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CHAPTER-BY-CHAPTER CRITIQUE OF 23 THINGS THEY DON’T TELL YOU ABOUT CAPITALISM: Thing 2: Companies should not be run in the interest of their owners.

This is the second delivery in the series constituting a chapter by chapter refutation of Ha-Joon Chang’s book with the above title. In the introduction he stakes his claim:

What the free-marketers have promised is at best half true.

Free markets make economies worse off than the correct alternative policies.

Capitalism remains the answer, but government intervention is necessary to make it work.

The book is based on the formula that free-marketers are guilty of peddling myths, and the author’s business is to debunk those myths (“things” the reader presumably does not know) – one per chapter. For that reason it is convenient to follow the same formula to criticise the points the author makes.

Thing 2: Companies should not be run in the interest of their shareholders

The basic premise of this chapter at first seems seductive. The author points out that in the 18th and 19th centuries limited-liability companies were the exception rather than the rule. Governments granted a dispensation permitting limited liability by exception, and only late in the 19th and early in the 20th century was limited liability a common phenomenon. The suggestion is of course that it required the intervention of the state to bring about the undoubtedly beneficial phenomenon of limited-liability companies, which allowed shareholders to feel much freer to invest their capital, as they would not be open to claims instituted by creditors of the company. That set in motion the positive cycle of investments that aided the industrial revolution so much.

The basic fallacy underlying this argument is of course the assumption that it was government intervention that allowed limited-liability companies to come about. The truth is (and this is even apparent from the author’s own account) that for years the government prohibited limited-liability companies, except for certain state monopolies and so on. Far from being the facilitator of limited liability, the state for years prevented it.

Just think about it logically for a moment: In a truly free market surely nothing prevents a company from declaring itself a limited-liability company? Any party contracting with that company would then know that it is a condition of any deal with the company that shareholders may not be sued if there is a dispute. Contracting parties would then be free to choose whether to enter into a contract with the company on that basis or not.

A further fallacy in the author’s thinking is the idea that, because of the limited-liability status so graciously bestowed on companies (to benefit and protect their shareholders) the shareholders are protected and run no risk. It is of course true that they cannot be sued for damages and other claims from creditors, but surely it is they who risk their hard-earned capital by investing it in the company? If that bet fails, and the company is liquidated, they lose their investment. Why should they not be rewarded by the company managing itself to improve shareholder value? Take the owner of the corner shop, a sole proprietorship. He is presumably entitled, as the sole investor, to run the business in his own interest and that of his family? If that is so, then why may the company not be run in the interests of its owners?

From there the author then proceeds to demonstrate that in the US two historical developments occurred: the traditional family business of the late 19th and early 20th century disappeared, and in the eighties it became vogue to run a business in the interests of its shareholders, which in turn resulted in company buy-backs of their own shares, which reached a climax at the time of the 2008 crash.

He compares the periods of the seventies and eighties and the period of 1990 to 2009, to demonstrate that per capita income growth declined. The point of this is to demonstrate of course that the second was a period of shareholder maximisation, and see, it resulted in less growth. I tested this by comparing the per capita growth rates of the two periods:

1970-89: 54.5%

1990-2009: 31%

If we ignore for a moment that the second period is inclusive of the biggest post-depression financial crash in the history of the US, then the point seems to be made.

Growth rates slowed down in the era of shareholder maximisation, not so?

The author’s explanation for the slowdown seems to be that, contrary to free-market countries like the US and the UK, some countries in Europe and the East did not suffer in the same way due to the emphasis on shareholder value, and indeed because these countries had mechanisms preventing such buybacks and consequent large pay-outs to managers and shareholders, outsourcing and off-shoring of labour, dismissal of workers and suppression of wages. Such measures include “stabilizing” large shareholdings for the state (France), differential voting rights for founder families (Sweden), supervisory boards for workers (Germany), cross-shareholding among companies (Japan).

Well, then it is only fair that we subject these countries to the same growth comparison, not so? Here are the results (excluding Germany, as the unification of 1989 falls between the two periods, and bedevils any calculation):


1970-89: 58.54%

1990-2009: 23.07%


1970-89: 41.77%

1990-2009: 30.72%


1970-89: 95.4%

1990-2009: 12.7%

So it is clear that all the countries suffered downturns in their income in the second period. So whatever it was that caused the downturn, also did so in the non-Anglo-American countries. And equally importantly, the measures that were supposed to stop share buybacks, did not succeed in preventing the fallout in terms of growth.

One obvious candidate to explain the downturn in the wealthy countries, is the economic phenomenon of convergence. For example, here is Wikipedia[1]:

The idea of convergence in economics (also sometimes known as the catch-up effect) is the hypothesis that poorer economies‘ per capita incomes will tend to grow at faster rates than richer economies. As a result, all economies should eventually converge in terms of per capita income. Developing countries have the potential to grow at a faster rate than developed countries because diminishing returns (in particular, to capital) are not as strong as in capital-rich countries. Furthermore, poorer countries can replicate the production methods, technologies, and institutions of developed countries.”

In other words, over time, wealthy countries tend to grow more slowly.

Here is another candidate, namely economic freedom:

Country Ave free-market rating 1980-90 Ave free-market rating 2000-2010 Change in rating Change PC GDP first/second period
US 8.275 8.216 -0.59 -43.11%
France 6.545 7.4 +0.855 -60.59%
Sweden 6.31 7.583 +1.273 -26.45%
Japan 7.655 7.783 +0.128 -86.68%


France and Japan, for all their protective measures, fared far worse than the US. These countries at all relevant times had far lower levels of economic freedom than the US. The country that bucked the trend of a decline in growth best is Sweden. Sweden is also the country that underwent the biggest deregulation (ie became freer) between the two periods.

That of course still does not mean that the share buyback trend is a force for the good, or that it doesn’t matter. It is, on the face of it, worrying that companies do not invest in machines, technology and training of workers, instead choosing to cannibalise their own shares. This is bound to be less than optimally productive. But knowing that, still begs the question: was it free enterprise that caused it?

Why did this tendency increase so much during the period 1980 to date, as correctly pointed out by the author?

The answer lies in easy money. Here is a graph showing the federal Fund interest rates in the US from 1971 to date:

The declining interest rate trend since the early 1980s is notable. Equally obvious is that the interest rates imposed by the Fed trended downward over precisely the period that the share buyback trend grew in severity. It is also the time during which a decline in productivity has been noted, as well as a trend for businesses to buy shares in businesses (including their own shares) instead of investing in research and development, training, new technology and new plant. The culture that took hold since the seventies has been one where consumption has been fuelled by debt, not productivity. This is all no coincidence. It is a fundamental principle of economics that production has to precede consumption. Low interest rates effectively open the door to money creation out of nothing. That encourages malinvestment in the form of share buying instead of building factories (to simplify) and fuels consumption[2]. The Mises Institute explains:

“On account of loose monetary policy and the subsequent increase in the money supply, the process of wealth transferring from wealth generators to the holders of the newly created money is set in motion. Since this new money was generated out of “thin air,” nothing was exchanged for it hence we have here an exchange of nothing for something.

This means the holders of newly printed money have taken from the pool of real wealth without giving anything back in return. Consequently, this puts pressure on the pool of real wealth. Similarly to government, these holders of newly created money are engaged in non-wealth generating activities. (These activities sprang up on the back of money pumping. In the free unhampered environment these activities, which ranked as low priority would not be undertaken.)”[3]

It is no wonder the US economy has suffered.

For our purposes the important point is that the increasing (and damaging) trend of growing share buybacks is more than explained by the Fed artificially pushing interest rates down, in effect pumping money into the economy. Needless to say, this process of priming the economy by means of low interest rates, is government intervention in the economy. It is not the free market at work. In a free market money would simply be a liquid medium of exchange, and interest rates would reflect supply and demand of real credit. In a fast-growing economy interest rates would tend upward, because demand for credit would increase. That would encourage ordinary people and businesses to enter the loans market. Conversely, if for some reason the growth rate of the economy declines, so would interest rates.

Now we can return to the notion that companies should not be run in the interest of their shareholders. That is like saying people should not obey their survival instinct. In a properly functioning economy, businesses would operate like the corner café or the local tailor: They would aim to serve their customers by giving the best value for money, because they would be driven by the selfish and normal urge to better their own economic well-being. To the extent that companies hire professional managers, the latter would be rewarded on a fiduciary basis, namely that contractually they are obliged to serve the interests of the company first and foremost. That is economically to all intents and purposes indistinguishable from the interests of the shareholders. Employees should receive rewards and favourable terms and conditions of employment to the extent that they serve the interests of the company in that sense, and not as an aim in itself.

Any suggestion that any other outcome is possible, likely or desirable, is clearly nonsense.


[2] See





For the next few weeks I am writing and publishing a critique of Ha-Joon Chang’s book with the above title. In the introduction he stakes his claim:

What the free-marketers have promised is at best half true.

Free markets make economies worse off than the correct alternative policies.

Capitalism remains the answer, but government intervention is necessary to make it work.

The book is based on the formula that free-marketers are guilty of peddling myths, and the author’s business is to debunk those myths (“things” the reader presumably does not know) – one per chapter. For that reason it is convenient to follow the same formula to criticise the points the author makes.

Thing 1: There is no such thing as a free market

The point that is made here, is that no market is completely free from state intervention.

To this one’s instinctive response is to say: so what?

There is no such thing as a completely free market. Even hard-core libertarians allow for some state role in the economy. For example, today it is generally accepted amongst free-market advocates that a country practising free enterprise policy should have a court system; a law of contract; property laws; a sound monetary system, and so on.

In practice there are of course more interventions than those.  In Hong Kong, probably the freest economy on earth, the state pays for education and housing for example. But the state interferes less than in any other country.

The point is that economic freedom is a relative concept. And the evidence is overwhelming that as a rule the freest economies fare the best in terms of any criterion yet designed for measuring life quality, including income, poverty relief, happiness, environmental protection, health, education and human rights.

The author’s tacit subtext is of course that state intervention is a good idea, and works better.

For example, the bailout of Freddie Mac and Fannie Mae in the US is cited as examples that prove that the government in America intervenes in the economy. Whether this is a good thing, is seemingly taken for granted, without a shred of evidence. Who knows what the effect would have been if these institutions had been left to their own devices? We cannot assume what that would have been.

The argument is similar to the one about the so-called developmental state, of which the Asian Tigers are typical examples. It is assumed that Singapore proves the case. But between 1961 and 1997 the per capita GDP in constant dollar terms of Singapore and Hong Kong were almost identical. For all its developmental strategizing, Singapore was slightly behind in the race, while the freest country, with the least intervention of any in the world, was slightly ahead. That raises the question: Was Singapore effective because the state intervened, or in spite of it? Then Hong Kong was handed over to China, and investment rates dropped. But until then, the laissez faire economy of Hong Kong was at least as good as the slightly more interventionist one of Singapore.

It must be emphasised at the outset that, despite the activism of the Singaporean government, in the period that of 1960-2015, both Singapore and Hong Kong were two of the freest economies on earth – in fact, throughout most of this period they were numbers one and two on indices measuring economic freedom. To a large extent, this explains why they greatly outclass the other Asian tigers, and indeed all other states in the Far East.

As a further example, the author makes the point that all countries today have anti-child labour rules. The implication is that it is the anti-child labour rules that caused child labour no longer to be used. This inference is drawn because of the coincidence of both the rules and no child labour in the same country at the same time. There is of course a good chance that the opposite is true, namely that the country can afford the luxury of such laws because it is wealthy enough to send all its children to school. That is, wealthy, successful countries do not need these rules, and in failing, poor countries they do not work.

To confirm this, Wikipedia for example reports[1] that

“In Cambodia, the state had ratified both the Minimum Age Convention (C138)[3] in 1999 and Worst Forms of Child Labour Convention (C182) in 2006, which are adopted by the International Labour Organization (ILO). For the former convention, Cambodia had specified the minimum age to work to be at age 14.[4]

Yet, significant levels of child labour appear to be found in Cambodia. In 1998, ILO estimated that 24.1% of children in Cambodia aged between 10 and 14 were economically active.[5] Many of these children work long hours and Cambodia Human Development Report 2000 reported that approximately 65,000 children between the ages of 5 to 13 worked 25 hours a week and did not attend school.

Despite the laws implemented by government, economic necessity dictates that child labour be used. The converse is just as true. In a successful wealthy economy, there is barely any demand for child labour.

Here is a list of the worst offenders in terms of child labour out of 197 countries rated by Maplecroft[2], together with their free-market rating and GDP per capita:

Country Child labour rank Market freedom rating (out of 159) Per capita income (out of 198)
Eritrea 1 190
Somalia 1 198
DRC 3 147 195
Myanmar 3 151 133
Sudan 3 144
Afghanistan 6 180
Pakistan 6 127 141
Zimbabwe 8 144 170
Yemen 9 123 171
Burundi 10 125 196
Nigeria 10 114 134
Average   133 168.3


The offending countries are desperately poor without exception. The best of them is Myanmar at number 133 out of the total of 198. The poorest country in the world, Somalia, is also on the list. As for economic freedom, the offending countries whose economic freedom has been rated, all fall squarely in the bottom 25% of free countries.

The statistics for the countries with the least child labour are not readily available, but education quality is a good indicator of child welfare. The 10 best countries in terms of education, according to the OECD Better Life Index (with their free-market rankings out of 159 in brackets) are Finland (17), Australia (9), Denmark (15), Germany (23), Slovenia (73), Japan (39), Sweden (27), Poland (51), Ireland (5) and Korea (32). Their per capita GDP rankings (out of 197) are Finland (28), Australia (20), Denmark (23), Germany (19), Slovenia (41), Japan (31), Sweden (18), Poland (47), Ireland (7) and Korea (33). All the countries are relatively free-market countries with high incomes.

No one can seriously contend that it was child labour laws that were responsible for the wealth and well-being of children in these countries. The inference is irresistible that they would have been well off in any event. Children in wealthy countries are sent to school, not put to work in factories. Children are enabled to become as productive as possible. The converse is true in unfree, poor economies, where parents (sadly) choose to use their children’s labour to survive. .

The same applies to rules like labour standards and minimum wages. Poor people (the poorest 10% of the population) in free-market countries[3] earn about ten times as much as their counterparts in unfree countries[4]. Minimum wages have absolutely nothing to do with this. Productivity that comes with economic development, education and training has everything to do with it. A good example is the clothing industry, where – despite the threat of forced closure – hundreds of clothes factories for years operated below the levels imposed by bargaining council minimum wages. In poor countries these standards on the whole do not help.

In the US a study was done by the US Chamber of Commerce comparing states with high, intermediate and low levels of labour regulation (called ‘Poor’, ‘Fair’ and ‘Good’ respectively). When it came to assigning overall rank, 15 states were ranked ‘Good’, 20 ‘Fair’ and 15 ‘Poor’. In the five-year period from 2009 to 2014, I calculated the average employment growth in each group, which was as follows:

Good  2.72 per cent

Fair     0.6 per cent

Poor    0.49 per cent

Quite clearly it pays to be ranked ‘Good’. Average employment growth in this group is about 4.5 times higher than in the ‘Fair’ group, and 5.5 times higher than in the ‘Poor’ group.

