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Unemployment is a growing concern among the youth

Johannesburg: 30 July 2019 – The number of broadly unemployed South Africans (including those who have given up looking for work) exceeded 10 million for the first time in the second quarter, according to Statistics SA’s Quarterly Labour Force Survey released today.

The narrow unemployment rate increased from 27.6% to 29.0%. The broad unemployment rate, which takes into account people who are no longer looking for work, increased from 38.0% to 38.5%. Despite a modest degree of job creation (21,000), the unemployment rate increased sharply because, of the 476,000 people who entered the labour force, only 21,000 (4.4%) found work.

The formal sector shed 49,000 jobs and the informal sector added 114,000 jobs. In recent years the informal sector, which accounts for 18.7% of employment, has created nearly two out of every three jobs (58.3%). Significant job losses occurred in private households (49,000), transport (42,000), mining (36,000) and finance (21,000). Jobs were created in wholesale and retail trade (84,000), community and social services (mostly government, 48,000) and construction (24,000).

“Unemployment is a growing problem. Over the past decade, the narrow and broad unemployment rates have increased from 22.5% to 29.0% and from 29.7% to 38.5%, respectively,” says workplace solutions company Adcorp CEO Innocent Dutiro. “Unemployment particularly affects youth: 39.5% of unemployed people are first-time job seekers, and 69.1% of young people under the age of 24 are unemployed.”

Dutiro believes that unemployment reduces one’s prospects of ever finding a job as 32.6% of unemployed people have given up hope of finding work, 79.1% of unemployed people have been so for more than a year, and 31.2% of unemployed people have been so for more than five years.

The labour force is currently growing by around 101,000 people per quarter, whereas the economy is creating on average 53,000 jobs per quarter. Dutiro says this means the economy is generally absorbing only one in two potential workers (52.5%), and he cautions that if the economy’s current malaise persists, the unemployment rate will continue to rise.

Among the employed, one in two workers (53.7%) are employed in cyclical sectors such as manufacturing, retail trade and transportation. The remaining workers (46.3%) are employed in semi-cyclical sectors such as finance and non-cyclical sectors such as utilities and government. Among unemployed people who previously had work, nearly two in three (62.6%) were previously employed in cyclical sectors. A revival of economic growth would tend to stimulate job creation in the cyclical sectors.

However, he notes that the economy’s labour intensity has been dropping steadily. In the 25 years prior to 1995, a percentage point of economic growth was associated with a 1.3% increase in employment. In the 25 years since 1995, a percentage point of economic growth was associated with a 0.2% increase in employment. “To put it another way: In 1995, it took 7.3 workers to produce R1 million of output. Today, it takes 4.4 workers to produce the inflation-adjusted equivalent – a drop in the economy’s labour intensity of 39.7%. Economic growth is certainly helpful for employment growth, but it is not a panacea. In the expected range of GDP growth over the coming years, between 1.5% and 2.1% per annum, the unemployment rate will continue to rise,” Dutiro explains.

He expresses concerns that if economic growth cannot be counted on to create jobs, either because economic growth is likely to be muted for the foreseeable future or because the link between economic growth and employment growth is steadily diminishing, it is natural to wonder how a significant number of jobs might be created. The possibility of creating jobs through skills development is explored in greater detail below.

In-Depth: South Africa’s Skills Crisis

There is a close relationship between skills and employment. The unemployment rate among high-skilled people (managers, professionals, technicians, etc.) is currently 2.3%, whereas 90.7% of unemployed people who previously had work were employed in low-skilled occupations (such as domestic workers and general workers) and semi-skilled occupations (such as sales assistants and basic machine operators). Dutiro says it is widely acknowledged that skills development is a national priority, but little is understood about the economics of skills acquisition.

“In economic models, it is typically assumed that a person will undertake an activity if it is expected to yield a positive economic return – that is, if the expected benefit from the activity exceeds its expected cost taking into account, as a cost, the potential benefits lost from any other opportunities that were available but which, by virtue of undertaking the activity, must now be foregone. So, to assess whether a person will acquire a skill, it is useful to consider what economic return the skill might yield.”

For example, he says if a person is considering whether to enter, remain in or drop out of a period of formal education, the likely duration spent searching for a job, the probability of finding and retaining a job, and the expected remuneration and other benefits from that job weigh heavily on the decision.

In South Africa, the returns to education follow a bizarre pattern. Figure 1 shows the relationship between a person’s highest level of education (measured in years) and their employment prospects. Interestingly, employment prospects are stagnant or, if anything, slightly decreasing in primary and secondary education: 67.9% of people who never enter education become employed whereas 63.6% of people who complete Grade 12 become employed. Dutiro says the probability of employment only rises significantly on completion of a certificate (72.4%), diploma (84.8%), bachelor’s degree (88.8%), honour’s degree (92.7%) or master’s or doctor’s degree (96.9%). Qualifications offered by technical colleges – N 1-6, NTC 1-6 and NIC – are particularly problematic. In the initial years of these qualifications, the likelihood of employment drops from 61.5% to 58.0%, and only in the sixth year (N6 or NTC6) does it match the likelihood of employment offered by matric.

Figure 1. Formal Education and Employment Prospects

Source: Statistics SA Quarterly Labour Force Survey (2019)

He says this explains why three in five children starting school do not go on to complete matric: it is not so much that they have a low overall prospect of finding work, but rather that schooling does not improve their prospects.

“It also explains why matric is relatively uncommon: only 29.7% of the labour force has matric, while a surprisingly high proportion complete less than matric (51.2%) or complete matric plus some post-matric education (19.1%).” He says that is the reason employers take a dim view on the relative merits of secondary education as well. Interestingly, roughly the same proportion of unemployed people have matric (34.5%) as employed people (29.7%). It is obvious that the education system is in serious need of reform.

“Of course, there is more to skills than formal education alone. Perhaps the most important type of skill is acquired in a workplace setting, on the job. While on-the-job learning is not easily measured, it is probably closely related to a person’s work experience: by virtue of being employed, a person acquires a wide range of personal, social, technical and economic skills that are proportional to the time spent in employment, including skills that employers make available.”

Figure 2 shows the relationship between a person’s work experience (measured in years) and their employment prospects

Figure 2. On-the-Job Learning and Employment Prospects

Source: Statistics SA Quarterly Labour Force Survey (2019), Adcorp calculations

Initially, with just a year of work experience, a person’s employment prospects remain low: 18.2% of people with 1 year of work experience remain employed, compared to 15.0% of people with no work experience. But beyond that, employment prospects grow sharply: from 29.5% after 5 years to 48.7% after 10 years and a peak of roughly 74% after 25 years.

It is clear from the preceding analysis that, since primary and secondary education fail to equip workers with skills that improve their employment prospects, and since the government’s skills development initiatives have a material impact on employment prospects only after 5 or even 10 years, employers themselves have assumed the role of equipping workers for work. Specifically, since 50% of people who are currently working commenced work for the first time in the past five years (71.9% in the past 10 years), employers face the challenge of expediting workers’ productivity on first entering the labour force.

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