An extraordinary feature of the SA economy is how large a proportion of the adult population — 58% or more than 22-million working-age people in early 2020 — reported no income from employment. 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. SA not only has an employment problem, it has a poverty problem. The difference between the living standards of those in formal jobs and those without work has widened significantly. The share of the remuneration in total value added has been maintained, despite the lack of growth in numbers employed.
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. This has not only been a consequence of unsatisfactory growth in GDP and all that comes with it, but a primary cause of slow growth.
It may be asked how so many survive — merely survive — with no income. The answer lies mostly in the support received from the state, or rather taxpayers, in the form of benefits in kind — education, healthcare, housing, water and electricity — and cash grants (for those over 60, mothers with dependent children and the physically or mentally disabled on a means- or asset-tested basis).
SA is exceptional not only in the unequal distribution of income, but in the share of government spending that goes to make up what is defined by the Treasury as the social wage. It represents a highly significant increase in redistributed spending power for those with low or no incomes.
The welfare bill now represents about 50% of all government spending of R1.1-trillion, of which roughly a quarter is distributed in cash. These cash grants now include monthly payments of R350 to able-bodied adults as Covid-19 relief — 9-million applications were made — which are bound to continue indefinitely.
The intention is to extend these poverty-relieving benefits for able-bodied adults in the form of a basic income grant (BIG). However, the bigger the BIG in terms of benefits and coverage, the more negative the effect will be on low-skilled, low-paid workers’ willingness to work. It will mean fewer jobs sought and provided, and will widen the income and cultural gaps between the fully employed and unemployed, more or less permanently.
Improved welfare benefits raise the reservation wage of all potential workers. That is the reward required to make work a sensible choice, especially for those with limited skills or capabilities. The improved income rewards sought and realised by better welfare-endowed potential workers — with limited productivity — makes them still less attractive to employ.
SA has chosen improved welfare rather than work to relieve poverty but cannot deliver for want of the economic growth required to provide a larger tax base. The higher tax rates needed to fund the welfare budgets are in part responsible. We should recognise the full causes of the failure to exercise our economic potential by employing more workers. With private sector involvement, SA could reform education and training to deliver better qualified entrants to the labour market. And we could subsidise their employment more heavily.
However, any meaningful increase in the tax burden to improve welfare or subsidise employment would have to be placed on formal sector workers in the form of a significant social security tax — that is, a proportional sacrifice of their wages and salaries. There is 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 are often well supported by their trade unions, which have dominated the regulation of the labour market.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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