Is competition policy to blame 

1. Introduction 

Unemployment in South Africa is a matter of serious concern for its effect on economic welfare production; the erosion of human capital, social exclusion, crime and social instability is immense. Various forums and strategies such as the Employment Strategy Framework, Job Summit, Umsobomvu Fund and GEAR have been directed at resolving the problem. None of them succeeded.

The unemployment rate is the percentage of the labour force that actively seeks work, but is unable to find work at a given time. Discouraged workers - persons who are not seeking work because they believe the prospects of finding it are extremely poor - are not counted as unemployed or as being part of the labour force. 

South Africa's registered non-farming workforce decreased by 0.3% in the first quarter of 2002 after retailers and hotels cut seasonal jobs. The number of nonagricultural workers dropped to 4 633 698 (Statistics South Africa). The total number of jobs in South Africa decreased to 10,8 million in September 2001 from 11,8 million in February 2001. South Africa's economically active population is 15,4 million (Labour Force Survey). As a result, the unemployment rate rose to 29,5% in September 2001 from 26,4% in February 2001.1 The mining and agricultural sectors have been particularly hard hit, while jobs in manufacturing have stagnated.

Employment has declined by 2,5% year-on-year (Naledi, Cosatu).2 The only sector to show employment creation has been the wholesale and retail sector as a result of the increase in part-time employment. This article looks at the effect of competition policy on employment through  merger activities notified with the Commission. 

2. Some reasons for rising unemployment 

There are various reasons for the high  unemployment rate in developing countries, particularly African countries. In South Africa labour experts attribute most of the immense loss of jobs in the formal sector to the restructuring of the world economy, which more than ever favours highly skilled individuals. While there has  been some growth in the service and  tourism sectors, this has not taken up the slack of the jobs lost. Once those jobs are lost they are lost forever.3 

The high unemployment rate among qualified tertiary graduates in South Africa has been attributed to a "mismatch between the kinds of skills and training people are getting in the tertiary education sector and what is needed in the labour market". Professor Eddie Webster of the Wits University Sociology of Work Project says that "many South African tertiary institutions are giving out qualifications that are irrelevant".4 

Figure 1: Trends in Retrenchment in South Africa

Source: PE Corporate Services

Another labour expert argues that the rigidity of South Africa's labour market due to our labour legislation certainly does not promote employment. A draft industry profile prepared by the Department of Trade and Industry identifies the following factors for rising unemployment:

• Domestic markets are contracting

• Exports are contracting

• Imports are rising and,

• Labour productivity is rising.

A formal sector trend survey by Johannesburg-based

PE Corporate Services indicates that many employers have trimmed their staffing levels back sharply in line with poor economic growth over the past two years. The graph below shows the number of sectors that have been affected by retrenchments from 1997 to 2001. 

"Retrenchment remains a major factor for employers," says Martin Westcott, Managing Director of PE Corporate Services. Although it has declined sharply from 1999 and 2000 when approximately two-thirds of companies were laying off  staff, unemployment is still the most important challenge for the country.5   

Labour intensive industries are considered to be most vulnerable to retrenchment. The major cause of job losses in these sectors is said to be the decline in local demand, implying that output supply exceeds  demand and therefore trimming the work force is considered the last option in order to reduce costs. The next section looks at the impact that mergers and acquisitions have had on employment. 

Product and labour market rigidities versus employment 

Unemployment is also considered to be the result of uncompetitive product and labour markets. An OECD report concluded that labour and product market rigidities have hampered member countries' ability to adapt to change, leading to increases in structural unemployment.6 In other words competitive markets with low barriers to entry are considered the best mechanism for creation of job opportunities. 

An unpublished study, by Vumendlini (1999), also found that in South Africa, less concentrated industries employ more people than highly concentrated ones. These facts are further supported by the neo-classical theory, emphasising the importance of competitive markets and the accompanying benefits compared to highly concentrated markets and the negative results that they bring to society in terms of less employment and high prices of goods and services.

3. Merger Activities and Employment 

South African competition policy differs from the policies of other competition authorities due to its consideration of public interest issues. Section 12A(3)(b) of the Act states that in determining whether a merger can be or cannot be justified on public interest grounds, the Competition Commission and  Competition Tribunal must consider the effect the merger will have on employment. This puts an obligation on the Commission to monitor the effect that various merger transactions will have on employment in the  country. The graph below shows the number of industries which have been affected since 1999. 

