Why a guaranteed jobs scheme in South Africa would pay for itself

South Africa has one of the worst rates of youth unemployment in the world. EPA/Nic Bothma

In his first State of the Nation Address, President Cyril Ramaphosa posed the key question: has South Africa built a society where the injustices of the past no longer define the lives of the present?

The answer is clearly no.

Among the biggest injustices is unemployment. Last year the unemployment rate worsened to over 27%. If discouraged workers are included, it’s as high as 40% – 9.3 million working-age South Africans. Youth unemployment is particularly dire: of 10.3 million 15 - 24 year-old South Africans, over 67% were unemployed.

This is one of the worst rates of youth unemployment in the world. Most of these unemployed youth – over three million – are categorised as NEET: “not in employment, education, or training”.

Wages from work remain by far the most important source of income for poor household members. The consequences of a vicious cycle of structural unemployment are devastating.

Current measures to reduce unemployment are clearly inadequate. But evidence from countries such as Argentina and India suggest that guaranteed employment policies have immediate, positive benefits. This includes reducing poverty and hunger, and strengthening social inclusion, especially for women and other disempowered workers.

The cost of South Africa implementing a guaranteed employment scheme – ensuring everyone who is not working, or has given up looking for work a job that pays the minimum wage – would be R380 billion.

But I would argue that it would pay for itself in terms of increased economic growth and – over the longer term – reduced inequality and crime. And initial costs could easily be paid for with tightening controls on tax evasion.

Short-term versus long-term

The country’s current job creation plans have rates that are far too slow. The Presidential Jobs Summit – if fully implemented – would nearly double the number of jobs currently being created: as this is now about 60,000, these measures aim to create 120,000 jobs per year. By my calculations, even if all the jobs being planned went to young people who aren’t in employment, education, or training, it would take 25 years to seriously tackle their unemployment.

For all the unemployed, it would take at least 50 years.

Nor can South Africa rely on economic growth to create more jobs. For more than a decade, the GDP growth rate has remained below 4%; there’s little chance of it exceeding this level for the foreseeable future.

The problem has received official recognition for some time. But what, in reality, can be done?

This is where guaranteed employment comes into play.

It has already been shown to work over the short term in the Global South. For example, nearly two decades ago, Argentina’s federally funded and locally administered Jefes y Jefas de Hogar Desocupados (Programme for Unemployed Male and Female Heads of Households) offered guaranteed employment of at least four hours a day in community created jobs to the unemployed heads of households.

The scheme successfully reduced poverty as well as feelings of powerlessness and social marginalisation, especially among its (majority) female participants. But it was phased out after three years and replaced with more traditional social spending efforts.

In India the 2005 National Rural Employment Guarantee gives up to 100 days of guaranteed paid employment per year to workers from rural households. Implementation varies regionally. But it has been found to increase earnings in low-income households by 13% and has also reduced the gender pay gap.

Direct benefits, including increases in wage income, were found to exceed program-related transfers. This was particularly true for some of the most socially marginalised groups. In addition, women in particular reported benefiting through increased food security and a better ability to avoid hazardous work.

What would happen if the state were to guarantee jobs to all South African workers willing to take them?

The cost

Let’s assume these will all be full-time, national minimum wage jobs, paying R3500 per month. For the 9 million workers that include the officially unemployed and those discouraged from seeking work or in unstable or part-time work, it would cost nearly R380 billion – more than twice the R150 billion spent on the country’s social grants, which benefit one third of the population.

Can South Africa really afford R380 billion spent on an additional welfare provision?

Many economists would probably concur with Ramaphosa that “spending our way out of our economic troubles” would be at odds with “setting the economy on a path of recovery.”

But there are strong reasons to think that labour-intensive employment creation may actually be one of the fastest and most durable ways of setting the economy on a path of recovery.

The reason is that reducing unemployment has a positive, direct, short-term effect on economic growth. Some estimates suggest that one percentage point of growth could be added for every 5 percentage point drop in unemployment. Thus, while employing 5% of the unemployed costs about R52.5 billion, 1% GDP growth adds R55 billion.

There are several reasons for this. One is that, because low-wage workers spend a far higher proportion of their income on locally produced goods than their higher wage counterparts, this money would circulate further in the national economy than any large capital expenditure project. And once incentivised to invest, South African firms bring capacity utilisation back towards its normal level.

There are, moreover, at least three additional arguments in favour of a full-employment policy.

Enlightened self-interest

The first is that like inequality, violent crime correlates with unemployment.

South Africa has the fifth highest homicide rate in the world. The national cost of violence in South Africa is equivalent to 19% of the country’s GDP – the 16th highest rate in the world. Total violence containment spending in South Africa cost US$66.7 billion (R989 billion) in 2016.

Second, a full-employment policy would give a powerful impetus to reducing inequality, which in turn would reduce crime.

The third, and strongest, reason for full employment is economic justice: a goal that can readily be combined with climate justice. Anyone who understands that the dignity of work provides individual and societal value that a social grant cannot, understands that millions of the “Born Free” generation are not truly free.

The virtuous cycle of employment-led growth would more than pay for itself over time.

In this light, the question surely should not be, can South Africa afford to massively reduce unemployment? But rather, can South Africa truly afford not to do so?