Wittenberg, Dept. of Economics (University of Witwatersrand)
The budget, economic policy and poverty in South Africa:
points for the presentation to the Finance portfolio committee
Friday 19 February

Martin Wittenberg
Senior lecturer, Department of Economics
University of the Witwatersrand

1. The experience of poverty is structured by race, gender and the urban/rural divide.

2. A key issue is the unemployment/employment divide:
while there are undoubtedly some working poor, the bulk of the poor live in households where no-one is working.

What can we do about unemployment?
3. One of the key determinants of success in the world economy is human capital, i.e. education. The current government's thrust to raise the overall level of education must therefore be commended. Nevertheless recent research has shown that there seems to be a problem with the functioning of the education system:

Figure 1 indicates that education seems to make very little difference to the chances of employment among African men and women. The reasons for this are probably twofold:
* unemployment is now so large that an educational qualification (matric) no longer serves as an effective screening device
* a matric probably does not say much about the actual abilities of a potential worker in the workplace, i.e. education no longer serves as an effective signalling mechanism.

4. One of the symptoms of the declining informativeness of the matric is indicated in Figure 2 (which is taken from an article by Fedderke, Luiz and de Kadt, Indicator SA vol 15, no.4). It shows that the number of matriculants with any kind of mathematics in their courses has decreases precipitously since 1984.

5. Interestingly, the period after 1984 was the period when the qualifications of black teachers improved most rapidly (see bottom graph, Figure 2 - also by Fedderke, Luiz and de Kadt).

6. These results suggest that the resources devoted to education are not per se the most important determinant of educational outcomes: it is about how effectively those resources are used.
Teachers need to be in the classrooms (rather than in the Universities getting additional qualifications)
The outcome of the educational system (the matric) must say something meaningful to an employer about ability

7. Given that the educational system seems currently to be failing in signalling to employers something about the abilities of entrants to the job market, how are
employers hiring?

The importance of contacts
8. Work that I have recently completed on South African unemployment suggests that informal networks are crucial in getting into employment. One can observe this within households: people who live in households where there is at least one other person working have a much larger chance of being employed themselves.

9. The importance of networks was also documented by the ILO country study, they noted that in recruiting production workers, most firms use informal methods. As their main method of recruitment, 41.4% relied on friends and relatives of existing workers; 26.2% use advertisements; 12.6% called on former workers; 7.3% from direct applicants at the factory gate; 0.3% from the "group's data base".

10. Networks have the benefit to the employer that they do not have to screen thousands of applicants. They can also find out something about a potential employee beforehand. Clearly these practices have, however, the effect of maintaining divisions.

How can access be broadened?
11. If it is true that one of the key problems facing employers is to gauge the abilities of a potential entrant, then one would want to make it as easy as possible for a firm to hire someone "off the street", to assess that person's potential in the workplace and if that person does not shape up to fire them. Unfortunately such procedures have now become much more difficult. Indeed the perception of top company executives is that it is almost impossible to get rid of someone once they are hired (see Figure 3).

12. The perceived lack of labour market flexibility (as shown in this figure) is of some concern, because employers are likely to hire not at all, rather than take the chance of being stuck with someone who is unsuitable. A recent study (di Tella and MacCulloch) using the same data base suggested that perceived labour market flexibility was highly correlated with low levels of unemployment.

[Attached Figures not included]

Figure 1: Proportion of people working, by level of education.
Figure 2a: Proportion of matric candidates with maths (1912-1996).
Figure 2b: Teacher qualifications (1961-1992)
Figure 3: Perceived labour market flexibility over time (1992-1998)