Unemployment is lower than you think

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Unemployment is lower than you think

The latest official unemployment rate in SA is 25% on the narrow definition and 36% based on the expanded definition. Such unemployment levels are very high compared with other emerging markets. However, a large number of people that are officially unemployed are not so in practice. They do work in and earn an income from the informal economy in SA. Fully taking them into account could mean that SA unemployment is lower than you think with the expanded rate at 18% and the narrow rate at 14% or below.

The UCT Unilever institute has done a great deal of research on what they call the Survivors in SA, people who live in households earning less than R6000 per month. According to them, this equates to 10 million households or 70% of the population. On average, these households earn less than R3000 per month.

What makes these people interesting to the topic of real unemployment is that many of them do a great deal to supplement their income by becoming involved in the informal economy of SA. They do not just depend on social grants. They aspire to be employed as the UCT Unilever Institute found in their Majority Report of 2012. They also do not deliberately get pregnant to receive social grants as the Human Sciences Research Council found in a 2012 report.

As many of you will know, the average township or rural community is abuzz with informal economic activity. An interesting case study that the UCT Unilever Institute considered was Ivory Park in Gauteng, just West of Thembisa. In this 1.5km² area there were more than 2300 informal businesses in 2014, including taverns, hair salons, tailoring, building, personal services, appliance repair, agriculture, art & craft, entertainment, educare, recycling, health services, phone shops, takeaways and other businesses. In addition to this, a large proportion of home owners in the area also supplement their income by renting out part of their space on an informal basis.

Ivory Park is by no means unique and what happens there is the status quo in many other areas of SA. So what does it mean when there are so many informal businesses in SA? Well firstly, it means that our SA economy is larger than the formal measurement. The latest estimate of SA’s gross domestic product (GDP) or size of formal economy is R3500bn. Research from different sources (and please understand that it is difficult to measure the informal economy) puts its size between R280bn and R680bn. That would imply that when including the informal sector, the total SA economy would be between 8% and 19% larger.

Secondly, it means that unemployment in SA is lower (maybe much lower) than formal estimates if we include the informal economy of the country. According to StatsSA, the number of people employed in the formal economy as at June 2014 was 10.8 million, with 2.4 million employed in the informal economy and 8.3 million people being unemployed using the expanded definition. Using the narrow definition, the number of unemployed was 5.2 million with the main difference being that 2.4 million were classified as discouraged work seekers. The expanded unemployment rate at this point was 36% and the narrow unemployment rate, 25% (see the calculations in the table below).

However, according to Adcorp’s June 2014 Employment Index, the number of informal employees were estimated at 6.5 million (compared with the 2.4 million according to StatsSA). This amounts to 3.1 million more employed people than StatsSA allows for. In the table below, I recalculated the expanded and narrow employment rate using the Adcorp estimate of formal employment. As a result, the expanded unemployment rate drops to 18%, while the narrow unemployment rate drops to at least 14% (could be even lower if I use more aggressive assumptions).

Expanded and Narrow Unemployment Rate (Official and based on Adcorp data) – June 2014
StatsSA (‘000)Adcorp (‘000)Comment
APopulation 15-643533235332B + I
BLabour force2342623426C + H
CEmployed1509419215D + E + F + G
DFormal (non agriculture)1075510755Adcorp = StatsSA
EInformal (non agriculture)23796500Adcorp estimate
FAgriculture670670Adcorp = StatsSA
GPrivate households12901290Adcorp = StatsSA
HUnemployed83324211StatsSA H + StatsSA E – Adcorp E
INot economically active1190611906Adcorp = StatsSA
JExpanded unemployment rate36%18%H ÷ B
KDiscouraged work-seekers2419532*StatsSA K – Adcorp L
LAdcorp informal double count assumption*1887StatsSA K ÷ StatsSA H x Adcorp E
MNarrow not economically active1266512665Adcorp = StatsSA
NNarrow labour force2024820248B + I – K – M – Adcorp L (2nd column)
ONarrow unemployed51542920H + I – K – M
PNarrow unemployment rate25%14%O ÷ N

Source: StatsSA Quarterly Labour Force Survey, June 2014; Adcorp Employment Index, June 2014; *: Assuming that under the narrow unemployment calculation, a portion of the Adcorp informal sector has already been counted by StatsSA in the discouraged work-seekers section – the double count percentage set equal the discouraged work-seekers(2.4m) as a percentage of expanded unemployed (8.3m)

Although a 14% unemployment rate is by no means low, with many countries like Vietnam, Singapore, Switzerland, China, Cuba, Mexico, Russia, the UK and the US having lower rates, it would move SA from position 173 to position 133 out of 203 countries according to the CIA World Factbook. SA would look better than countries like Iran, Jamaica, Portugal, Nigeria, Spain and Greece.

Should we be satisfied with the position that our country finds itself with regards to unemployment? Certainly not! We need to generate more formal employment to attract the unemployed, informally employed individuals and discouraged work-seekers into the labour market. Despite some disadvantages of being formally employed, including increased travelling costs, the advantages outweigh the benefits. Income security and supplementary benefits (for many formally employed people) like pension, medical and annual leave are the main benefits to the formally employed. There are also likely to be more career growth opportunities for them.

There is much that can be done in SA to increase formal employment with higher economic growth and a less rigid labour market being the most important. In a previous blog I discussed the potential benefits of nurturing chosen industries in SA and encouraging the immigration of skilled professionals (scientists and engineers) to support these industries and create jobs. In another blog, I asked the SA Government to reduce the red tape and regulations for companies and allow them more freedom to dismiss underperforming workers. I asked them to consider bringing in a youth subsidy or a form of employment where young people can be employed more cheaply (like apprenticeships or internships) so that these people can earn an income, learn more skills and become more productive. Such changes may not sit well with the unions, but in the long-term, they will also benefit from higher employment as it will help to swell their numbers.

So where does this leave us? There are certainly reasons to be unhappy about the employment situation in SA and we need to be critical towards Government because of the slowness of delivery in this regard. However, we also need to come up with solutions and need to find ways that we as individuals can help to improve the situation. Further, we must also be wary not to overplay the position we find ourselves in as this tends to polarize the discussion. As I have shown above, the situation may not be a dire as many people think. Instead of just complaining, we should build on what we currently have.

How much experience do you have with the informal sector in SA? Can you see the jobs that it creates and the incomes that it provides? What do you think needs to happen to employ more people in the formal sector in SA? What can you do to help? In the mean time, keep your talking straight!


Marius Strydom is the owner of MLAX Consulting