The dubious growth of government

2013-08-06 12:55

So the latest Quarterly Labour Force Survey is out and, much to surprise, unemployment is ridiculous. 528 000 new blood, of which 254 000 are without work.

To say that South Africa has an unemployment problem would be the understatement of the century. An unemployment rate of 36%, if you include those discouraged work seekers, and a murky 50% of young people between the ages of 18 and 24. And it’s not getting any better.

If you think about all those 18-24 year olds sitting around without an industry-sufficient qualification to get a foot in the door, and realizing that eventually those 10 million child support grant beneficiaries and their dependents (who are part of the 20 million people who are economically inactive and don’t earn an income) would have to come out of the system, the appropriate policy response for the Government would be to stimulate employment.

But, there are a few policy questions that are somewhat troubling. Is the Government doing too much to boost employment? Are public sector wages competitive and meritocratic, in line with private sector wages and service delivery? For me, in short, I find the growth in public sector employment, as the Government aids in lowering urban unemployment and the rise in the public sector wage bill rather discomforting.

What may not come as a surprise to some, the Government has been the biggest benefactor of jobs since the apocalyptic catastrophe in 2008. Since the fourth quarter of 2008 over four years, the Government has been a net creator of jobs; 226 000 of them and double digit, above-inflation growth in the public sector wage bill, and most of them in the provincial and local governments. Bemusing? Yes, the average public sector worker is paid more than the average private sector worker.

One also has to be doubtful over why such a large proportion of unsecured lenders’ loan clientele are government workers. Obviously it makes business sense to target the government employee, who on average earns more than the private sector worker and who's less likely to get retrenched. But surely, someone who is paid well would imply that s/he is qualified which would imply that s/he is financially better off than someone who isn’t and wouldn’t have to seek out unsecured finance at ridiculously high interest rates. It’s kind of scary to think that the government employee sustains the current uptake but now moderate growth in unsecured loans than private sector aggregate demand, in an environment that is inconsistent with the current economic climate.

Of the 437 000 jobs that were lost in the private sector since the Crunch, only 149 000 jobs were recovered. Not created, recovered. This is potentially detrimental for economic growth, especially if public sector employment and wages are more attractive than in the private sector; people respond to incentives and the incidences of poor service delivery suggests that public sector wages and employment is not based on merit. What may look impressive, the sustainability of the public sector workforce and wage bill hinges on the ability of the economy (public and private) to grow the tax base.

Scary thought. There’s more people in the public sector than in manufacturing and mining combined. Public wages account for almost 40% of public expenditure. Adding to it, more people rely on income from social security (something like 15 million of them) than the 13 million who get an income from employment and the 4.5 million taxpayers who are expected to pay for it all. This puts a strain on the existing taxpayers, the social security net and, unless anything is done to broaden the tax base, the possibility to “extort” money from the people who account for more than half of personal income taxes, the rich man. Ask any investor, and the one thing that they wouldn’t want to hear is that most of their money would be going to wages.

Meritocratic employment is the most important determinant of an effective public service. Over-compensating workers may just be the only way to attract and retain talent in the public sector, since productivity is marked by increases in labour and there is little room for innovation and technological advancement. The degree to which the public sector wage bill is sustainable depends ultimately on the mismatch between productivity or service delivery and the wage paid. Not forgetting to mention the tender irregularities, wasteful and irregular expenditure, spending on consultants and the abuse of state resources as one colossal inefficient allocation of resources.

One could justify the large public sector wage bill by the rate of inflation and the Government’s role in lowering urban unemployment by filling vacant positions, but the attractiveness of public sector employment and the potential loss of employment and investment in the private sector and subsequent loss of economic activity may outweigh the added benefit of lower unemployment.

In a perfect world it would be ideal that the Government create a balance between public and private sector employment, and a non-progressive public sector that serves rather than competes with a progressive private sector through infrastructure development and the provision of public and social services.

But, unfortunately, we don’t live in a perfect world.

Sources: National Treasury, SARB, Statistics SA

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