The trend seems to be declining, though not all the merger reports were reviewed. The graph shows that it is only in 2000 that more industries (34) were affected. It should also be noted that some of the industries were affected positively, in other words, job gains. This is evident from Table 1.

Table 1: The Impact of Merger Activity on Employment (All Sectors): 1999 - June 2002

Note: Data collected from 680 8 merger cases notified.  

• September 1999 to date 10 669 job losses occurred, with gains of about 9  616 

• Net loss of 1 053 jobs occurred 

•  69% (7377) of total losses occurred in 2001 

• 81% (7849) of the total gains occurred in 2000 

Figure 2: Trends in Employment: Effects of Merger Activities

Considering that a net loss of 1 053 jobs occurred, it becomes apparent that competition policy is not responsible for the increasing unemployment rate in the country. 

According to a draft document prepared by DTI, major employment losses are in the labour intensive wage goods sectors, which incorporate manufacturing of food, textiles and clothing. However, in terms of the cases handled by the Commission to date, the food sector accounts for 370 job losses, which represents 3,4% of total losses and clothing and textiles 387, accounting for 3,6% of total losses. 

4. Concentration and employment 

Concentration is the extent to which an industry is dominated by a small number of companies. Such concentration implies monopoly pricing and profits, which greatly increases the range of options available to  managers to push up prices and reduce employment opportunities. There are various measures of concentration, however, and the CR49 is considered in this regard. Table 2 breaks down the data according to the concentration levels of the industries/cases notified to the Commission from 1999 to June 2002.  

Table 2: Employment Gains or Losses as a Result of Mergers and Acquisitions Activity in the SA Manufacturing Sector: September 1999 - June 2002

• In 236 cases evaluated a net loss of 7 382 jobs occurred. 80,6% of the overall employment losses were within industries where the combined market share of the leading four firms was between 60% and 100%11 (39,9% of the cases in the sample) 

• Merger activity in competitive industries with low levels of concentration (54,4% of  the cases in the sample) contributed to only 19,2% of the overall employment losses 

• It is noteworthy that 67% of the job gains were within the highly concentrated industries. These are activities that relate to mining, a sector that usually employs many people at a given time. Mining contributed to a loss of over 5 000 jobs during the period under review 

• A net loss of about 4 372 was recorded for manufacturing. If other sectors are considered, the net loss is 1 053 

5. Summary 

It is clear that the data compiled from cases notified with the Commission does not reflect the high unemployment rate that is reported by Statistics South Africa. This could be due to two reasons at least:

1. The firms affected by job losses have downsized and have not been "swallowed  up" by bigger firms

2. Mergers take place after job losses have occurred, so that job losses are not attributed to the merger process.

In addition, the industries identified in a draft document of the DTI, namely food, textile and clothing do not account for most of the total job losses that occurred as a result of mergers notified with the Commission. It is therefore recommended that a study on the effect of competition policy, particularly the effect of mergers on employment, be conducted in order to gather facts in this regard.

1 Business Report: Employment shrinks 0.3%, 26/06/2002 

2 Sunday Argus: South African economy shedding jobs at  an alarming rate 

3 Jackie Kelly, a labour consultant: Andrew Levy and  Associates 

4 Business Day: Student training a mismatch, 11/04/2002 

5 Business Times: There's light at the end of the job  tunnel, 16/06/2002 

6 The OECD Job Study: Facts, Analysis, and Strategies, 1994 

7 Activities relating to mining accounts for over 5000 job losses 

8 It should be noted that this number does not represent all  merger cases notified with the Commission. Some cases are still under investigation whilst some of the 1999 cases were Schedule 3 cases and no reports are available. Nevertheless, 680 represent the majority of  merger cases notified 

9 It is defined as the sum of the market shares of the top  four firms in an industry. The closer to one the ratio is, the more concentrated is the industry 

10 These concentration ratios were compiled from the 1996  Manufacturing Census, which might not reflect the current structure of industries in South Africa. However, Mr Jan de Jager from the National Productivity Institute argues that these ratios still reflect the concentrated structure of the economy. In addition, the big ones are  still big with very few smaller players who have entered  the economy since 1996 

11 Suggesting that the link between market structure and  employment consequences, as seen by neo-classical  theorists, might be true. However, more research is still required to justify these findings 

Charles Mabuza 

Policy and Research 

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