A more dramatic illustration of the value of low regulation is to compare the percentage of jobs created over the same five-year period for all the states in each group combined. The ‘Good’ group’s employment growth was 4.4 per cent, while that of the ‘Poor’ group was a measly 0.6 per cent. In other words, the ‘Good’ states proportionally created more than seven times as many jobs as the ‘Poor’ states did. In actual numbers, the ‘Good’ states created 2 124 734 jobs (starting from about 47 million), while the ‘Poor’ states created only 390 551 jobs (starting from a much larger 62 million).

And in case you were wondering, per capita income growth is also better in the ‘Good’ states:[i]

Good  1.82 per cent

Fair     1.64 per cent

Poor    1.68 per cent

Labour laws and minimum wages not only had no beneficial effect on incomes in the Poor states; it exacerbated them drastically.

It is enough to conclude that while it is true that most, in fact all economies contain mixtures of freedom and state intervention, that tells us nothing about the superiority of either.



[3] The first quartile on the Economic Freedom of the World Index

[4] The fourth quartile on the Economic Freedom of the World Index

[i] ‘United States real per capita personal income growth by state: Average annual percent change, 1959-2015’, United States Regional Economic Analysis Project, November 2016, available at (last accessed 1 April 2017).


Definitions, facts, solutions: A reply to Henry A Giroux: Democracy in Crisis

This is a reply to Henry A Giroux: Democracy in Crisis, the Specter of Authoritarianism, and the Future of Higher Education, an article that attacks “neo-liberalism” as a major threat to universities as a democratic public space, and ultimately as a cornerstone of democracy itself.   ( This is crucial in view of the current debate about the role of universities in South Africa.


Definitions, facts and practical proposals. Whenever I deal with a piece like this, I feel the need to get three things straight at the outset. What is “neo-liberalism”? What are the facts concerning its application at this stage? And finally, what does the author propose should come in its place?

First then, the definition. Normally what people mean when they talk of “neo-liberalism”, is free-market policy. The author does however qualify this by suggesting it is a more authoritarian, undemocratic version of free markets, driven by selfish values hostile to the weak of society. If the suggestion is that there is an acceptable version of free-market policy that is none of those things, one has to agree.

It is important to understand what a free market is and is not. It is not anarchy.  An absolutely typical exponent of free-market policy is the Fraser Institute’s Economic Freedom of the World Index, which measures freedom of markets across the world. It regards certain institutions, such as courts of law and sound money systems, for example, as essential to a free market.  In other words, even where there is a free market, the framework is based on the principle that certain forms of regulation are essential to ensuring freedom.  Most significantly, the law of contract is central to the system, as is the law of property.  This is because the two principles of freedom of contract and protection of private property are crucial to the free-market system.  It is based on voluntary exchange of goods and services, and unless the legal system is able to enforce contracts voluntarily reached between adults, and the protection of property, such a system would be next to meaningless.  A free-market system also has a sound monetary foundation in that a monetary unit adopted by the system is stable and not inflationary.  That in turn is essential for the other cornerstone of the free-enterprise system, namely accurate price signals.

But most importantly, a free-market system has as an inherent ingredient the rule of law – the idea that people are governed not by the arbitrary whims of people, but by laws. That is a crucial ingredient of the policy,that is equally essential to democracy.

All these instruments are designed to protect the individual, including the poor, against abuse by the state and other people.

The free market does not rest on “an irrational belief in the market to solve all problems and serve as a model for structuring all social relations”. It is based on a rational belief – namely the belief that, as is evidenced by developments, the most effective economic system to improve the life quality of the largest number of people, given the inevitable scarcity of resources, is a free market. Can it solve all problems? Of course not. But on balance, is it better than the alternatives? You bet. The big picture is that

  • The world has globally moved in a free-market direction over the past 35 years, as the Economic Freedom of the World reports[1]:

“There are 109 countries for which the EFW data have been continuously available since 1985. … economic freedom has increased throughout the world during the past three decades. The average EFW rating of the 20 high-income countries was 0.8 units higher in 2014 than 1985 and that of the 89 developing economies, 1.7 units higher.” (Note, this is out of a possible 10, therefore increases were 8% and 17% respectively)

  • In that period billions of people have been lifted out of poverty:

“The extreme poverty rate in the developing world fell from 56.9% in 1980 to 34.5% in 2000, and 15.6% in 2014. Thus, the extreme poverty rate in less-developed countries is now more than 40 percentage points lower than in 1980. In 1980, 73.9% of the population of low-income countries had incomes below the moderate poverty rate threshold in 1980. By 2000, the moderate poverty rate in the developing world had declined to 59.2%, and by 2014 the figure had fallen to 34.3%. Thus, the moderate poverty rate was reduced by more than 50% during the 34-year period.”

This is not an ideology that “considers profit-making the essence of democracy”. The essence of democracy is power given to the people – to have an effective say in decisions affecting them, to be protected against the power of government, to be free to live life with as many choices as possible. These principles are not only compatible with free-market policy, they are essential to it. Most people in a free market never take profit in the normal sense of the word. They are employed through contracts freely concluded. They benefit yes, just as much as employees, as consumers.

For example: Jason Furman, the Chair of the Council of Economic Advisers to President Clinton, explained in 2006:

“There is little dispute that Walmart’s price reductions have benefited the 120 million American workers employed outside of the retail sector. Plausible estimates of the magnitude of the savings from Walmart are enormous – a total of $263 billion in 2004, or $2,329 per household.”

Ordinary people enjoy the enormous benefits of profit-driven consumer goods like smartphones and internet access. Life quality has changed for them beyond all comparison. Ask the billion people lifted out of poverty in the last 30 years in South East Asia whether they would rather forego the benefits they enjoy as consumers. We know what they will say.

But no, consuming” is not “the only operable form of citizenship”.  What a gross distortion to say that free-market policy has ever suggested anything of the kind. But consuming matters a great deal. Our ability to consume – food, housing, entertainment, education – co-determines our quality of life. And that makes it an important part of citizenship.

Take that away, and what do you have? Take the example of environmental consciousness – the sort of concern that embodies good citizenship, beyond “mere” consumerism. Here are the ten countries with the best environmental performance in the world: Switzerland, Luxembourg, Australia, Singapore, Czech Republic, Germany, Spain, Austria, Sweden and Norway. They are all relatively free-market capitalist countries, with an average score of 7.728 on the Economic Freedom of the World Index, and an average ranking of 24.1 out of 157. By contrast, the ten countries with the worst environmental records that also appear on the Index – Bangladesh, DRC, Sierra Leone, Togo, Lesotho, Haiti, Burundi, Madagascar, Mauretania and Myanmar – have an average point of 6.154, and an average ranking of 126.1 out of 157. The best environmental records generally are held by the wealthiest countries. The average per capita income of the above ten best environmental performers is $54224, while that of the ten worst performers is $2095. The best cure for most environmental scourges is economic growth. The best way to ensure economic growth, is by maintaining free markets. Environmentalism costs money. The most productive societies (ie those that produce wealth most cost-effectively) are invariably the ones that best address growth of human wealth as a priority, and then as a happy side effect, care for the environment.

We are often guilty of not seeing the wood for the trees.   It is necessary to step back a little and gain some perspective and see where we are.

For example:  A common misconception is that the United States has a free-market economy.  Whereas it is true that for many years – in particular the years 1980 to 2000, the US was amongst the freest economies in the world – that, sadly, is no longer the case.

According to the latest edition of Economic Freedom of the World, the US has declined in economic freedom:

“Americans have long described their country as ‘the land of the free and the home of the brave’, a description immortalised in the American National Anthem, sung before every major sporting competition in the United States.  While that description was apt for much of modern history (at least compared to other major economies), over the last decade and a half that description has begun to ring less and less true.  The United States was ranked first in economic freedom among OECD countries as recently as 2000 – and third overall, typically behind only Hong Kong and Singapore, and some years, only Hong Kong – and had been since 1980.  Unfortunately, it has been declining since then.”

The authors show that the US declined from second or third position in the international rankings to hovering between sixteenth and eighteenth in the world.  Of particular concern is the fact that the components of freedom relating to the rule of law and the size of the government have been deteriorating.

So, the US is no longer a paragon of market freedom, and its performance in respect of income has reflected this.  From 1985 to 2000 its per capita income grew by about 100%.  By contrast, over the next decade and a half its freedom rating declined to 7.75, and per capita income only grew by about 50%.

A particularly disturbing trend is the decline of the rule of law in the rating of the US. This takes the form of, among other things, a surfeit of executive orders to attack foreign countries and implementing regulations by executive fiat, not to mention the arbitrary interference with the due-process rights of prisoners of war and criminal accused. Judicial independence (as measured by the Index) declined between 2000 and 2014 from 8.02 to 6.84, impartial courts from 9.02 to 6.84. Legal enforcement of contracts declined from 7.33 to 5.45.

Individual freedom has therefore suffered severe setbacks.

Also the economic power of the government has grown hand over fist. Government spending at the time of Obama taking over the reins was at a historical high. To the credit of the government under his leadership government spending was brought under control somewhat, but at the same time billions of Dollars’ worth of paper money was pumped into the balance sheet of the Fed, massively inflating the stock market and unjustifiably boosting inequality. In this way an unsavoury alliance has been formed between the corporate rich and the government, to the detriment of the poor. Arbitrary money creation by an agency that is not answerable to Congress, is a serious violation of the rule of law.

Here is a graph showing the decline in the rule of law in the US, compared to its general economic freedom, which is now lower than that of Canada.


According to the Cato Institute: The measured deterioration in the rule of law is consistent with scholarship in that field and, according to the report, is a result of ‘increased use of eminent domain to transfer property to powerful political interests, the ramifications of the wars on terrorism and drugs,’ and other property rights violations.”

As a matter of fact therefore, the US has become a more authoritarian and pro-rich place, which undermines many of the principles of democracy. In many instances government and corporate interests are in bed together. Examples include almost any commercial lobby one can imagine. The increase in the influence of special interests is in its turn the result of a watering-down of democracy by reason of the entrenchment of incumbent congress members due to election rules that undermine the principle of federalism and centralise state power. If all that is what “neo-liberalism” means, then one must agree with the author – the less one has to do with it the better.

The problem is that that shift in policy – away from the rule of law – is seized upon by the left to discredit free-market policy, whilst it demonstrates the opposite. The left now wants to throw out the baby of free markets with the bathwater of abusive state power. That is a serious mistake. In the relatively free-market era (1980-2000), for example, the poor in America in absolute terms advanced in leaps and bounds. During that period, the real income of the bottom 20% grew cumulatively between 20% and 40% per year – faster than that of the second and third quintiles. To the extent that the income of the top 20% still grew faster, that is mainly the result of arbitrary money creation referred to earlier.

As for higher education, it is not clear from where the idea comes of “the increasing exclusion of working-class youth from higher education”. The US, which is presumably the pinnacle of modern-day neo-liberalism, has one of the most accessible higher education systems in the world as measured by enrolment figures (  88.8% of school leavers enrol in some form of tertiary education, compared to 78.5% in the Netherlands, 62% in France, 61% in Germany, 76% in Norway and 63% in Sweden. If neo-liberalism is the cause of denying university access to the youth (of any demographic) then it is passing strange that the latter group of social democracies are more guilty on this score than that paragon of neo-liberalism, the US.

As for high tuition fees, the main cause of this is the universal availability of government-subsidised student loan schemes, which increase tuition by 50-70% ( How ironic that the focus of the author’s thesis provides such a good illustration of the unholy alliance between the government and corporate interests! The answer is to get the government out of tuition funding, and make prices more cost-effective, as in the case of Korea or Chile, neither of which has traditionally had such national loan schemes.

Even so, while it is true that tuition fees in the US are the highest in the world, between 1965 and 2014 university enrolment there increased as follows:

1965 2014
Public 3.97m 14.66m
Private 1.95m 5.55m
% private 21.3 27.46


The idea, in the light of these figures, that youths are progressively excluded from tertiary education (by anyone) is simply fiction. What is true, is that private interests, as is the case all over the world, bear an increasing load of the funding and management of universities. The one reason for that is that it is very difficult for even the richest countries nowadays to provide free education to all those who demand it. The supply of higher education is in the result increasingly carried by the private sector. Over the last few decades university access has dramatically grown.  Consequently the idea that university education is increasingly an “elite” activity, is simply nonsense. While in the sixties it truly was an activity reserved for the elite, today it is a common commodity. University education has never been as equal as it is now. Like all commodities it has been made more accessible by the market system, not less. The countries that have so-called “free” education (mainly the Nordic societies) suffer significantly by comparison in that they are on the whole worse off in terms of access, quality and cost-effectiveness of education.

Here is a table of developed countries ranked from highest private funding of higher education to the lowest, showing:

  • The quality rating of each country’s higher education system (SR)[2];
  • the enrolment percentage of school-leavers in higher education (E)[3];
  • the combined figure for the two (SR + E);
  • their respective economic freedom ranks;
  • their respective per capita GDPs.
Country Private funding % System rating (SR) Enrolment % (E) SR+E Free


Korea 70.7 80.1 97 177.1 39 34549
Japan 65.7 78.5 62 140.5 26 37322
Chile 65.4 46.7 84 130.7 10 22316
US 62.2 100 88.8 188.8 16 55837
Australia 55.1 92.6 86.6 179.2 12 47514
New Zealand 47.6 70.2 80 150.2 3 36982
Israel 47.6 50.1 66 116.1 39 35431
First quartile average 59.18 74.02 80.62 154.64   38564
Portugal 45.7 40.3 66 106.3 35 29214
Canada 45.1 90.2 88.7 (1996) 178.9 9 44310
UK 43.1 98.5 57 155.5 10 41325
Russia 36.5 59.8 78 137.8 99 24451
Italy 34 73.4 63 136.4 68 35897
Netherlands 29.5 84.8 78.5 163.3 30 48459
Second quartile average 38.98 74.5 71.86 146.36   37276
Spain 26.9 75.3 87 162.3 49 34527
Poland 22.4 20 71 91 47 26135
Estonia 21.8 10.5 73 83.5 22 29095
Czech Rep 20.7 31.8 65 96.8 42 32167
France 20.2 89 62 151 70 39678
Turkey 19.6 26.1 79 105.1 82 19618
Third quartile average 21.93 42.11 72.83 114.94   30203
Ireland 18.2 60.9 73 133.9 8 54654
Germany 14.1 94 61 155 29 47268
Sweden 10.7 73.1 63 136.1 42 46420
Belgium 10.1 71.6 72 143.6 52 43992
Austria 4.7 49.1 80 129.1 31 47824
Norway 3.9 46.6 76 122.6 27 61472
Finland 3.8 66.9 91 157.9 19 41605
Fourth quartile average 9.35 66.02 73.71 139.73   49033


As regards the issue whether the university is no longer a public space where freedom of thought, speech and enquiry flourishes, firstly this: There is always a place for the university in the time-honoured tradition as a place of such learning and enquiry. In the sixties this role was fulfilled mainly by public universities.

As to the idea that universities are beholden to private funding to such an extent that funders effectively shut down public discourse and academic freedom, where is the evidence of that? It is true that the market dictates what courses have to be provided, which is a function of training needs of the corporate world.

