Unemployment Crisis in South Africa

By Khethelo Maphalala

Most people assume that life’s advantages are natural and permanent. This false assumption of natural and permanent order is more evident in the workings of the South African economy than anywhere else. We walk around believing that some naturally occurring phenomena ordain us to live the lives we live. Our privilege is natural and permanent. This privilege becomes the prism through which we interpret the world around us, plan our futures, choose our life partners, and make political decisions.


In 1936 John Maynard Keynes published his ground-breaking work named: The General Theory of Employment, Interest, and Prices. In The General Theory, Keynes provided an alternative way to look at an economy. The salient points of his theory were that the macroeconomy (government budget) does not function like a microeconomy (household or a factory). Keynes rejected the idea that the government’s tax collections constrained the well-being of society. Instead, he argued that, unlike a household that should reduce its expenses in times of financial stress, the government should do the opposite. During economic depressions, governments should increase spending to boost aggregate demand.


This counter-intuitive idea of spending more to get out of financial difficulty boosts aggregate demand and creates employment. The prevailing theory at the time was that of the classical economists, who believed the ideas published by Adam Smith in The Wealth of Nations in 1776, that free markets could correct themselves into a state of equilibrium, a condition which allowed everyone who wanted a job to find one. Keynes argued that classical economists might be correct in the long run but that all of us might be dead in the long run. The government needed to increase the deficit to boost demand. Keynes, of course, had never visited modern-day South Africa, where every R1 of government spending is accompanied by corruption and inefficiency. South Africa operates in a voodoo economics state, where government spending does not necessarily boost aggregate demand but boosts the bank accounts of a few private individuals and public servants. The Keynesian multiplier does not apply in an economy where additional government spending does not circulate in the real economy. Yet the South African economy requires an exogenous shock to pull the economy out of its current slump.


The unemployment rate in South Africa has been on an upward trajectory since the early 2000s (an article unpacking unemployment is available here). Additionally, manufacturing capacity utilization has declined over the same period. The graph below illustrates both of these points. The expanded unemployment rate sits at 43.1% in the latest available quarterly data. According to the South African Reserve Bank, the manufacturing capacity utilization sits at 78% (a number I believe is overstated, but that is a discussion for another day). To exacerbate these depressing numbers, the SARB has  been on a program of rate hikes that will likely continue until June this year.. Whereas low capacity utilization, increasing interest rates, and poor aggregate demand are likely to tip the expanded unemployment rate above 50% in the upcoming years. A tipping point that is likely to change the way our society functions. As a staunch Keynesian but also an individual with a natural mistrust towards the government’s ability to efficiently spend on infrastructure and public welfare, I’ve often wondered what practical solutions South Africa can implement to solve the unemployment crisis.


Figure 1: Data obtained from StatsSA and SARB


This question leads one to the theories of the less known but equally important economic scholar of the last century, Michael Kalecky, who defined the relationship between national income (Y), investment(I), the propensity to consume of workers (a) and firms (q) by the following mathematical relationship:


In this simplified model, an increase in the propensity to consume of workers (a), all other variables held constant, increases national incomes. The same applies to the other variables on the right-hand side of the equation, under the simplifying assumption that the others can be held constant. This Kaleckian relationship presents an intuitive but unpopular solution for the South African economy and its challenges.


Under the Keynesian assumption that the economy does not operate like a household, an alternative measure to boosting aggregate demand without government corruption’s inefficiencies is to ensure reduced taxes for those individuals in the economy with a high propensity to consume (q in the Kaleckian equation above). The South African middle class represents the most significant opportunity to boost aggregate demand. The top 10% of highest-earning South African households earn an average of R7313 a month (2020numbers), that is to say, that for most South Africans, any additional income that is generated is most likely to be spent in the real economy (for contrast the top 1% households earn R48 753 per month). A home earning R7313 a month an additional R500 a month – through a tax cut or salary increase – isn’t likely to go into a savings account. Instead, it will go towards buying extra groceries or improving their households. The increased purchases of groceries and renovation materials, in turn, increase the amount of production required from the factories, which increases the capacity utilization of factories.


As capacity utilization increases to total capacity, the private sector becomes incentivized to invest in additional capacity to achieve greater efficiencies and to meet additional demand. In order for factory managers to meet the additional demand, they need to hire an extra shift of workers to produce, those workers go out and purchase their own groceries and improve their own homes and create more demand thus pulling the economy out of its slump. Therefore an effective tax cut for the middle and lower class goes some way towards addressing the trends in figure 1 above. Investment summits and roadshows by politicians have not achieved the required results to attain economic growth and create jobs for South Africans. Where government spending in our country is riddled with corruption and inefficiencies, such that it cannot be trusted to be the only effective solution. However, the middle class does provide an alternative approach to consider when trying to create jobs.


I attended a function at a corporate finance firm I used to work for, where one of the directors and I reflected on how privileged we are to have jobs and, more importantly, to have good jobs at good companies. That conversation inspired a trail of thought. Our jobs and lifestyles are not a natural, permanent condition that is bestowed on us by the gods we believe in. They are a temporary construct enabled by a society that allows us to enjoy them. The privilege we enjoy can easily disappear if the country does not solve its unemployment problem fast enough. The current modus operandi in South African society, where close to 50% of the people are left without jobs or means to look after themselves, will eventually lead to social and civil unrest that will permanently change how we live. Those members of society who can create jobs for others must do so which isn’t limited through starting businesses but through advocating for the kinds of fiscal and monetary policy changes that enable real social change.


John Maynard Keynes started “The Economic Consequences of Peace” with the following abstract: The Power to Become Habituated to His Surroundings is A Marked Characteristic of Mankind. Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half-century… In continental Europe, the earth heaves and no one is aware of the rumblings. There is not just a matter of extravagance or ‘labour troubles’; but of life and death, of starvation and existence, and of the fearful convulsions of a dying civilisation.


In 2023, Keynes could replace Europe with South Africa, and his words would still remain relevant.