A most extraordinary feature of the SA economy is how large a proportion of the adult population, some 58% or over 22 million of working age in early 2020, reported no income earned from employment. These estimates are abnormally high when compared to other similarly undeveloped economies. The adult population has been growing faster than the numbers employed and the participation rate in the economy has accordingly declined. A large number of South Africans including the great majority of those reporting no income, are also objectively poor. South Africa has an employment and a poverty problem. It is only when you reach the upper end of the third quintile of the income distribution that income from work becomes significant. The SA economy has served those in employment well enough in what is a dual labour market of insiders and outsiders who struggle to break in. It has failed to absorb vast numbers of potential workers into employment. A consequence but also a primary cause of slow growth.
It may be asked – how do so many survive- merely survive – with no income? The answer is mostly in the support received from the SA government or rather its taxpayers in the form of benefits in kind- education, health care, housing water and electricity and in form of cash grants for those over 60 and mothers with dependent children and for the disabled on a means or asset tested basis.
Some 50% of all government spending, currently 1.1 trillion rands, is the welfare bill of which a roughly a quarter is distributed as cash. These cash grants now include monthly payments of R350 to able bodied adults as Covid relief for which 9 million applications were made and are bound to continue indefinitely. The intention is to extend meaningfully these benefits for able bodied adults in the form of a Basic Income Grant. (BIG) The bigger the BIG in terms of benefits and coverage the more negative however will be the impact on the willingness to work of low skilled low paid workers. It will mean fewer jobs sought and provided and widen the income and cultural gaps between the fully employed skilled and, the more or less permanently, not employed.
Improved welfare benefits raise the reservation wage of all potential workers. That is the rewards required to make work a sensible choice, especially for those with limited skills or capabilities. The improved income rewards sought and realized by better welfare endowed potential workers – with limited productivity – makes them less attractive to employ. They lack the skills and training to justify higher rewards sought from understandably cost-conscious employers. Capabilities that their expensive education (provided by taxpayers) has failed to provide them with. Employers are also reluctant to stand accused of paying “starvation” wages. Who therefore prefer to employ better paid, more productive workers and hence fewer of them.
The South Africa has chosen improved welfare rather than work to relieve poverty – and has failed to do so – for want of the economic growth that would have provided a larger tax base. For which the higher tax rates needed to fund the welfare budgets are in part responsible. We should recognize the full causes of the failure to exercise our economic potential employing more workers. Ideally, with private sector involvement, we could reform education and training to deliver better qualified entrants to the labour market. And we could subsidise their employment more heavily.
Any significant increase in the tax burden to improve welfare or subsidise employment would however have to borne by formal sector workers in the form of a significant social security tax – that is a by a proportional sacrifice of their wages and salaries. There will be no other realistic place to look for additional tax revenue. It is therefore unlikely to be popular with the formally employed, the insiders whose interests, well supported by their Trade Unions, that have dominated the regulation of the demand for labour, adding further to the sacrifice of employment opportunities.