But the idea that corporate needs include a subservient, indoctrinated student mass in the result, is laughable. As in, it induces laughter due to the conspiratorial nature of the theory. For instance:  “This role of higher education [namely as democratic public sphere]  is perceived by neoliberal acolytes as dangerous because it has the potential to educate young people to think critically and learn how to hold power accountable (Giroux, 2014b).” Can the man be serious? A growing number of CEOs demand a liberal arts degree for a significant percentage of their job candidates, as the complexity and ambiguity of modern commerce, especially hi-tech, requires integrative, creative and critical thinking. (See E Segran: Why Top Tech CEOs Want Employees with Liberal Arts Degrees, 8/28/14).One only has to read the debates on social media about identity politics for example, or the American mass protests against Trump, to see how false the notion is that corporate culture has killed critical thought among students. Not all of it is of high quality, mind you, or remotely independent. Free-market intellectuals (such as the very Thomas Sowell denigrated by the author) ironically frequently complain about precisely the opposite, namely that the mindless narrative of modern identity politics and political correctness speaks of a lack of independent thinking at our universities.

That university education has “dumbed down”, is possibly true. Inevitably, if it is going to be a mainstream commodity (as it is, like cell phones, the internet, international travel) there is going to be some “dumbing down” in the aggregate. In the US part of this must be laid at the door of American basic education, run by the government on a highly centralised basis and with consequently moderate to poor results by world standards. But part of it is simply a function of demographics. Universities are no longer an elite pastime reserved only for the graduates of elite schools. It is today the expected due of all who pass school.

But the most laughable idea advanced by the author is the notion that universities are now bastions of free-market/neo-liberal thought, in a manner of speaking. Anyone who has tried to advance the ideas underlying a free market, will testify to the fact that academia is the very last place where such an agenda is likely to fly. Academic economists are, almost to a person, terrible free-marketeers. An example is the almost universal support for trade unions in those ranks, notwithstanding ubiquitous evidence that high trade union density slows down job growth.  Academics are the strongest bulwark against the free market, a demographic that supported Bernie Sanders as a solid block (see eg “Leading Academics Launch ‘Higher Ed for Bernie’”, 27 October 2015). If the author is worried about free-market policy having converted entire faculties, he shouldn’t be.

That brings us to the most important question: so what?  What does the author suggest we do to cure this mass cultural conversion of universities into neo-liberal agencies? Not much on the practical front. This is the type of platitude with which we must content ourselves:

“Those who believe in higher education and democracy have to engage the issues of economic inequality and overcome social fragmentation, develop an international social formation for radical democracy and the defense of the public good, undertake ways to finance oppositional activities and avoid the corrupting influence of corporate power, take seriously the educative nature of politics and the need to change the way people think, and develop a comprehensive notion of politics and a vision to match.”

Really? No wonder the left is so ill-equipped to beat the forces of “neo-liberalism”. What the author doesn’t get, is that calling higher education a democratic public sphere, does not mean it does not have to answer to the laws of economics.

May I venture a proposal: Given the author’s transparent suspicion of the market, one expects he would say that the scourges he identifies should be dealt with by way of public funding. That way, surely, the sacred space of academia will not be beholden to corrupting corporate culture. So, how has that worked out in the world so far?

If you believe that the percentage of a country’s GDP that is expended on tertiary education is important (as undoubtedly it is), then it is significant to know what proportion of that percentage is private expenditure[4]: In other words, which countries (OECD countries in the sample below) tend to spend more on higher education: those where most of the spend is public, or where it is private? In the first column is the percentage of GDP spent by the private sector in each country. In the second column is the percentage that that private spending makes out of all spending on higher education; and finally we see the total percentage spent on higher education, expressed as a percentage.

Country Private spend as % GDP Private spend as % of whole spend Total spend as % GDP
Chile 1.5 60 2.5
Korea 1.5 65 2.3
US 1.4 50 2.8
Canada 1 40 2.5
Japan 1 66 1.5
Australia 0.7 43.7 1.6
Israel 0.7 43.7 1.6
NZ 0.7 36.8 1.9
Ave 1st quartile 1.06 50.65 2.05
UK 0.6 33 1.8
Hungary 0.4 33 1.2
Mexico 0.4 30,7 1.3
Portugal 0.4 30.7 1.3
Netherlands 0.3 17.6 1.7
Czech Rep 0.2 14.28 1.4
Estonia 0.2 12.5 1.6
France 0.2 14.28 1.4
Ireland 0.2 15.38 1.3
Spain 0.2 16.6 1.2
Turkey 0.2 14.28 1.4
Sweden 0.2 11.76 1.7
Ave 2nd quartile 0.29 18.1 1.44
Finland 0.1 5.55 1.8
Iceland 0.1 8.33 1.2
Italy 0.1 11,1 0.9
Poland 0.1 7.69 1.3
Slovak Rep 0.1 10 1.0
Ave 3rd quartile 0.5 8.53 1.24
Austria 0 0 1.7
Norway 0 0 1.6
Belgium 0 0 1.4
Germany 0 0 1.2
Slovenia 0 0 1.2
Luxembourg 0 0 0.4
Switzerland 0 0 1.2
Ave 4th quartile 0 0 1.24

Clearly then, the greater the percentage spent by the private sector, the more a nation spends on higher education – by far. When a country is really intent on increasing spending on tertiary education, the private sector should incur as large a percentage of the total expenditure as possible.

Of course, you may say the amount spent does not matter. Perhaps it is better to have a “democratic public sphere”, even if that means “the increasing exclusion of working-class youth from higher education”.

Education is a resource. It depends on the development of human resources, namely academics, and the provision of facilities in the shape of libraries, classrooms, computers and laboratories. In other words, how is this luxury of a “democratic public sphere” to be funded, while still maintaining high pedagogical and research standards and optimal access for all? Like all such questions, it is a matter of efficiency. Without addressing that, the author’s opponents will not take him seriously. In fact, one wonders how his supporters can.






Money, not equality, buys happiness

House-and-money-on-scales-Isolated-3D-image-Stock-Photo-balanceOne of those seemingly self-evident truths that seem to skip effortlessly off the tongues of the left-wing advocates of equality, is that equality of income is essential to societal stability and contentment. But is that really true?

The Better Life Index of the OECD aims to measure the relative life satisfaction (happiness) of citizens of mainly OECD countries. The point allocated to each country, calculated on the basis of a series of answers in a survey, reflects the subjective views of respondents. Dealing as the survey does with a purely subjective value, namely happiness, this is perfectly in order. The one thing that a person cannot second-guess, is another’s say-so about his or her own happiness.

Here is the raw data (from the most equal society to the least), including data on GDP per capita, a good proxy for average income levels:

Country Equality (Gini coefficient) after transfers & taxes Life satisfaction GDP per capita
Sweden 25 7.2 45143
Norway 25.8 7.4 64893
Czech Rep 26 6.5 30445
Austria 26 6.9 46164
Slovakia 26 6.1 27585
Finland 26.9 7.4 39755
Iceland* 28 7.5 43393
Denmark 28.1 7.5 44862
Australia 30.5 7.3 43901
Germany 30.6 7 45615
Luxembourg 30.8 6.9 91048
Netherlands 30.9 7.3 47130
Slovenia 31.2 5.7 29917
Hungary 31.2 4.9 23334
S Korea 31.3 5.8 34356
France 32.7 6.5 38851
Belgium 33 6.9 42725
Switzerland 33.7 7.5 56939
Canada 33.7 7.3 44088
Poland 34.1 5.7 23690
Greece 34.3 4.3 25667
Ireland 34.3 7 47804
Spain 34.7 6.5 33763
Italy 36 6 34758
Estonia 36 5.6 26355
NZ 36.2 7.3 35217
UK 38 6.8 39137
Japan 38.1 5.9 36426
Portugal 38.5 5.1 28326
Turkey 39 5.6 18783
Israel 39.2 7.4 33072
Russia 39.7 6 25248
US 41.1 7.2 54629
Mexico 48.1 6.7 16370
Chile 50.8 6.7 21942
Brazil 52.7 7 15835


First, a few observations:

  • The most unequal of the developed countries in the list, is the US. Yet it still has an LSI of 7.2, which compares well with that of the happiest society, Denmark, at 7.5.
  • The US fares even better compared to highly equal Sweden (7.2) and Norway (7.4)
  • It is a far happier society than a whole host of other more equal societies on the list, including Czech Republic (6.5), Slovakia (6.1), Austria (6.9) and Germany (7)
  • Switzerland, which tops the pile in terms of happiness together with Denmark at 7.5, is dead average in terms of equality, with a Gini coefficient of 33.7, placing it 18th out of the 36 on the list.

Assuming that equality matters for purposes of happiness, the rather obvious explanation for these seeming anomalies is that the per capita incomes of the happier societies – such as average-equality US and Switzerland – are far superior to that of any of the other more equal, but unhappier, societies.

If we plot the LSI (happiness) of each country on a graph against the income equality of each, it is immediately obvious that there is no correlation between the two. In other words, mere equality does not make people happier:


25 Sl Cz Sw Nor
27 Au Fi
29 Ice, Den
31 Hu Sl, Ko Ger, Lux Aus Ne
33 Fr Be, Ire Swi, Ca
35 Gr Po Sp
37 Est It, Ja UK NZ
39 Por Tur Ru Is
41 US
47 Mex
51 Chi
53 Br
Happiness 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5


On the other hand, if we were to plot the LSI of each country against its per capita GDP, it is immediately apparent that there is a compelling correlation between the two. It confirms the somewhat un-PC point that money, up to a point, does indeed seem to buy happiness:


GDP pc
90 Lux
70        X
65 Nor
60 Sw
55 US       X
50 Ire
45 Swe,Au. Ger, Be



Ice, XDen,

Aus, Ne,Ca

40 Fr UK, Ja Fi
35 Ko, It Sp X NZ, Is
30 Por Sl X Cz
25 Gr




Po,Es Sl, Ru
20 X Tur Ch
15 Mex Br
Happiness 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5


That of course does not mean that it may not be better to be both more equal and wealthier.

The point to make however, is that of the two factors (per capita income and equality), per capita income is by far the most influential. This we can tell by breaking the countries into peer groups according to income:

PCGDP over R50000:

Country Gini LSI
Norway 25.8 7.4
Luxembourg 30.8 6.9
Switzerland 33.7 7.5
US 41.1 7.2


40 000 – 50 000:

Country Gini LSI
Sweden 25 7.2
Austria 26 6.9
Iceland 28 7.5
Denmark 28.1 7.5
Australia 30.5 7.3
Germany 30.6 7
Netherlands 30.9 7.3
Belgium 33 6.9
Canada 33.7 7.3
Ireland 34.3 7


30 000 – 40 000:

Country Gini LSI
Czech Rep 26 6.5
Finland 26.9 7.4
S Korea 31.3 5.8
France 32.7 6.5
Spain 34.7 6.5
Italy 36 6
NZ 36.2 7.2
UK 38 6.8
Japan 38.1 5.9
Israel 39.2 7.4


20 000 – 30 000:

Country Gini LSI
Slovakia 26 6.1
Slovenia 31.2 5.7
Hungary 31.2 4.9
Poland 34.1 5.7
Greece 34.3 4.3
Estonia 36 5.6
Portugal 38.5 5.1
Russia 39.7 6
Chile 50.8 6.7


Less than 20000:

Country Gini LSI
Turkey 39 5.6
Mexico 48.1 6.7
Brazil 52.7 7


In none of the income categories is there any correlation between equality and happiness.

The real question is, however, whether there is a trade-off between the two factors of per capita income and equality of income. In other words, does a country have to give up income in order to achieve equality, and vice versa?

There are two types of policy measures that improve equality. The first is applied before government takes tax money and spends it on grants and welfare in order to equalise incomes. That category includes measures such as policies to bring about greater equality in the labour market.

First, let us examine labour law (the quantified value of which appears in the first column in brackets) as potential equaliser of income. A comparison of the Gini coefficient of different countries before taxes and transfers shows that labour laws have no significant impact on inequality of income. So for example the US, with significantly less labour regulation than most European countries, compares well with several highly regulated countries that are normally held up as paragons of equality (such as Austria and Germany, for example). The list comprises a wide variety of labour law systems with hugely differing degrees of labour regulation among both equal and unequal societies, with little discernible variation or trend.


Country Bargaining coverage

(labour market freedom)

Unemployment Immigrant  % of population Ed Gini before T&T Gini after T&T
South Korea 12 (4.51) 2.7 2.9 .865 .344 31.3
Iceland 100 (7.67) 4.5 10.7 .847 .382 28
Switzerland 37 (7.79) 3.5 28.9 .844 .409 33.7
Norway 74 (4.40) 3.7 13.8 .910 .410 25.8
Denmark 92 (7.34) 6.2 9.9 .873 .416 28.1
Sweden 90 (6.85) 7.8 15.9 .830 .426 25
New Zealand 15 (8.66) 5.6 25.1 .917 .455 36.2
Australia 39 (7.02) 6.4 27.7 .927 .468 30.8
Austria 95 (6.09) 4.8 15.7 .794 .472 26
Singapore 15 (7.60) 1.9 42.9 .768 .478 46.3
US 11 (9.03) 5.5 18.9 .890 .486 41.1
Germany 59 (6.49) 4.7 11.9 .884 .504 30.6
Portugal 45 (6.46) 13.3 8.9 .728 .521 38.5
Italy 80 (6.55) 12.6 9.4 .790 .534 36
Hong Kong 5 (9.30) 3.3 38.9 .767 .537 47.5


A related factor is the percentage of a country’s workforce that is covered by collective bargaining agreements. The bargaining coverage of countries is often cited as a factor that significantly brings about greater equality, but the table clearly disproves this notion. If labour law contributes to equality in these listed societies, clearly it must have to do with some other aspect of the law, or other factors.

The only other labour law factor that realistically be significant, would be state-imposed minimum wages. However, none of the 6 most equal societies above has such minimum wages – except for South Korea, which is the exception proving the rule.

As for non-law factors, the countries above that have low inequality have low unemployment too, provided they also have low levels of immigration (Korea, Iceland, Switzerland). Singapore, Hong Kong and the US (with much higher inequality), by contrast, have low unemployment but high immigration.

Low unemployment is self-evidently conducive to equality (poor people earning wages always have higher incomes than poor people who are unemployed).

Immigration has an impact as it often – at least temporarily – lowers the educational and skills level and language- and cultural cohesion of the population. (Germany in a way of course has the greatest “immigration” burden of all in that West Germany had to absorb an entire country barely two decades ago. It is fair to infer that that partly explains its relative inequality of income.)

The most equal society in the world (as measured by its pre-T&T Gini coefficient), namely Korea, confirms this thesis as it has both very low unemployment and very low immigration levels.

High levels of education improves productivity and thus salaries. This is well illustrated by New Zealand, the US and Australia, where indifferent unemployment rates and quite high immigration levels are somewhat corrected by very high education levels.

These and similar non-law factors, one intuitively feels, account almost entirely for the difference in pre-T&T Gini levels, leaving very little room for labour law as a differentiating factor.

Minimum wages and similar measures designed to improve conditions of employment, thus have virtually no impact on equality of income, whilst education and job growth most certainly do.

It is of course so that taxes and transfers may be used to improve equality of income.

To deal with this, I compare the proportion of the economy of a group of wealthy countries (excluding purely oil-based economies) that consists of state expenditure, that being a good proxy of taxes and transfers.


