writes in their working paper, A Nation in Search of Jobs: Six Possible Policy Suggestions for Employment Creation in South Africa: “That an institution as central to labor market efficiency in the country as the CCMA needs to worry about cash flow is an example of a labor market rigidity which can be avoided.” With South Africa suffering from nearly 25 percent unemployment, funding institutions seems like a simple step that can support both workers and employers.

For more information, you can also read recent commentary on South Africa’s rapid economic growth but continued challenges with inequality by scholars from the Brookings Africa Growth Initiative and DPRU in the February edition of Yale Global Online.