Khaya Sithole | A spotlight on the fragility of the labour market

Given their
relative positions in US political history, you would struggle to find many parallels
between Bill Clinton and Donald Trump. Whilst Clinton’s philandering before and
during his presidency was a source of great anxiety and embarrassment; it
failed to get him impeached from the White House.

Trump’s
philandering predated his presidency and his flirtation with impeachment had
more to do with an ongoing dilemma of Americans trying to figure out how they
elected him in the first place rather than his personal foibles. And yet, in
one Tweet last December, the Clinton and Trump politics found one common link.

On 6 December
2019 the November Employment Situation Report was released. The report is a
monthly tracker of the US labour market.

Its key
indicator – the unemployment rate – reflected that the US had achieved the
lowest unemployment rate in 50 years. At 4{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}, the US unemployment rate had
benefited from 21 months of uninterrupted growth in jobs.

The growth
during the Trump administration alone was over 6 million jobs. The US economy
had managed to add over 22 million jobs since the 2008 financial crisis. Such
impressive numbers and the associated rise in wages and stock markets would be
the pride of any administration.

Naturally for
the Trump administration – prone to hyperbole and nationalist rhetoric – this
represented a moment of triumph.

To celebrate
this, Mr Trump tweeted “It’s the economy, stupid.”

This phrase was
the cornerstone of the 1992 Clinton presidential campaign and was coined by his
strategist James Carville.

Carville’s
statement was based on the idea that voters fundamentally care about the
stability and performance of the economy more than anything else. An electoral
campaign must therefore exhibit an intimate understanding of the economic
fundamentals of the country.

This approach
carried Clinton to the White House at the expense of the Republican candidate
George H W Bush and independent candidate Ros Perot. Far less remembered today,
however, is the fact that one key element of the Clinton approach to the
economy was the ratification of the North American Free Trade Agreement (NAFTA)
which sought to facilitate trade between the US and its North American partners
Canada and Mexico. The consequences of this opening up of trade would later on
become a key topic for the Trump administration.

The main criticism
of the NAFTA agreement was the unintended impact of the liberalisation of trade
barriers. In the 1992 presidential debate, Ros Perot prophetically referred to its
“giant sucking sound”.

Perot said: “You implement that NAFTA, the Mexican trade agreement, where they pay
people a dollar an hour, have no health care, no retirement, no pollution
controls, and you’re going to hear a giant sucking sound of jobs being pulled
out of this country.”

Perot predicted
the agreement would result in the movement of production and factories across
from the USA to Mexico which would suck the life out of the American economy. In
2014, the Economic Policy Institute estimated that 700 000 US workers were
displaced as a result of US-Mexico trade under NAFTA.

The predicted
growth in trade surplus between the US and Mexico – initially expected to rise
from $7 billion in 1995 to $12 billion by 2010 – actually turned into a trade
deficit of $100 billion in 2013. Highlighting these variables and promising to
reverse them formed a cornerstone of the Trump campaign in 2016.

His crude
characterisation of it all – referring to Mexicans as rapists and promising to
build a wall – didn’t seem to matter as much as the promise of reviving the
economy.

In the five
months since Trump tweeted his excitement, the coronavirus has arrived and
completely altered the global economic landscape. The effect of the pandemic –
the shutdown of value chains – has led to a sharp contraction in economic
activity.

In the US, over
38 million unemployment claims were filed in just nine weeks. The claims
themselves outnumber the actual jobs created since 2010. Consequently, the US
labour market is experiencing its lost decade.

The high labour
attrition rate in such a short time indicates that the vulnerabilities of the
economy are at once coinciding with the fragility of the labour market. The
longstanding features of decent employment – a living wage, access to transitional
benefits and post-employment benefits – have largely been achieved in the US
market. The prevalence of the minimum wage and the ability to file unemployment
claims during the transition from one job to the next, are a great achievement
of the labour movement.

What remains
key is the question of the quality and duration of the jobs.

Long before the
emergence of the coronavirus, the rapid rise of automation across multiple
industries has emerged as an existential threat for labour. The rewriting of
the employment compact has created a few beneficiaries – primarily those who
only enter the labour market on the back of the rise in the gig economy.

However, such
beneficiaries are exposed to unintended trade-offs. These trade-offs are illustrated
by the loss in bargaining power and the type of protective employment benefits
Ros Perot mentioned in 1992.

This creates
fracture points in the labour market where one interruption in a key variable
collapses a market altogether. A nationally-imposed lockdown on human mobility
instantly kills of the business proposition of Uber, AirBnB and JustEats. For
workers who depend on such industries, the fragility of the market is
highlighted in a crisis like the current one. The crisis, however, provides
learning lessons for all stakeholders.

For South
African workers the sense of vulnerability and fragility is more acute due to
the bleak economic prospects. The expected contraction in GDP – expected to be
as high as 7{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} for the next 12 months, means those who exist on the fragile end
of the job spectrum face a higher risk of being condemned into economic
servitude.

The diverse
feature of the labour market involving those formally employed, the cyclically
employed and freelancers, requires a diversity in solution making. As we have
seen since the advent of the national lockdown, the transitional benefits and
the post-employment benefits play an important role in protecting workers at
crisis moments.

In our case,
the UIF serves as a conduit of paying out transition benefits for labour market
participants. The challenge, however, is that not everyone who actively
participates in the labour market is within the UIF net. Those reliant on ad hoc
contracts, exist between the extremes of a compliance burden and a compliance
vacuum. The vacuum exists primarily amongst those whose labour market
participation is so informal, irregular and inconsistent they have little capacity
to consistently comply with the requirements of the labour safety net
structures.

President Cyril
Ramaphosa and Tito Mboweni have recently referred to a ‘new economy’ construct
that ought to emerge in the aftermath of the pandemic. Whatever form such a
compact eventually takes, it is fundamental that it takes lessons from what we
are witnessing now. One example of the new thinking would be revisiting the
current ceiling in UIF contributions. The current value – 1{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of a salary up to
R14 872 – hasn’t been updated for a long time.

Wage inflation,
however, is constant and ongoing. The consequence of this disconnect, is that
the collections of the fund are understated but also the suite of benefits are
not in line with the earnings profile of beneficiaries.

The one unique
feature of this fund is that it is a classic template of cross-subsidisation.
The problem is that the beneficiaries of cross-subsidisation are those whose
employment form puts them within the ambit of the UIF net.

Having learnt
that this crisis – and indeed the next crisis – are unlikely to distinguish
between traditional and other forms of employment and employment contracts the
government needs to formulate an approach that embraces this reality.

The various
data points the coronavirus has highlighted, are a good reference point for
initiating the roadmap towards the new economic compact. Failing to live up to
the demands of the current moment will condemn an entire generation of citizens
to a lifetime of economic solitude and servitude. And as Gabriel Garcia Marquez
would attest: “Races condemned to
a hundred years of solitude, never get a second opportunity on earth.”

Views expressed are the author’s own.