Government expenditure as a proportion of GDP: Wealthy countries, excluding oil-based economies

Country State expenditure% (economic freedom rank) Per capita GDP Gini after T&T
Sweden 58.1 (42) 45 143 25
Denmark 58.1 (22) 44 862 28.1
Iceland 58.1 (85) 43 393 28
Belgium 56 (52) 42 725 33
Netherlands 54.7 (30) 47 130 30.9
Austria 54.3 (31) 46 164 26
Germany 48.8 (29) 45 615 30.6
Canada 48.2 (9) 44 088 33.7
Australia 43.6 (12) 43 901 30.5
Switzerland 37.8 (4) 56 939 33.7
Luxembourg 37.5 (27) 91 048 30.7
US 19.9 (16) 54 629 41.1
Hong Kong 17 (1) 55 084 53.7
Singapore 16.3 (2) 82 763 46.4


The trade-off between taxes and transfers on one hand and equality on the other is clear. The higher taxes and transfers are, the lower the inequality of income tends to be.

Another trade-off is equally clear however. And that is between government taxes and transfers, and per capita income.

Countries with a government expenditure percentage over 40 percent of GDP (down to Australia in the list), all cluster around a per capita GDP of just over $40 000. The rest, whose government spending is under 40% of GDP, are significantly better performers with an average per capita GDP of $68 092. The incomes of these countries increase exponentially in line with declining state spending.

The fair inference from all this is that taxes and transfers tend to undermine per capita income, which as we have seen, tends to correlate with happiness. Amongst already developed countries this may be less important. Amongst developing countries like South Africa it matters hugely.

South Africa is thus far better off aggressively pursuing employment and growth than equality, in the pursuit of the happiness of our people.

This has important implications. Policies that amount to tax and spend such as welfare grants, do not support income growth and happiness in the long run. The same applies to policies that indirectly have the same effect, such as employment equity laws, BEE and minimum wages.



The moral case for scrapping labour law

One of the most intractable problems encountered by South Africa Can Work in advancing its cause, is political correctness.

Let us make it clear beyond doubt: Our concern is about the poorest of the poor. The weakest of the weak.

It is not complicated. Labour laws are ostensibly designed to protect the weaker of two sides, namely employees as against employers, by reason of their relatively weak bargaining power. Which is all very fine, but for the fact that there are 8 million people in South Africa who are in an even weaker bargaining position than employees, and those are the unemployed.

In our Constitutional dispensation the Court has always insisted on respecting the interests of the weakest members of society. As it was put in the matter of in Hoffman v South African Airways 2001 (1) SA 1 (CC):

“Our Constitution protects the weak, the marginalised, the socially outcast, and the victims of prejudice and stereotyping.  It is only when these groups are protected that we can be secure that our own rights are protected.”

The simple question is: What is the effect of our labour laws on this grouping? For unless it is not only designed to make, but also effective in making, their lives better, how can it be justified?

Firstly, labour laws are designed to protect the employed, not the unemployed. With rare exceptions, the unemployed do not enjoy the benefits of legislatively mandated fair labour practices. Almost by definition labour laws protect the employed against exploitation by reason of their perceived weak bargaining power. This it does by:

  • mandating minimum terms and conditions of employment, including wages;
  • prohibiting unfair labour practices, in particular unfair dismissals; and
  • protecting trade unions and strike action.

Besides that, by reason of their relative place in the market pecking order, the employed are not defenceless. They have an advantage over the unemployed in that:

  • on balance they are better educated;
  • they have the benefit of work experience; and
  • they have more and better work-related skills.

These advantages mean that they have greater bargaining power than the unemployed. Self-evidently the group with the weakest bargaining power is the unemployed. They typically include:

  • previously disadvantaged people, in particular blacks;
  • women;
  • uneducated people;
  • inexperienced youths; and
  • the aged.

These are precisely the kinds of people who our Constitution says must be protected: “the weak, the marginalised, the socially outcast, and the victims of prejudice and stereotyping…”

Labour laws have the effect of keeping precisely these categories of workers out of jobs. As examples see almost all the other articles on this website (,,

It is not hard to believe. Make anything more expensive – and labour is no exception – and the market will buy less of it.

If that is true, then labour laws fail the moral test by giving an unfair advantage to the employed – the stronger group – over the unemployed – the weaker group. There is simply no moral justification for advancing the interests of the employed at the expense of the unemployed, as labour laws do.

The moral stereotyping of calls for labour deregulation has more to do, one surmises, with the fact that labour deregulation also happens to be good for employers.

Labour law protagonists have two moral problems with deregulation:

  • They find it hard to believe that both employers and employees can benefit from deregulation. They believe that employers can benefit only at the expense of employees.
  • For them the moral puzzle is simple: employers must give up something, to make things right.

It is undoubtedly so that employers will benefit from deregulation of labour. And it would be hypocritical to contend that employers calling for reforms of the labour market, do so out of altruistic motives. When white people called for democracy in 1994, or defended the Constitution in years thereafter, they undoubtedly did so out of selfish motives. But that did not make it wrong. They acted out of what is accurately described as enlightened self-interest. They pursued what is described, in another clichéd term, as a win-win solution. By the same token, when parties negotiate a settlement in a dispute because it has more benefits for both than a costly and damaging court case, no one would suggest that they are acting immorally.

Which of course raises the question: How can employees benefit from deregulation?  Where is their “win-win” situation?

Again, a rudimentary understanding of the way markets work supplies the answer. By making employment cheaper through deregulation, the state causes employment to rise. As soon as that happens, the demand for workers grows, as more and more workers become employed. The moment that happens, employers are forced to offer better working conditions in order to attract sufficient workers and not to lose out to other employers competing for their services. That includes the employed who initially took a dip in employment benefits.

Examples of this phenomenon are not hard to find:

  • Between 1960 and 1990 manufacturing wages in Taiwan, a country with almost no labour regulation and almost full employment, in real terms grew by 5-9% per year;
  • In 1991 New Zealand introduced the Employment Contracts Act, that brought about significant if incomplete deregulation of the New Zealand labour market. Amongst other things, it significantly reduced artificial statutory support for trade unions, and abolished centralised bargaining structures that prevented employers and employees from concluding their own, individual contracts of employment. In the result, between 1991 and 2007 unemployment fell from about 11% to under 4%; during the same period the labour force participation rate increased from 63% to 69%; most significantly, GDP per capita in real terms increased from about $20000 to $30000.
  • In 1985 a worker in Hong Kong (one of the least regulated labour markets in the world) in the poorest 10% of the workforce (precisely the group that labour laws would normally target) would have earned about $1560 in current prices. Today that same worker would earn $7693, a fivefold increase in real terms.

So, employees’ working conditions improve, not despite the absence of labour regulation, but because of it. Even so, one cannot escape the sneaking suspicion that trade unions and other protagonists of labour laws secretly cannot stomach the fact that a freer labour market may have the effect of improving the welfare of employers in the process. Such thinking forms part of the notion that labour law is a type of redress of the wrongs of the past, including apartheid. The laws will not fulfil the purpose these thinkers have in mind unless employers “pay”, or are “punished”, or at the very least inequality is reduced legislatively by forcing employers to spend more to meet legal standards.

First of all, employers are not a uniform group of previously advantaged white capitalists who benefited from apartheid. More than half of employers are black or black-owned, and many white employers are post-apartheid issue. Moral redress by means of labour law simply creates more moral problems than it solves.

Secondly, and more importantly, if we know that the only way to turn around the labour market is to deregulate it, does it really matter that employers’ positions are improved in the process? What would the moral choice be between uplifting both employers and unemployed workers on one hand, and uplifting neither? The choice is clear – the choice that will serve the common good is the correct one.

But what about inequality? In another article ( I have shown that, in South Africa at least, inequality of income declines as unemployment does. It is in our interest then to cut unemployment as much as possible, if we are interested in reducing inequality. Inequality will be reduced by reducing unemployment – once again in service of the common good.

The protagonists of labour law display little interest in the common good.

It is time that these exploiters and rent-seekers are exposed for what they are. They are people who use the system of labour laws to oppress the outsiders of the economic world, namely the unemployed. What makes it worse, they do so by calling on a misplaced sense of guilt of the public: The public feel guilty because ostensibly workers are the “underdogs” in society. Well, here’s a newsflash: They are not the underdogs. The unemployed are. And the leaders of the trade unions shamelessly exploit the false perception that employed workers are the true oppressed of society.

But morality is not only about that kind of choice. It also has to do with providing others with choices. And here we think of the unemployed person who would have got a job, but for the current labour laws. By maintaining these laws we deny the unemployed an adult choice, namely whether to accept employment and earn an income for his family, and the humiliation and incapacitation of penury. What is more, we do so on the basis of the assumption that we know better what is good for such a worker, than he knows himself. We deny him the dignity of deciding for himself.

It is a universally accepted legal and moral right that all adults of full capacity have or should have freedom of contract. Likewise, it is now axiomatic that everyone is entitled to equal enjoyment of the benefits of the law. Freedom of contract entails the choice of a worker to accept or reject terms of employment that an employer is prepared to offer. That includes the choice of accepting a compromise in order to compensate for his relatively weak bargaining power by reason of lack of training, education, skills or experience. But by imposing legal minimum requirements for such contracts (such as minimum wages for example), we deny certain workers that choice. In particular we deny that choice to the weaker members of society, those who are unemployed because their bargaining power is too weak to command contracts that comply with labour law. That amounts to outright discrimination against these workers, discrimination on the ground of their socio-economic status, namely their weak bargaining power. To make it worse, it is done in order to improve the position of the stronger set, the employed.

Once we know that labour laws suppress job creation (and how can we not know?) and we do or say nothing, they share in the moral guilt of the rent-seekers.

Morality is about making the right choice when you know what the effects of your decision are. When you dare not say: but I did not know.


Convincing American evidence that regulation kills jobs

In the United States the Federal Government regulates many aspects of labour relations. So for example it provides for a national minimum wage and anti-discrimination procedures. But over and above those Federal laws, each state also has the right to enact local laws that regulate employment. Any state could, for example, enact a minimum wage for the state that exceeds the national minimum wage. Although state labour law makes up only a fraction of American labour regulation, it is useful as a measure determining the differing degrees of state intervention between states.

All this makes America an ideal testing ground for the effect of labour laws on employment creation, because:

  • Many of the economic conditions in states are determined by Federal legislation and circumstances that are shared by all states;
  • Citizens of states are free to move from state to state to find   work.

The American Chamber of Commerce thus maintains an index of labour regulation  (The Impact of State Employment Policies on Job Growth 2011 )  that measures the levels of such state-wide employment regulation in each of the 50 states of the US. The Index examines six categories of regulation, namely

  • Employment relationships and the costs of separation;
  • Minimum wage and living wage laws;
  • Unemployment insurance and workers’ compensation;
  • Wage and hour policies;
  • Collective bargaining issues;
  • Litigation/enforcement climate.

A composite point (denoted by the abbreviation “ERI” for Employment Regulation Index”) is allocated to each state on the basis of individual questions relating to sub-topics (an ERI of 100 denoting the conceivably most heavily regulated state employment market).

The states are annually divided into three groups titled “Good”, “Fair” and “Poor”, each corresponding with the relative degree to which the labour regulation of each member of each group is conducive to job creation.

The authors then measure the economic impact of the regulation on the performance of each state as follows:

“Applying standard statistical techniques, we found that, when the ERI is inserted as an explanatory variable, our models demonstrate that higher levels of regulation (i.e., higher ERI scores) result in both higher unemployment and lower rates of new business formation, and that the effect is statistically significant at standard confidence levels. Moreover, the magnitude of the estimated effects is substantial. We estimate that, if each state were to achieve a “perfect” score on the ERI, the effect would be equivalent to a one-time boost of approximately 746,000 net new jobs”.

The outcome is indicated in the following table (The “but-for UR” is the notional unemployment rate that a state would achieve if it had a perfect score, ie maximum deregulation of those aspects governed by state employment law):


Scores in all States

South Dakota 4.8% 4.5% 1,028
Wyoming 6.4% 6.0% 1,213
North Dakota 4.3% 4.0% 1,380
Vermont 6.9% 6.3% 1,743
Mississippi 9.6% 9.4% 1,758
Alaska 8.0% 7.4% 1,819
Delaware 8.1% 7.7% 1,823
Idaho 8.0% 7.7% 2,099
Rhode Island 11.2% 10.8% 2,358
Montana 6.2% 5.6% 2,773
New Mexico 7.2% 6.8% 3,619
West Virginia 7.9% 7.5% 3,647
New Hampshire 6.3% 5.8% 3,662
Nebraska 4.6% 4.2% 3,706
Hawaii 6.8% 6.2% 3,707
Maine 8.0% 7.5% 3,747
Utah 6.6% 6.2% 4,305
Alabama 10.1% 9.8% 4,811
Kansas 6.7% 6.4% 5,169
Arkansas 7.3% 6.8% 5,574
Oklahoma 6.4% 6.0% 5,776
Iowa 6.0% 5.5% 7,340
South Carolina 11.7% 11.4% 7,349
Louisiana 6.8% 6.4% 8,025
Nevada 11.8% 11.2% 8,285
Tennessee 10.5% 10.1% 10,015
Kentucky 10.5% 9.9% 10,680
Arizona 9.1% 8.6% 10,959
Oregon 11.1% 10.4% 11,578
Virginia 6.7% 6.4% 11,592
Indiana 10.1% 9.7% 11,688
Connecticut 8.2% 7.5% 12,265
Colorado 7.7% 7.2% 12,669
Georgia 9.6% 9.3% 12,695
Missouri 9.3% 8.9% 12,884
North Carolina 10.6% 10.3% 13,634
Maryland 7.0% 6.5% 14,365
Minnesota 8.0% 7.4% 15,904
Wisconsin 8.5% 7.9% 17,294
Washington 8.9% 8.3% 17,847
Michigan 13.6% 13.0% 25,881
Massachusetts 8.5% 7.7% 26,772
Ohio 10.2% 9.7% 28,031
Florida 10.5% 10.2% 28,095
New Jersey 9.2% 8.5% 32,212
Pennsylvania 8.1% 7.5% 36,210
Texas 7.6% 7.3% 36,612
Illinois 10.1% 9.4% 43,488
New York 8.4% 7.7% 58,373
California 11.4% 10.6% 138,001
National average / total 9.3% 8.7% 746,462


Here are the states grouped according to the relative value of their respective ERI’s:


Alabama, Florida, Georgia, Idaho, Kansas, Mississippi, North Carolina, North Dakota, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia.


Alaska, Arizona, Arkansas, Colorado, Delaware, Indiana, Iowa, Kentucky, Louisiana, Maryland,  Minnesota, Missouri, Nebraska, New Hampshire, New Mexico, Ohio, Rhode Island, Vermont, West Virginia, Wyoming.


California, Connecticut, Hawaii, Illinois, Maine, Massachusetts, Michigan, Montana, Nevada,  New Jersey, New York, Oregon, Pennsylvania, Washington, Wisconsin.

But how do the actual job creation figures of the three groups compare? Here is the average employment growth of each group in the 5-year period from 2009 to 2014:

Good:                                   2.72%

Fair:                                      0.6%

Poor:                                     0.49%

Quite clearly it would pay a state to be in the “Good” group. The average employment creation in that group is on average 4.5 times bigger than what it is in the “Fair” group, and 5.5 times that in the “Poor” group.

