Unemployment is high because doing business is hard

When small businesses are burdened by excessive administration and regulation, the cost of compliance can become overwhelming.

Photo by Clem Onojeghuo on Unsplash

The South African economy faces one of the highest unemployment rates in the world. Although some executives suggest that the figure may be lower, the issue of a population that is not participating in productive activities cannot be overlooked.

Unemployment occurs when there is an oversupply of labour that individuals are willing to provide, in contrast to the number of businesses willing to hire that labour. This basic explanation raises the question: why aren't more businesses being established? The answer lies in the fact that the South African government consistently strives to make it more challenging for businesses and capital to thrive.

By any global standard the unemployment figures in South Africa are alarming. Nearly half of the South African population is not engaged in any productive activity. The situation is even more dire among the youth, with well over half of them unemployed.

Our youth unemployment levels are particularly alarming, as millions of South Africans are unable to even start their journey into the workforce. This lack of opportunity prevents them from acquiring the skills necessary to advance in their future careers. Given our current unemployment figures, many individuals cannot even initiate their working lives, let alone make progress within them.

According to a recent International Monetary Fund (IMF) report released this year, the South African jurisdiction ranks last in terms of ease of doing business. Out of the 49 countries examined by the IMF, South Africa was at the bottom of the list. This alone should highlight the root of the unemployment problem, which cannot be attributed to the capitalist system.

The intervention of the state in the functioning of capitalism – specifically, in free markets and free enterprise – contributes to unemployment. According to World Bank report, excessive red tape that hampers small businesses is one of the reasons why conducting business is so challenging.

Organisations such as the Free Market Foundation have produced materials such as the Laws Affecting Small Businesses report which details the regulations impacting small enterprises and suggests ways to improve or eliminate them to foster a more dynamic business environment.

When small businesses are burdened by excessive administration and regulation, the cost of compliance can become overwhelming. The resources allocated to adhering to laws and regulations could, and should, be invested in enhancing the core function of the business: customer satisfaction.

There is also the issue of a labour market that is stagnant and constrained by burdensome legislation, regulations, and collective bargaining agreements. The latter can be imposed on businesses that were not even parties to the agreement if they choose to operate in an industry that already has one in place with specific trade unions. Additionally, our labour market is a contributing factor to South Africa being regarded as one of the least favourable places to do business, according to the IMF.

Hiring and firing in South Africa is heavily regulated. It is important to note that any contract should represent a meeting of minds between two parties. Unless there is a violation of rights arising from a specific agreement, it is unjust (laws can indeed be unjust; one can reference numerous examples from the apartheid era) to impose restrictions on the terms under which individuals can enter into agreements.

This indicates that the various labour laws, which are often praised for protecting workers' rights, are unjust. They prevent potential workers from negotiating on their own terms. Provisions such as the minimum wage and collective bargaining agreements represent an injustice to society, as they contribute to unemployment.

They regulate unemployment by prohibiting the hiring of individuals outside the parameters established by the state. If an individual seeks employment at a wage rate below the state-mandated level, both the individual and their employer violate the law. In any market, prices are determined by supply and demand; when the state interferes with this pricing mechanism, shortages or inefficiencies become evident.

Therefore, it should come as no surprise that the labour market, which the state has chosen to prioritise, is characterised by inefficiencies - as evidenced by the employment statistics in South Africa.

The solution to South Africa's economic challenges is straightforward. It should not matter whether the insights come from the IMF report, or the FMF's Liberty First research papers. The South African administration must embrace deregulation.

Unemployment can only be effectively addressed when it becomes easier to start and operate a business in South Africa. The government should take all necessary measures to facilitate this process. A failure to deregulate our labour market and improve the overall business environment will result in a continued decline toward the state of serfdom that we have been experiencing for some time.

Zakhele Mthembu, BA Law LLB (Wits), is Policy Officer at the Free Market Foundation.