A more dramatic illustration of the value of low regulation is to compare the actual percentage of jobs created over the same five-year period by the “Good” group as opposed to the “Poor” group of states. The “Good” group’s employment growth was 4.4% over the period, compared to that of “Poor”, which was a measly 0.6%. In other words, the “Good” states proportionally created more than seven times as many jobs as the “Poor” states did. In actual numbers the “Good” states created 2 124 734 jobs (starting from about 47 million), while the “Poor” states created only 390 551 jobs (starting from a much larger 62 million).

What is amazing about these figures is how big an impact a relatively small difference in regulation makes. Imagine the difference that could be achieved if the edifice of Federal labour legislation were to be dismantled as well!


The more union members, the less job growth

You cannot please everyone all the time, but I have to say it: Trade unions are not part of the solution to unemployment. They are a major part of the problem causing it.

What I demonstrate in this article is that the higher the trade union density is in an industry or an economy, the slower the job growth in that industry or economy.

Trade union density is the number of trade union members expressed as a percentage of a particular industry, a particular country or even a particular business.

It provides a very important indicator of the influence of trade unions in any unit measured.

South African union density is very much a function of legislation.  It was only after the introduction of the Labour Relations Act 1979, which extended legal protection for trade unions to black workers, that union membership in South Africa truly started escalating.  Before that there were unprotected black trade unions for a minority of black workers, as well as some white trade unions.  Pursuant to the new legislation in 1979, trade union membership escalated from a very low base of a few percentage points to a very high percentage.  In Table 1, South African Union density is expressed as a percentage of the economically active population, to demonstrate the initial spurt of growth of this phenomenon which eventually came to dominate the economic scene in South Africa.

From Table 1 it is clear that union density grew very steeply until 1993, whereafter it levelled off until it reached another peak in 1998 of 26%.  Thereafter a gradual decline followed. Table 1

For purposes of what follows I assess the success of our labour market simply by the growth in jobs, rather than a static notion of unemployment, because.  in South Africa we need massive job growth over the next decade and more.

Is there any correlation between union density and the rate of growth or decline of employment over a period of time?

In Graph 1 the block to the left of the vertical axis expresses union density as defined.  On the right-hand side of the vertical axis is the graphic exposition of formal employment growth or decline from 1980-2004.  (Union density is a mirror image of the employment growth value, in that the left-hand axis counts from zero to 35 in a left-hand direction, whereas the right-hand axis counts from -4 to +6 in a right-hand direction).

Graph 1:

Union density and employment growth

Graph 1

It is uncanny how closely these two curves run in parallel – in other words, as union density sharply increases from 1980 to 1993, there is a precipitous drop in the rate of employment growth.  This growth starts off at a very positive and healthy clip of 5% to 6% in the early part of the eighties, but as union membership grows, it eventually declines to a rate of decline of between 2% and 3% in the early nineties.  Thereafter union membership expressed as percentage of EAP reaches its zenith in 1998, namely 26%.  It is at this point that the most dramatic shrinkage in the formal labour market actually also occurs.  It is in that year that the growth rate of the formal employment market reaches the dismal figure of -4.  Thereafter, as union membership expressed as percentage of EAP goes into gradual decline until 2004, there is a miraculous reversal of fortunes for growth in the employment market, which then for the first time reaches the same heights as were achieved in the very early days of the previous decade.

Of course all this graph illustrates is that there is a correlation between union density and the growth rate of formal employment in this country.  It does not necessarily mean that union density is what causes the growth rate to decline.

It is at this point that it becomes important to remind ourselves that what we are measuring here as union density, is union membership expressed as a percentage of the economically active population, not as a percentage of the working population.

One argument that seeks to explain the correlation between union density and employment growth is that it is employment growth that causes a decline in union density, and employment decline that causes growth in union density.  In other words, if there is a sudden spurt in employment growth, it takes a while for union membership to catch up, and as a result union membership expressed as a percentage of the employed will be lower.  This argument is clearly wrong, as the figure that is used here is union membership expressed as a percentage of the economically active population.  Because that figure includes all unemployed persons who want to work, growth in employment does not affect union density so expressed.

The same applies to the converse argument, namely that because union employees have legal protection as a result of their union membership, they are less likely to be dismissed if retrenchments occur.  That being so (so the argument goes), this will result in increased union density if retrenchments take place.  Again this is wrong, for the simple reason that, even if it were true that union members survive retrenchments in greater numbers, their membership in the measurement is still expressed as a percentage of the economically active population, which does not change as a result of the retrenchments.

An examination of the curve of the economically active population shows a gradual incline over the years which does not fluctuate dramatically as do the union density and employment growth curves.

It therefore seems more and more likely that the explanation for the correlation between union density and employment growth is that it is the growth in union density that causes a decline in the rate of job growth.

The relationship between high union density and sluggish job growth is not unique to South Africa.  In order to test the same proposition that the employment growth is negatively influenced by growing union density, a number of American economists measured the correlation between union density and employment growth in a number of states in the USA, which they referred to as the “peer states of Pennsylvania”.  These are states that lie in the north-east of the USA and are either bordering on or very close to Pennsylvania.  Furthermore, they are used in economic comparisons as peer states of Pennsylvania for reasons of their similarity in type of economy, size, climate and so forth.  Whereas they are not identical, they are economically similar in many ways.

Where they differ quite sharply however, is in the relative degree of their union density and also in the relative degree of employment growth.  In this exercise union density is expressed not as a percentage of the economically active population, but as a percentage of the total number of employed in each state.

In Table 2 this comparison is expressed numerically:Table 2



We can now express the same set of figures graphically as follows:


Graph 2

 The various states cluster around a very clear curve.  In states where the union density is high, such as New York with a density of some 32%, job growth over the relevant period is very low, namely 14%.  On the other hand, in low density states such as Virginia with a union density of some 12%, job growth over the same period was almost 60%.  The same pattern follows consistently for all the states.

Next we can investigate developing countries such as South Africa.  In such an exercise the economist Siebert made a comparison between the change in union density in the 10-year period of 1985 to 1995 and unemployment change between 1990 and 1998.  He used a number of developing countries, including South Africa (as well as China and the United Kingdom, to add some interest to the experiment).  Graph 3 shows the result:

Graph 3

In his discussion of this graph, Siebert makes the following interesting point about South Africa:


“Countries such as Brazil and South Africa, with the largest union density increases, have also had the largest unemployment increases.  As figure 6 shows, it was also these countries which had the largest real wage increases.  It is hard not to conclude that for these countries we are observing a move akin to that from A to C in figure 4.”

Siebert continues as follows:

“We see that South Africa has had the largest increase in union density over the period 1985 to 1995, 23 percentage points.  The only country with a similar increase is Brazil, with its new 1988 pro-union Constitution.  Both Brazil and South Africa, in fact, have had contemporaneous increases in union power, in real wages and in unemployment.”

Another example which is worth noting in the Siebert study, is that of Ireland, where union density in the relevant period declined by approximately 12%, which correlates with a drop in unemployment of 5%.

Another way of doing the same exercise is to divide South Africa into industries that are potentially sensitive to union density, and to compare their results.  In Table 3 we compare COSATU membership expressed as a percentage of formal employment in 2000 with growth or decline of employment expressed as a percentage in 2001 to 2006.  This is done in respect of the industries of mining, manufacturing, transport, trade, finance and construction.

Table 3

Next we can express the same information as a graph, namely as follows:


Graph 4

  The same test can be done over a different period – this time 2000-2012 – and with all unions (not just Cosatu) with similar results:

  Table 4

graph 5

Again one accepts that this correlation does not necessarily mean that it is union density that causes low employment growth.  However, as we have seen in the discussion about the time-line comparison over the period 1980 to 2004, the explanation cannot be that union density is higher when employment shrinks, and vice versa.  Another explanation must be found.

In this regard, those who wish to get the trade unions off the hook may grasp at that old trustworthy, globalisation.  The argument will go thus: because of globalisation, export industries such as mining and manufacturing are more sensitive to international competition (minerals, and manufactured products from China, etcetera) and as a result of upward pressure on the Rand (as the Rand increases in value, exports tend to decline).  The next step in this argument is then to say that industries under pressure from globalisation tend to downsize (retrench) more, creating fertile recruitment grounds for trade unions.  The first question is whether globalisation depresses growth, or whether it depresses employment growth as such.  If it were so that globalisation was the explanation, then we would expect job creation or shrinkage to stand in a constant relationship to gross sectoral product (GSP) growth across all these industries.  In other words, all industries will demonstrate employment growth that is equivalent to their GSP growth rates.  We would thus expect the GSP growth / employment growth ratio to be the same or similar across all industries.

What does this ratio in fact look like on an industry-by-industry basis?


Table 5

In order to make sense of these figures, we can divide the six industries into two groups on the basis of union membership, namely those with COSATU membership lower than 10% (trade, finance and construction) and those with COSATU membership greater than 20% (transport, manufacturing and mining).  On this basis the average performance of the two groups is as follows:

Table 6

There is no comparison between these two groups.  What is clear is that employment growth is not simply a function of economic growth.  All of these industries demonstrated positive growth rates over the relevant period, but in the low-union industries employment grew faster than their respective GSP’s, whilst in the high-union industries there was effectively “jobless growth”..  This suggests that there is something other than merely low growth that impedes job creation.  The above figures suggest that that something is union density.

It is true that growth in manufacturing and mining is generally lower than in the other industries, but this is partly also the result of the fact that there is a disincentive on investment in employment in those industries.

There is also a correlation between union density and low investment.  Graph 5 (from a study by Radulescu and Robson) shows there is a correlation between trade union density and foreign direct investment flows:

Graph 6

FDI is only one instance of investment, but one expects the same effect to apply to domestic investment, and thus job creation.

A further difficulty with the globalisation argument is that transport is not sensitive to globalisation.  If anything, transport will benefit from globalisation as it tends to lead to an increase in tourism and trade.  Yet it is clear from the data that transport employment suffered, even though the GSP grew at a good rate.  What it did have, was quite high union density of 24%.

This points to the conclusion that it is not globalisation that causes retrenchments, which in turn causes high levels of unionisation.  The contrary appears to be the correct explanation, namely that high union density deters investments, and particularly and disproportionately deters investment in labour.

Finally on this point, it is significant that in the study of the Pennsylvania peer states and the 2000-2012 study above the trade union density was high at the outset of the period over which resultant employment growth was measured.  That makes it much more difficult to argue that it was low employment growth that caused high union density.

The same point can be made by reference to the position in Britain.  In the decades up to 1980, union density in Britain relentlessly followed an upward curve.  Then, as Margaret Thatcher’s Conservative government started a progressive series of stealthy reforms at that time which endured throughout most of the next decade, union density declined sharply.

In the pre-Thatcher 20-year period the aggregate employment growth was 3.4%, and after the watershed of 1980 growth in the next two decades was 13.8%.  If union density played any role, clearly this was caused by the drop in union density, rather than the other way around.  In the first 4 years after 1980, British employment growth lagged, and only from about the middle of the decade did it start increasing.  That suggests that it was union decline that caused job growth, rather than the other way around.

Finally, for good measure research relating to the position in Australia confirms the relationship beween high union density and low employment growth.  This study makes use of a whole range of industries, namely agriculture, trade, personal services, finance, construction, manufacturing, community services, public administration, transport, mining and communication.  Once again union density, defined as the percentage that union members make up of the entire employed workforce, with employment growth in each industry.  The tabulated results are as follows:

Table 7

 Graphically the same information can be expressed as follows:

Graph 7

In an independent study Woodon & Hawk re-examined the role of union density in employment growth in Australia.  Unlike     earlier studies done in Australia, the data used were from a panel of firms surveyed in both 1989 to 1990 and 1995, rather than a single cross-section of firms at a point in time.  As a result, the study was able to control not just for the fixed characteristics of firms at workplaces, but also for changes in the economic environment and managerial strategy.

At the end of the study, the authors conclude as follows:

“The results presented in this article confirms conclusions reached in North American and UK research – unions slow job growth.  This adverse effect of trade unions on employment growth in Australia, however, appears to be confined to the private sector.  No evidence of any impact of unions on employment growth in the public sector could be found.  Within the private sector, the union employment effect is quite large, with workplaces with average levels of union density in 1989 to 1990 estimated to have experienced rates of employment growth that are close to 2,5 percentage points per annum less than lowly unionised workplaces.”

As already pointed out above, the focus of this article falls on the private sector.  For obvious reasons the government sector is not as sensitive to market pressures as the private sector.  For example, the demand for teachers is determined by the number of schools and the number of learners that have to be educated, and there is very little competition where the government is the main employer.  In the result pressure on wages, productivity, foreign direct investment and profitability are not problems that will trouble the state sector.  It will simply go ahead and appoint as many teachers as are needed, no matter what the cost.

In South Africa the numbers confirm this interpretation. Between 2000 and 2012 a quiet, insidious revolution took place in South Africa, in that government employment rose by approximately 46%, while private sector employment barely increased. The ratio of private to government workers changed from 5.5/1 to 3.9/1 over this period. Whilst private sector employment stagnated, government employment increased by 850 000 jobs.

In other words, government employment is slowly but steadily crowding out private employment. Although over the same period union density of private sector employees declined from 26% to 20% (which would normally result in a surge in private employment) the only surge that occurred was in government employment. Not only did this occur in the teeth of a surge in union membership to about 70%, it occurred despite some 20% higher earnings growth in the government sector. Not surprisingly in the result the higher wages of the state sector are luring employable workers away from the private sector. State workers are notoriously unproductive, as their careers do not depend on profit as those of private sector workers do. The net effect is that scarce resources are re-allocated from a more productive to a less productive sector. This has also destroyed the beneficial effects of lower unionization in the private sector. What is equally concerning, is that all of this occurs at the taxpayer’s expense, which means that funds that could have been used to create wealth-creating private-sector jobs, now go to the ever-growing state burocracy.

Why does high trade union density lead to a depression of the employment growth rate?  The most conventional explanation is that the wage rate of unionised industries is artificially pushed up through the legal bargaining power of trade unions. This results in a new equilibrium point where the same demand curve yields lower employment as a result of the increased wages bargained by the trade unions.

Another explanation for the same phenomenon is a variant of the first.  According to this explanation, the wage curve of an industry is not simply the actual salaries paid to employees, but the total package of costs incurred by employers as a result of labour laws.  These costs incurred include things such as time spent in disciplinary hearings and labour court cases, the appointment of human resource managers to manage labour law, legal costs paid to labour lawyers to advise companies, retrenchment costs, and similar impacts of labour law.  Because trade unions are a focal point of labour laws, in that their very raison d’etre is to enforce rights granted to workers under labour law, they serve as a type of “magnifying glass” through which the impact of labour laws is magnified many times over.  This serves as a disincentive to employers to create jobs in industries with high union density.

A further and related explanation is that related to profitability.  Because employment costs artificially increase as a result of the bargaining activities of trade unions, costs must either be passed on to the consumer or be absorbed by the business.  Because businesses operate in a competitive environment, and also have to compete with foreign operations in a globalised market, many companies are driven to reduce their profitability.  This in turn results in a reduction in investment in those businesses.  Ultimately a reduction in investment leads to a reduction in employment.

Trade union density also directly impacts on the number of work days lost due to strikes. In South Africa the agricultural strike in the Western Cape in 2012 was remarkable as it was the only major strike in years not called by a trade union.

A good example of the impact of trade union density on strike rates, is the change in union density and strike rates brought about by the New Zealand Employment Contracts Act of 1991:

Table 8

By halving union density, New Zealand managed to achieve an 8-fold reduction in strike days (from 520 to 65 days per 1000 workers per year). Here it is in graph form:

Graph 8 (4)

High strike rates obviously exact a cost, and thereby suppress job creation.

It is important to appreciate that trade unions get their power from labour laws, in particular the Labour Relations Act, and that that Act enables the unions to a large degree to exercise monopoly power over the way in which employees in the workplace are represented. That in turn, has a cost implication.  Power in this context is relative. The most extreme power wielded by a union is perhaps that of the closed shop. In terms of the Act a union can agree with an employer that the employees of that workplace must all belong to the union. Although the agreement may not require employees to belong to the union before becoming employed by the employer, the employee may be required to join the union as soon as he accepts the job. In fact, the Act further provides that it is not unfair to dismiss an employee for refusing to join the union, or for being expelled by the union.

A variation on this theme is an agency shop, in terms of which the union may recover fees from non-members in exchange for the non-members sharing in the spoils of the collective bargaining performed by the union.

A further variation of this theme is that non-members of unions may be bound by extensions of bargaining council agreements concluded between employers’ organisations and unions. The non-members have no choice in the matter, even if it means that the extension will have the result that they lose a job, or do not get a job in the first place,  because they cannot command terms of employment that comply with the extended agreement’s terms.

The golden thread that runs through these provisions is that of an infringement of the workers’ freedom of association. By law they are all compelled to join the trade union regime in some form or manner:

  • In the case of the closed shop, by becoming union members;
  • In the case of the agency shop, by being forced to pay union fees and not being able to negotiate their own terms of employment;
  • In the case of the bargaining council extension, by being compelled to accept terms and conditions of employment not necessarily demanded by them, at the risk of becoming or remaining unemployed as a result. 

In a way, all the laws that support trade unions in South Africa are variants on the theme of infringement of freedom of association. Because the law gives power to unions to populate workplaces and ultimately become majority representatives of the workers in the workplace, they are thus enabled to impose their will on non-members. By seeing union power for what it is, namely a form of closed shop (the difference case by case simply being a mere matter of degree) it is useful to study the effect of laws in other countries that infringe on non-member workers’ freedom of association, and determine how it impacts on employment growth.

In the United States this type of infringement drew the attention of the legislature, with the result that it passed the Taft-Hartley Act, also known as the Right to Work Act, in 1947. In terms of this Act each State has the right to determine whether its employees may decide whether to belong to a trade union or not, and no closed shop may be imposed on them should the State choose the latter option, ie choosing what is described as right-to-work status.

A recent study[1] in Michigan (which has recently become the latest right-to-work state) examined the economic effects of adopting right-to-work status. Here are some of its most striking results:

  • According to the Bureau of Economic Analysis, right-to-work states showed a 42.6 percent gain in total employment from 1990 to 2011, while non-right-to-work states showed gains of only 18.8 percent.
  • According to the U.S. Census Bureau, population increased in right-to-work states by 39.8 percent and only 16.7 percent in non-right-to-work states from 1990 to 2011.
  • According to the U.S. Census Bureau, 4.9 million people moved from non-right-to-work states to right-to-work states from 2000 to 2009.
  • According to the Bureau of Economic Analysis, nominal personal income grew by 209.3 percent in right-to-work states and by 148.5 percent in non-right-to-work states from 1990 to 2011. 

For our purposes the most significant impact is on employment growth. The authors conclude that right-to-work states in the period 1970 to 2011 grew employment at a rate exceeding that of non-right-to-work states by 0.9% per year.

It is also significant that, despite growing jobs roughly three times faster, right-to-work states do not sacrifice in terms of personal income. On the contrary, they gain in those terms too.

Of course, we must bear in mind that the right-to-work states have far lower union density than the non-right–to-work states (8.83% as opposed to 15.59%). In terms of the evidence in this article, that alone may explain the superior job performance of the right-to-work states.

The evidence from the US is convincing proof that legislation that favours high union density, such as that contained in our Labour Relations Act, is bound to enhance union growth and to deter employment growth in turn.

Finally, there is also evidence that over the medium to longer term high union density significantly retards productivity growth[2].  That obviously affects competitiveness and job creation.

It does not really matter what the exact mechanism is by which higher trade union membership leads to slower or even negative job growth.  For present purposes, it is enough to know that it is so.  Each of these explanations probably represents an aspect of the truth, and in their own way they all contribute to the ultimate result.  At a later stage, we look at ways and means that this problem can be tackled.  For the time being, it is good enough to know that it is there; that trade union density is a major impediment to desperately needed employment growth in our country.




[1] Hicks and LaFaive: Economic Growth and Right-to-Work Laws (Mackinac Center 2013)

[2] Barry T Hirsch: Labor Unions and the Economic Performance

of Firms. Kalamazoo, MI: W.E. Upjohn Institute

for Employment Research.


Do we need a national minimum wage to improve income equality?

The ANC has pledged to investigate the introduction of a national minimum wage “as one of the key mechanisms to reduce income inequality”.[1]

Will it work?

When contemplating this question, I suddenly wondered: Are there in fact any countries with no form of minimum wage? And if so, what happens there? What I discovered, was most interesting. Surprising in many ways.

But first of all, a bit of structure: The term “minimum wages” can be used in one of two ways: It either means a national or regional minimum wage set by the government or one of its agencies, or it means a wage negotiated by unions and employers in industry-specific collective bargaining forums and then often extended by law to other players in the particular industry.

Many countries do not have minimum wages in the former sense, but then do in the latter sense. And believe it or not, there are a few countries – only a few mind you – that have neither type of minimum wage.

It is important to know that normally the first type of minimum wage has universal application, whilst the other only applies to specific industries, sometimes only to parties to the bargaining structure, and sometimes also to non-parties. This is useful to know, because if minimum wages hamper employment creation, then we would expect minima that apply to sections of the workforce only, to be less damaging.

The other piece of structural understanding that is useful, is that there are countries where there is no minimum wage, but the economic market is not free – that is, it is over-regulated. Those countries do not really assist in assessing the employment and wage outcomes of the absence of minimum wages. Predictably their economic performance is poor, and for purposes of this discussion they be discarded[2].

First of all, let us then look at the countries where until recently[3] there was no minimum wage at all, and where there is a relatively free market. The data is summarised in the following table:


Country Economic Freedom[4] Per capita GDP[5] Unemployment[6] Gini coefficient[7] Income poorest decile (p/a)[8]
Brunei 7.05 $54144 2.6% n/a n/a
Qatar 7.62 $100889 0.5% 41.1 n/a
Singapore 8.60 $60799 1.9% 48.1 $9379.4
Hong Kong 8.87 $50936 3.3% 53.3 $7693.7
UAE 7.85 $29176 4.3% 31 $26372.8
Average 7.998 $59189 2.52% 43.4 $14482
World average 6.87 $11964[9] 9% 52[10] $8410.61
Peer average[11] 7.75 $47765 6.42% 31.46 $19524


The following clear trends appear:

  • All 5 countries with no minimum wages are very rich – bar one they fall in the top ten richest countries in the world.
  • All the countries (both those with minimum wages, and the peer group of high-income countries) have relatively free markets.
  • The countries with no minimum wages outperform their peers in terms of per capita GDP by a considerable margin (about 25%).
  • Their Gini coefficient (measuring income inequality) at 43 compares well with the world average (52), but lags behind the average Gini of their peers (31).
  • The absolute income of their poorest 10% is better than the world average, but significantly worse than that of their peers.
  • Significantly, the no-minimum wage countries vastly outperform their peers in terms of unemployment (2.5% vs 6.42%).

What does all this mean for policy in South Africa?

What we can see, is that it is possible, even likely, to have high income and low unemployment in a no-minimum wage set-up. But we also see that inequality is higher in these societies than in their peer economies. Does that mean that job growth comes at the expense of inequality, and how important is that?

For purposes of the current discussion, we can discard the three oil-producing countries of Qatar, UAE and Brunei. Each of these countries showed GDP trends that tracked the oil price over the years, and are examples of almost artificial economies that generated obscene amounts of wealth during oil boom times, and had reversals of fortune in other times. So for example:

  • Between 1970 and 1980 (the period of the so-called oil crisis) the crude oil price measured in constant prices rose to an unprecedented peak. During this period the per capita GDP of the three countries all rose dramatically and peaked in 1980, in tandem with the oil price. Qatar’s per capita GDP, for example rose from $4929 to $35029 in that period.
  • When the oil price dropped in 1998, it reached a low of $18634.
  • In 2012, again in tandem with the oil price, it reached a high of $93831.
  • Personal income fluctuated in a similar way. So for example the per capita income in the UAE almost doubled in the period 1995-2007, a period during which the oil price shot up to record highs.
  • Besides, Brunei and Qatar have been so coy with their equality data that it is impossible to evaluate them for present purposes.

That leaves Singapore and Hong Kong. Both of these countries are useful in our case, because they are diverse, heterogeneous societies which at one stage needed to lift almost their entire population out of poverty. During the mid-sixties the two countries and South Africa were peers – waiting in in the emerging-country starting blocks as it were, at about $650 GDP per capita each. Since then Singapore and Hong Kong have grown to $50000 and $36000 respectively, while SA still lounges at about $7000.

Both East Asian countries experienced increases in inequality over the last 2-3 decades. In Hong Kong the Gini coefficient increased from 4.53 to 5.33 between 1985 and 2008, an increase of 17%[12].

In Singapore it increased by a similar percentage (17%) over the period, namely from about 4.1 to 4.8.

By way of comparison, over the same period, the OECD countries increased their aggregate Gini coefficient by 10.3%[13]:

Again: Does that mean we in South Africa will be better off, and more effectively combat inequality by introducing a national minimum wage?

Inequality Watch did a study in 2012[14] that compared and assessed OECD countries in terms of changes in inequality that they underwent from 1985 to 2008. Whilst noting that there was a general trend during that period for inequality worldwide to increase, there were significant differences between individual countries.

The authors discovered that there were in fact three groups of countries:

  • Two countries that bucked the trend and managed to decrease inequality over that period, namely Turkey and Greece
  • Countries that also bucked the trend, but by maintaining the same level of inequality: France, Hungary, and Belgium; and
  • Countries whose income inequality increased: The USA, the UK, Australia, Canada, Finland, Sweden, Denmark, Norway, Portugal, Italy, Germany, Italy, Germany, the Netherlands and Austria (by about 13% on average).

What is significant about these statistics is that the average unemployment rates of the three groups differ markedly:

  • The group that managed to reduce inequality, has average unemployment of 18.65%;
  • The group that maintained inequality at a constant rate: 9.3%; and
  • The group whose inequality increased: 7.6%.

It is quite clear that countries that succeed in maintaining or reducing inequality, tend to suffer higher unemployment.

To see what role national or regional minimum wages and other forms of minimum wage-setting (such as collective bargaining, with or without extensions to non-parties) play in this trend, I grouped the countries into two groups, namely those with state minimum wages and those with other forms of minimum wages. The average unemployment of the two groups is as follows:

  • Those with state-mandated (universal) minimum wages: 10.4%;
  • Those with other forms of (non-universal) minimum wages: 7.07%

Now it will be remembered that we analysed the countries that have neither type of minimum wages, and that their average unemployment rate was 2.52%.

So it seems that a country that wants to reduce its unemployment, is clearly better off without any form of minimum wages. Although it appears to be marginally better to have parties negotiate minimum wages in collective bargaining structures, that is exactly what it is: only marginally better. First prize goes to a free-market economy with no minimum wages.

The other lesson that we learn from this is that it is possible in a modern economy to reverse the international trend towards inequality, but that comes at an enormous price in terms of unemployment. Even just maintaining the same level of inequality, exacts a massive pound of flesh in terms of lost jobs.

The above statistics thus seem to confirm what many left-wing commentators have been telling us for years: the minimum wage helps to maintain or improve equality.

So does that mean we should introduce the minimum wage in South Africa?

Not so fast.

As we have already seen in another article[15], in South Africa at this stage of our development, inequality is in fact reduced by reducing unemployment:


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It follows that we in South Africa must do whatever we can to grow employment, if we are serious about reducing income inequality.

But even if job creation does increase inequality, (as some of the above statistics suggest), does that still mean that we should not do everything in our power to give jobs to the 7 million unemployed?

The point that we must not lose sight of when assessing job creation as a tool to reduce inequality, is that a country with successful job creation also grows the wages of the poorest workers. In the two examples that we looked at earlier, namely Singapore and Hong Kong, this is illustrated very well. In 1985, for example, a Hong Kong worker in the poorest 10% of the workforce (precisely the group that the minimum wage would normally target) would have earned about $1560 in current prices. Today that same worker would earn $7693, a fivefold increase in real terms. Singapore’s figures yield a similar result. In short: Whilst adding about a million jobs (about 38%) to its workforce, Hong Kong also grew its lowest-paid workers’ income by 500%. No wonder it did not bother with minimum wages.

Ultimately the actual level of pay of the poorest 10% is a function of how free the market is in which they are employed. The freer the market, the higher the actual income:

The amount per capita, as opposed to the share, of income going to the poorest 10% of the population is much greater in nations with the most economic freedom than it is in those with the least[16].


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In South Africa the hard policy question that we must ask, is whether we dare flirt with the idea of improving inequality by means of minimum wages. If we look at the tragic price paid by Turkey and Greece in terms of job losses, it hardly seems worthwhile. Besides, it seems as if we, at our current stage of development, will in any event improve our income equality if we simply do whatever we can to increase employment.

Finally, it boils down to this: will a national minimum wage help or hinder job creation?

Few industries offer as dramatic an illustration that a sanguine attitude about the effects of minimum wage legislation on employment growth is misplaced, than does the agricultural sector.

Haroon Bhorat and others, in a study[17] on the minimum wage introduced in the agricultural sector in 2003, drew certain startling conclusions.  This study made use of figures provided by the Quarterly Labour Force Survey of Statistics South Africa, to determine the level of employment in the agricultural sector both before and after the introduction of minimum wages in 2003, namely from September 2000 to September 2007.  Here is a sample of the statistical results found by them:

“… the number of farm workers falls by almost 200 000 between September 2002 and September 2003, which is a decrease of over 20% …  The data shows that over the period, employment in the control group rises steadily over time while farm worker employment starts falling in March 2003 (the law was announced in December 2002) and does not recover.”


Immediately before the introduction of the law, the estimated number of employees was 824 954 in the sector, whilst a year later it was 622 328 (2003), declining to 574 101 in 2007.  The study rules out other factors such as economic growth/decline in explaining the results.

In conclusion the authors then state:

“Our results suggest that the sectoral minimum wage law in agriculture in South Africa had significant effects, as farm worker wages rose by approximately 17% as a result of the law … In examining the effect that the minimum wage had on employment, this paper shows that … employment fell significantly in response to the law … the probability of employment as a farm worker was shown to have fallen by approximately 13% in the post law period.  Such effects are largely supported by the new minimum wage literature where Neumark and Wascher (2007) emphasised that this employment effects are more likely when aggregate data is analysed – particularly for unskilled workers.”

It is worth quoting the following extracts from the abstract summary of the cited study of Neumark and Wascher (which did a wide-ranging literature review of available research):

“….. the oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect. …..among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries. Two other important conclusions emerge from our review. First, we see very few – if any – studies that provide convincing evidence of positive employment effects of minimum wages, especially from those studies that focus on the broader groups (rather than a narrow industry) for which the competitive model predicts disemployment effects. Second, the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups.(Emphasis added).

It is no coincidence that farm workers have proved to be very vulnerable to the minimum wage law. The average characteristics of farm workers surveyed for purposes of the study, were:

  • they were typically African (being the most disadvantaged historically), and
  • they had between 7 and 8 years of education.

In a nutshell: they were typical of the most vulnerable group of marginal workers, with the exception that women are probably even more exposed to economic depredations. The typical farm worker comes from that sector of society that is by far the most exposed to unemployment and poverty.

Seen from the perspective of labour market policy, it is precisely workers like these – marginal workers – who most need to be absorbed into the economy.  The proportion of the unemployed who have not completed secondary schooling is 59.7%, amounting to more than 2.8 million workers[18].  These numbers are particularly disturbing if one considers that the labour market participation rate for African people in 2012 was 51.8% (compared to, for example, the United Arab Emirates at 91%, Brazil at 85%, China at 85% and India at 85%).  That means that in South Africa almost half of all Africans of working age are not part of the economically active population, and have lost all interest in finding work.  The result is that in 2012 the labour force absorption rate of Africans, namely the proportion of working-age Africans that is employed, was a paltry 36.9%.  That means that more than 60% of Africans of working age are idle.  These are the people who need to be drawn into the labour market if we are serious about fighting poverty and reducing inequality.

Since 2010 events at least as dramatic as those in agriculture, have been playing themselves out in the clothing industry. In that year hundreds of employers were fingered by the National Bargaining Council for the Clothing Industry for breaches of minimum wages and other prescribed terms and conditions of employment imposed on them by the extension of bargaining council agreements.  In the end the closing down of several hundred employers was prevented only because of political intervention, whereby a moratorium was imposed, saving not only the employers, but thousands of employees employed by them.

If the bargaining council in the clothing sector had followed through on its initial threat to levy execution against the recalcitrant employers, it is certain that hundreds of them would have closed down and thousands of employees would have lost their jobs. Although skilled to a degree, workers in the clothing sector, especially these marginal ones who stood to lose their jobs, are not highly educated and trained employees. And yet they have the ability to make a real contribution to wealth creation if allowed to charge market-related wages for their services.

The reason why the unskilled and low-skilled sector is an obvious victim to laws such as minimum wage legislation, is fairly obvious.  It is the marginal worker who needs to offset his lack of training, skills and experience with the compensating advantage of accepting a lower wage.  That lower wage will very often fall below the prescribed minimum wage.  This truth has been abundantly illustrated in the agricultural sector example cited earlier.

At the time of the introduction of the minimum wage, the market wage in that industry was at least 17% lower than the minimum wage on average. It is no wonder that dramatic results followed. The same applies to the clothing industry, where for example in non-metro KwaZulu-Natal, 3 200 employees worked in firms where the lowest wage was R300,00 per week, at a time when the prescribed minimum wage was R684,25.

In South Africa we must bear in mind that we have another problem that greatly exacerbates the threat of unemployment through the operation of minimum wages, and that is our notoriously ineffectual education system and resultant low levels of literacy and numeracy. We absolutely have to find work for the millions of almost unemployable workers who are victims of this system. There is no time or resources to educate the school leavers who have already been released onto the employment market. It is enough of a burden to try and bring the standards of education of the current body of learners up to scratch; it is a forlorn hope to attempt to play catch-up with workers already in the labour market. Their best hope by far is to get jobs, albeit at modest wages and terms of employment, so that they can at least start acquiring some skills through on-the-job training, which will make them better employable, give them a chance of promotion and advancement and improve their bargaining power.

If South Africa is serious about addressing the plight of the most vulnerable sector, namely the typical unemployed person who is African, lowly educated and lacking in skills, and thus address inequality of income, the last thing in the world we should do is to introduce a national minimum wage.



[1] IOL BusinessReport 14 January 2014

[2] A good example is Ethiopia, which occupies position 141 on the Economic Freedom of the World Index 2013

[3] Hong Kong only got the minimum wage in 2011, too recent to influence the outcomes given here.

[4] Freedom of the World Index 2013

[5] IMF

[6] Wikipedia based on various official sources

[7] Wikipedia based on various official sources

[8] Euromonitor International ltd: World Consumer Income and Expenditure Patterns 2013

[9] Wikipedia based on various official sources

[10] Conference Board of Canada

[11] Average of peer states selected on basis of average per capita income: Australia, Austria, Canada, Ireland, Luxembourg, Netherlands, Norway, Sweden, Switzerland, USA.

[12] Lap, Tung, Hi: Income Inequality in Hong Kong

[13] Inequality Watch

[14] The Rise of Income Inequality amongst Rich Countries (2012)

[15] The Effect of Regulation on Unemployment

[16]Economic Freedom of the World 2013

[17] Bhorat, Kanbur & Stanwix: Estimating the Impact of Minimum Wages on Employment, Wages and Non-wage benefits: The case of agriculture in South Africa, University of Cape Town 2012.

[18] SA Institute Of Race Relations


The Effect of Regulation on Employment

Let me start by making something clear: I want the poor to be exploited.

That’s it. I’ve said it: exploit the poor. My biggest concern is that not enough employers in our economy exploit the poor. The result is that they do not work, do not earn an income, do not learn on the job, do not get promoted, do not buy houses, and do not send their children to school.

All because they do not get exploited. Because over-regulation makes it impossible to exploit the poor.

When I am concerned about the poor not being exploited, and when the trade unions are concerned about reduced standards, we are all in effect worried about the marginalised workers. These are the workers most at risk of not getting jobs – workers such as:

  • historically disadvantaged people, typically blacks;
  • the uneducated;
  • people from poor households with few resources;
  • youthful workers.

How can these poor people best make their way in the world? The best way for them to make their way in the economic world is to get jobs.

Of course, we can say that they should first become educated, but for the time being we do not have that luxury. On the whole the unemployed are poorly educated, and in the mean time they have to eat.

For the time being the fact is that our education system is in a mess, and that thousands of poorly educated workers are released on the marketplace on an annual basis.

So how must these poorly equipped marginal workers find jobs?

Let’s deal with this by way of an analogy. Let’s accept for the moment that chuck steak is regarded by the consumer as less desirable than fillet. Let’s say chuck steak sells for R50 a kilogram, whilst fillet sells for R150 a kilogram. For the chuck steak to be attractive enough so that available supplies can be bought up by consumers, the seller has to compensate by means of a lower price. If the supermarket or the butcher should insist that both kinds of meat should sell at R150 a kilogram, the chuck steak will not sell. In fact, to translate it into economic terms, it will remain “unemployed”.

Now suppose legislation was passed which compelled supermarkets to sell chuck steak and fillet at the same price of R150 a kilogram, whilst market forces would dictate the prices of R50 and R150 respectively. The result would be predictable. The chuck steak would remain unemployed.

Of course, a predictable objection to using such an analogy is that employees are not pieces of steak, and cannot be analysed as such. One may well ask: Is it fair that some individuals, through no fault of their own, have to work for a lower wage in order to become employed?

It may arguably be unfair that that is so, but that does not change the facts. The facts are that if by law minimum wages and other terms and conditions of employment are imposed on employers who wish to employ marginal employees, those employees will either lose their jobs or never be employed in the first place. Like “chuck steak” the law then renders them unable to offer a compensating advantage for their lack of skills and experience. They are by law prohibited from offering their services at a lower rate to compensate for their less desirable employment qualities. In short, we are outlawing their employment.

If, on the other hand the government should allow chuck steak to be sold at R50, or the employee to sell his labour at its natural market wage, both will sell to its maximum potential.

The purpose of labour laws generally is to improve the working conditions of employees. That means that they are aimed at one of the following changes:

  • Setting a minimum standard for wages, benefits or hours of work and similar conditions;
  • Improving workers’ bargaining power by protecting trade unions and strikes; and
  • Protecting workers against unfair dismissals or other unfair labour practices.

It does not really matter in which of these categories a particular labour law provision falls. The bottom line is the bottom line: in other words, each of these provisions exacts a cost from an employer. In the case of the minimum wage and similar conditions, self-evidently an employer has to fork out more money in order to meet the minimum benefit than he would otherwise have done. (It is of course possible that a minimum standard of employment is set so low that employers in the market exceed it in any event, but that is not the type of minimum standard which interests anyone, least of all the employees and trade unions.)

Employers also need to fork out more money in order to pay workers represented by trade unions and workers on strike. The simple economic fact is that if employees have higher bargaining power, as they undoubtedly have where trade unions and strikes are protected by statute, employers end up paying more in order to secure the co-operation of their workforces. Finally, unfair dismissal legislation exacts a price not only for the otherwise productive hours spent by employers in disciplinary hearings and similar proceedings mandated by law, but also for legal expenses incurred in fighting disputes as well as compulsory retrenchment and similar packages. Many disputes end up in compensation awards payable by employers, also in the case of unfair labour practice and unfair discrimination disputes.

The result is thus that the total package that employers have to fork out – whether by way of cash or lost productivity – increases pursuant to benefits to which employees are entitled as a matter of law.

The cost argument can also be approached from the viewpoint of a future investor. Although a potential investor does not necessarily consider labour laws in his calculations whether or not to invest in the labour market of a country, he undoubtedly considers potential profitability. In doing so he projects the likely unit labour cost having regard to the market price of labour as influenced by labour law and other factors, as well as the demand for the product. If he concludes that there is insufficient demand to provide a satisfactory return on his investment, he will not invest. If the cost of labour as influenced by labour law is therefore such that he concludes that his investment is not worthwhile, he simply will not create any new jobs.

What is the evidence: What impact does regulation have on employment?

First, consider general economic legislation, as opposed to labour laws. Although general economic regulation may not be intended to impact on the labour market, it often has such unintended negative consequences for employment.

A number of internationally recognised indices measure the degrees of regulation of countries. They typically identify the following areas of regulation in calculating a quantitative assessment of what it calls the economic freedom of the country:

  • Size of government: expenditures, taxes and government enterprises;
  • Legal structure and security of property rights, including impartiality of the courts and absence of crime;
  • Access to sound money, in particular sound monetary management and anti-inflation policies;
  • Freedom to trade internationally, including tariff barriers and international capital market controls;
  • Regulation of credit, labour and business markets.

In the 2011 annual report of Economic Freedom of the World, for example, 152 countries are evaluated. Hong Kong, for a number of years running, has been the country with the highest score for economic freedom, namely 8,97 (out of a maximum of 10). Venezuela brings up the rear with 3.93. South Africa, has dropped from 41st place in the rankings in 2000 (when its score was 7.08 – its best performance since democracy) to 64th with a score of 6.8 in 2011. In other words, while South Africa’s absolute score has declined marginally, its relative ranking has slipped 23 places in a decade. That means that South Africa’s net relative competitive position compared to those of other countries, has declined. Because all countries compete in the same global market, what matters is the relative competitiveness of a society as much as its absolute score.

In answering the question what the impact is of economic freedom as measured by the report, the authors used a number of criteria to present evidence of the superiority of free markets. In order to do this, they have divided the participating 152 countries into 4 quartiles, ranking from the least free quartile to the freest quartile. In the statistics that follow below, the figures cited rank from the least free quartile to the freest quartile. In each case it will be apparent that, as a general trend, freer markets are significantly superior in achieving good performance according to any of the criteria chosen:

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Economic freedom and per capita income
Countries with more economic freedom have substantially higher per capita incomes.

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Economic freedom and economic growth
Countries with more economic freedom have higher growth rates.

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Economic freedom and the income share of the poorest 10%
The share of income earned by the poorest 10% of the population is unrelated to the degree of economic freedom in a nation.

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Economic freedom and the income level of the poorest 10%
The amount per capita, as opposed to the share, of income going to the poorest 10% of the population is much greater in nations with the most economic freedom than it is in those with the least.

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Economic freedom and life expectancy
Life expectancy is over 20 years longer in countries with the most economic freedom than it is in those with the least.

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Economic freedom and civil liberties
Civil liberties (e.g. freedom of speech) go hand in hand with economic freedom. (Here the smallest number indicates the greatest degree of civil liberty)

It is hard to argue with these statistics. It should be emphasised that the measure of economic freedom adopted by the authors does not imply anarchy or no regulation at all. However, where regulation is to improve the score of a country, it is invariably regulation that ensures good governance, effective court systems, protection of property and prevention of crime – ie regulation that protects economic freedom, rather than limit it. On the other hand, factors that tend to detract from the score are the size of the government, the level of taxes, an inflationary environment, interference with international trade, tariff barriers, interference in credit markets, labour market regulation generally, licensing, high start-up costs and price controls.
Whereas the 2011 report does not contain any attempt at establishing a correlation between economic freedom and employment, it would not be surprising if such a correlation existed. What do the figures in fact show?

Countries with more economic freedom have lower unemployment.

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What is interesting about this result is that those countries that fall in the first quartile, namely the freest countries, perform significantly better than the other quartiles, whilst there is less difference between the remaining quartiles. The lesson from this is that it pays a country that is interested in job creation, as far as possible to put in place all the ingredients of market freedom, and not to neglect any. This will have an exponential or multiplier effect on employment creation.

Does labour law itself have an influence on the likelihood of unemployment in an economy?

The argument about whether this is so or not, has raged on for years. The difficulty is that many factors influence job creation, and it is hard to rule out factors other than labour legislation in determining its influence statistically. The following factors undoubtedly play a role in this context:

  • The extent to which the relevant labour laws are actually enforced in practice. It is all very well having a plethora of black-letter regulations; but if the state does not have the will or the wherewithal to enforce them, they are next to meaningless.
  • Allied to this is the factor of the size of the informal economy, especially that part of it comprised by illegal immigrants. To a large degree informal employees do not enjoy the benefits of labour law.
  • As I show in a later article, of crucial importance is the demographic make-up of the country in question, notably whether it is homogenous or heterogonous in terms of ethnic, religious, linguistic and educational criteria.
  • As appears from the earlier section on the effect of regulations on employment generally, the degree of freedom of the relevant economy – above and beyond labour law – is highly relevant..

So the challenge is to try and design a study that isolates the impact of labour laws, whilst excluding the other and similar factors as well as possible.
One such a study is to one done by Timothy Besley and Robin Burgess entitled Can Labor Regulation Hinder Economic Performance? Evidence from India.
The introduction to the paper summarises it as follows:

This paper studies the role of labor market regulation in explaining manufacturing performance in Indian states between 1958 and 1992. Such regulation is frequently cited in explanations of India’s poor growth performance over this period.The charge is that granting excessive bargaining power to organized labor blunted investment incentives and gave India a generally unfavorable business climate. Our data on labor regulation come from looking at state amendments to the Industrial Disputes Act of 1947. While the act was passed at the central level, state governments were given the right to amend it under the Indian Constitution. The emphasis on central planning in India meant that state governments have had limited influence on industrial policy outside the area of industrial relations. We read the text of each amendment (113 in all) and classified each as pro-worker, pro-employer or neutral. This gave a sense of whether workers or employers benefited or whether the legislation had no appreciable impact on either group. Regulation applies to a specific sector — formal manufacturing — smaller firms in informal manufacturing are not covered.”

The significance of the study lies therein that all the states investigated come from a single country, which is India. Whilst these states are by no means identical, they are sufficiently similar to rule out the influence of factors such as those listed above. India is generally a very heterogonous society, irrespective of state; it can be assumed that states have more or less similar enforcement capacities; and as the paper asserts, apart from labour law, most economic regulation is done at national level, and is thus common to all states
The authors conclude:

The evidence amassed in the paper points to the direction of labor
regulation as a key factor in the pattern of manufacturing development in
India. Regulating in a pro-worker direction was associated with lower levels
of investment, employment, productivity and output in registered manufacturing.
It also increased informal sector activity.”
The paper finds little evidence that pro-worker labor market regulations
have actually promoted the interests of labor and, more worryingly, that they
have been a constraint on growth and poverty alleviation. Our results have
not been able thus far to find any gainers except for the extent to which
there may have been capital and labor flows across Indian states in response
to policy disparities as they have developed. Our finding that regulating
in a pro-worker direction was associated with increases in urban poverty are
particularly striking as they suggest that attempts to redress the balance of
power between capital and labor can end up hurting the poor.”

Another study by Thomas A Garrett and Russell M Rhine1 compared the economic freedom, and separately also labour market freedom, of the different American States. In addition to finding that the general level of economic freedom is positively correlated with employment growth, it also found that labour regulation is specifically significant in this context:

Further results suggest that labor market freedom and a smaller state government, which are two components of overall economic freedom, are important determinants of employment growth across U.S. states, with the former factor the more important”.

It follows that if South Africa is interested in improving its job creation record, it must seriously consider improving its general economic freedom score, and also in particular its labour market freedom score.

Why are we still arguing?

It is quite simple really. The law pushes up the cost of labour. So employers buy less of it. Why then do we keep on arguing about it?
I have over the years encountered a number of dearly held myths, that explain why even those who are in good faith on pro-labour law side of the debate (whom I call the “pro-lawyers” for short), honestly believe they are right. It is necessary to deal with these.

Myth 1: Deregulation will lead to a race to the bottom

This a a serious myth, because most people really believe it. The most obvious reason why labour law protagonists so fervently support it, is because they really care, and believe employees without the protection of labour law will be exploited and standards will become progressively lower and lower as employers are left without any incentive to improve working conditions of employees.

Often they ask in all good faith: Does deregulation not mean that increased job creation by removing expensive labour laws will breed a low-wage workforce whose conditions of employment will never improve? Does the government not have a point when it says that removing existing protections and minimum conditions will lead to a downward spiral of ever-worsening employment conditions? Or as it is sometimes put, “a race to the bottom”?

This is one of the most persistent ideas amongst pro-lawyers, and one which is hard to shake. The perception, which is surprisingly common even amongst commentators who should know better, is an understandable and intuitive one: Surely, they reason, if you remove, say, minimum wages, employers will be free to pay lower and lower wages, and will continue doing so in order to remain competitive – not only with their local counterparts, but also with overseas competitors. This process will feed on itself, with the result that workers will get paid less and less over time.

To understand why a so-called race to the bottom will not occur, it is important to bear in mind how the labour market works.

At the risk of repetition, the labour market is a market like any other. As long as marginalised workers can charge market wages for their services (even if that is lower than minimum wages that the State would prescribe) employment will grow. It will do so because the economic law of supply and demand dictates that demand for a good or service rises if it becomes cheaper.

At first workers will be employed at wages that are lower, most likely significantly lower, than the erstwhile prescribed minimum wages, and on conditions that probably give less protection to employees than what the law used to mandate.

However, the labour market being a market like any other, as soon as employment increases because more employers are able to pay wages and accommodate conditions for and under which workers are prepared to work, the demand for workers will increase labour becomes scarce.
As soon as that happens, workers’ bargaining power will increase, because their labour will become a more sought-after commodity. That will mean that they will in time be able to demand better working conditions and higher wages.

Employers will have to meet these demands, or run the risk of losing the workers, and losing out to the competition.

At the same time employers will be forced, by reason of increasing wages, to train workers and improve their productivity.

Workers for their part will have the opportunity through on-the-job training to increase their bargaining strength and become more employable.
All of these factors will thus inexorably push wages upwards.

Real-world examples of this phenomenon are not hard to find. The following are outstanding examples of countries with relatively lowly regulated labour systems, taken from the period 1994-2003:

  • Vietnam maintained per capita income growth of more than 5% per year (in real terms), while achieving unemployment of under 3%.
  • The UAE managed to improve the average income of workers by over 4% per year (again in real terms), and to limit unemployment to under 5%.
  • In case of doubt about the ability of an African country to achieve such results, Uganda achieved per capita income growth of 2.5% against unemployment of 3.2%.

Historically a prime example of a country which achieved a spectacular “race to the top,” is Taiwan (once again with a very lightly regulated labour market), which performed as follows in the period 1961 to 1987:

1961-71 1971-81 1981-85 1986 1987
GNP growth per annum 9.9 9.4 6.5 11.6 11.2
Unemployment 2.5 1.6 2.3 2.7 2
Gini coefficient 37.2 31.1 31 32.2
Real manufacturing wage increases 6.2 8.0 5.5 9.3 9.7

Far from there being a race to the bottom, the opposite is likely to occur.

Examples in other countries where labour deregulation took place, support this conclusion too. In 1991 New Zealand introduced the Employment Contracts Act, that brought about significant if incomplete deregulation of the New Zealand labour market. Amongst other things, it significantly reduced artificial statutory support for trade unions, and abolished centralised bargaining structures that prevented employers and employees from concluding their own, individual contracts of employment. The results were most encouraging:

  • Between 1991 and 2007 unemployment fell from about 11% to under 4%;
  • During the same period the labour force participation rate increased from 63% to 69%;
  • Most significantly, GDP per capita in real terms increased from about $20000 to $30000.

It is simply not true that deregulation is likely to lead to a plummeting of labour standards. Quite the contrary.

Myth 2: Mandated minimum terms and conditions improve average welfare

Another reason for the inability of people like me and the pro-lawyers to see eye to eye has to do with a misconception about the nature of jobs, welfare and wealth.

I call this myth the wage fallacy. It is the fallacy, put at its simplest, that believes that aggregate welfare of people in the economy will improve if we can manipulate wages and other employment terms in an upwards direction. It is related to the belief that money is wealth, which is the fallacious premise underlying all inflationary monetary policies.

The fallacy is implicit in the government’s policy of maintaining a system of labour laws that is designed to improve the terms and conditions under which employees work – in other words, to make employment more, rather than less, expensive for employers.

When it introduced minimum wages in the domestic workers sector some years ago, in its memorandum in support of the legislation it admitted that jobs would be lost as the result of the increases. But the job losses were justified on the basis that they would ensure a basic living wage for employees in the sector. (Read: people will become more wealthy).

Of course, there was no suggestion as to what should happen to the employees who lost their jobs through this process, or worse, who were never employed in the first place. The government seemed to believe that the trade-off between higher wages and lower employment was justified in the circumstances.

Enter the wage fallacy. Decreeing “decent work” is not a straight trade-off. It is not a case that some jobs are simply sacrificed for better working conditions.

The workers who are put or kept out of jobs do not work, which means that they do not create wealth.

Stop there for a moment. Ask yourself: Why do we work? We work in order to create wealth: To create houses, cars, transport, food, clothes, haircuts, entertainment, health services, education. Everything and anything that the market regards as valuable and is prepared to pay for. There is no other point to employment.

Wealth creation is what enables the economy to grow, and more jobs to be created. The moment you decide to sacrifice some jobs for the sake of better working conditions, you must know that you do not merely sacrifice jobs. You sacrifice the wealth that those jobs would have created.

Take the case of a furniture worker. If a furniture employer is forced to lay off workers, that means that those workers no longer make furniture that can be sold to members of the public. The reduced supply of furniture will push up the price of furniture.

It can also happen that an employer, faced with mandatory wage increases, is forced to employ machines in order to do the work previously done by the employees. That is likely also to push up the price of furniture, because if the employer before the mandatory increase could have made furniture as cheaply using only machines, he would have done so in the first place.

The bottom line is that unemployed workers are unproductive workers. That means that they are not able to contribute to the wealth of society, but instead become net consumers of benefits funded by the public purse – to which a smaller and smaller percentage of productive citizens contributes.

The wage fallacy has another manifestation, which we can call the welfare fallacy. At the moment our government gives out more welfare grants than there are tax payers to fund it. That in a nutshell summarises the problem of our inability to conquer poverty. Recipients of welfare do nothing in return for the payments they receive. They create no wealth. Approximately 10% of the population pays the tax on which the vast majority survives. That vast majority do not help create the wealth on which the welfare of the nation should actually rest.

The problem is not jobs first and foremost. It is lack of wealth creation. Poor people suffer because they do not create or have wealth – houses, food, transport, medical care. A job is not wealth. It is just a contractual deal whereby a person’s labour (his wealth-creation capacity, if you like) is engaged. But its economic purpose is to create wealth.

That is why it matters if workers in the clothing industry are laid off, or their employers are closed down because they are not willing or able to pay minimum wages mandated by the bargaining councils. Those factories and workers effectively stop creating wealth in the shape of clothes. Thus a source of affordable clothes for poor people is closed down. The supply of clothes is reduced. The moment that happens, competition in the domestic clothes market is reduced, and consumers (most of whom are poor) are forced to buy more expensive clothes. Instead, by keeping those factories in business by allowing them to pay market-related wages, other manufacturers, and importers of Chinese clothes, would be forced to keep their prices low. By mandating “decent wages” for clothes workers, we thus undermine the creation of wealth by restricting the supply of cheap clothes to poor people.

Agriculture is another example that makes the same point. Partly by reason of labour laws, the number of people working in agriculture has dropped dramatically over the last decade or so. The net result is that less South African produce in the form of meat, vegetables and grains comes onto the market, forcing South Africans to buy imported food at higher prices.

Employment is part of the modern economy’s system of division of labour. We can notionally view our South African economy as a giant wealth-creation enterprise in which all the workers get a share of the wealth they make. But rather than reward workers in a food factory by giving them food, or those in a clothes factory clothes, it is more efficient to give them money that they can exchange for other forms of wealth. Viewed as a whole like this, it is clear that the economy will be wealthier, and so will its participants, the more workers work in it.

We thus need a system under which more and more workers are employed, so that they can make a contribution to creating more wealth than would be the case if they stayed idle.

Just stand back for a moment and consider this: In the current setup we have about 10 million workers earning mandated minimum wages in some form or fashion. Let’s suppose we could employ them, and the remaining 7 million unemployed workers, at market wages – that is, without the intervention of labour laws. Then 7 million more workers would all be creating wealth. Not only would that almost double the wealth creation – ie the GDP of the country – it would also give each of those 8 million a share of that wealth in the form of a wage.

That will be infinitely better than artificially pushing up the wages of the 7 million who are in formal jobs. No significant increase in wealth creation will take place as the result of such a move.

It is of course conceivable that an employer, in response to the increased costs imposed by law through labour laws, will feel compelled to, and succeed to, increase his labour productivity in order to meet the cost increases imposed by law. So, for argument’s sake, let us say a minimum wage law compels an employer to increase his monthly wage by 10%. The only practical way in which that employer can recoup the loss caused by such an increase, is by increasing his productivity. If the object of the exercise is to recoup the loss, the economic incentive of the employer will be to improve his productivity to the point where the loss is in fact recouped. In other words, it is unlikely, since there is no incentive to do so, that the employer will increase the labour productivity beyond that point. In other words, the employer will train his workers and equip them with technology that will enable them to justify the increase in cost imposed by the minimum wage law, and no more. The net result thereof will be that each worker will be, say, 10% more productive in order to recoup the increased cost of 10%. The employer’s output per worker will be more, but his unit labour cost will be the same. In other words, he will spend just as much as before on putting out a single unit of production. The problem is that he will now over-produce by ± 10%, all other things being equal. The reason for that is the enforced increase in productivity. It must be remembered that the employer produces for the same market as before, in which there is a limit to the demand of the consumers whom he serves. The demand for his products will be the same, and he will therefore have to retrench workers in order to maintain his output at the same level as before.

Increases in productivity are good for the market, and in the long run create jobs – but then only if such increases in productivity lead to reductions in the unit labour cost – in other words if the employer can produce one unit of production more cheaply than before. If however the employer is compelled by law to recoup an increased cost imposed by law, the incentive is to improve productivity to the level that is necessary to recoup the imposed cost, and to get rid of workers.

The pro-lawyers mistakenly believe that by improving the lot of employed workers by force of law, we will all be better off. And that causes them to believe that if we continue digging this vast hole that is unemployment, hoping against hope that if only we dig hard enough, one day we will get out. We will not.

Myth no 3: Deregulation will lead to wage inequality
In similar vein to the “race to the bottom” myth, the argument is often made that the removal of protective labour law measures will lead to an exacerbation of South Africa’s problem of wage inequality. One of the possible benefits of such measures is, after all, is that they ensure greater social justice in the shape of greater equality of income, they reason. In other words: Although as the result of labour regulation we pay a price in terms of employment, at least we ensure greater equality of income, not so?

But just think about that for a moment: In principle nobody earns less than the unemployed. The more unemployed we have, the less will the bottom sections of the labour market earn.

So it follows that the more unemployed we have, the greater the income gap.

It therefore should come as no surprise that here is a close relationship between unemployment and earnings inequality, as appears from the graph:

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But at least enforced minimum wages and the like should have the effect of compressing wages amongst the employed? At least that will serve the object of social justice, will it not?

First of all, a standard of social justice that measures only the equality of income those privileged enough to get jobs, is a doubtful notion of justice indeed. This immediately exposes the fallacy of this thinking.

But more surprising is that this seemingly axiomatic conclusion is one “that just ain’t so”.

What is particularly surprising in South Africa is that unemployment is associated with earnings inequality even among the employed:

Unemployment and earnings inequality amongst the employed

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In her recent study which produced these figures, Fiona Tregenna (Tregenna: The relationship between unemployment and earnings inequality in South Africa, February 2009) concluded that:
“Our empirical investigation points to the centrality of unemployment to the understanding of inequality in South Africa. The decomposition of overall income inequality by factor source showed that earnings from work account for most of total income, and the inequality in households’ receipt of earnings from work account for almost 80% of overall income inequality.

We also observe a surprisingly close relationship between the trends in unemployment and in earnings inequality amongst the employed over time. This is interesting in that it suggests that – at least for the period under review and within the ranges of inequality and unemployment during that period – there might not be a trade off between inequality and unemployment as the dominant international literature would expect … Furthermore addressing the crisis of unemployment is vital if South Africa’s extremely high levels of inequality are to be reduced ...” (emphasis added).

Labour law is unlikely in South Africa ever to remove the problem of inequality of income. On the contrary, indications are that it is one of its major contributing causes.

If we seriously want jobs to grow, we need to take the thicket of regulation – both general economic and labour regulation that hamper it – far more seriously.

1 Economic Freedom and Economic Growth in US States (Federal Reserve Bank of St Louis)


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