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We are shopping less, but buying more

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CheckersMini

One of the things I realised soon after marriage, is that my wife and I share different strategies when it comes to grocery shopping. I like to stock up, buying bulk on the cheap, while she prefers to visit the store more frequently, acquiring only what is necessary for the next few days. This of course means that we never run out of canned beans, but often out of milk.

Such choices are at the heart of economics. Understanding how, why and when a buyer chooses a product or service is often the difference between a thriving and failing business. That is why every successful firm, from banks to health insurance to mobile communications companies, spend considerable resources these days analysing ‘Big Data’ to understand and ‘nudge’ the behaviour of their customers.

Even general retail, a sector often caricatured as unaffected by technological change, now has to adjust to the new technological possibilities, like sensing technologies that track the movement of customers as they browse a store. Not only can technology help retailers to optimise store lay-out, but, with a little leap of the imagination, they can have advertising that can recommend new products when a new customer walks past based on the content of their previous purchases, of their existing basket or of the purchases of their friends that is connected to them on social media. (Imagine buying shampoo, and being prompted: Your friend, Herman, purchased Organics in this store five days ago.) And then there is a plethora of other technologies that are likely to revolutionise the shopper’s experience, from mobile payments (in South Africa: wiCode or SnapScan), to digital receipts (another South African upstart: Pocketslip), to online shopping.

There is no doubt that these new technologies will shape the way we make decisions about what, how and where to buy our groceries, but technology is not the only thing that affects our spending behaviour. A new NBER Working Paper by three authors affiliated to US universities, identifies an interesting trend in the US over the last four decades: the rise of spending inequality, or a widening gap between how much different households spend when they go shopping.

We usually measure inequality by comparing peoples’ incomes. But presumably we are also interested in how people spend their incomes: are there huge differences between how much some households spend vis-à-vis others, and do these differences change over time? In fact, it seems like this is indeed the case: the difference in household spending patterns in the US seem to be on the increase. Some families seem to be spending a lot more than others.

One suggestion for the rise in income inequality is the impact of technology. But this is where the authors find an interesting result: the reason for the rise in spending inequality, they argue, is not because of growing differences in consumption caused by greater levels of income inequality (i.e. the rich still consume more than the poor, but this gap is not increasing), but instead because Americans go shopping less frequently. They explain it as follows: if a household starts buying groceries once a month instead of once a week, their consumption may not change (they stockpile to smooth their consumption), but the measured spending inequality will change because some households in surveys will appear as if they spend a lot, while others will appear as if they spend nothing. This difference was less dramatic when households went shopping every week, and so it appears as if inequality is on the rise.

Using various datasets, the authors find two distinct trends to support this theory: first, the number of shopping trips that Americans make has been steadily falling since 1980. In contrast, the average expenditure per trip has been steadily rising. Americans are making fewer, but larger, shopping trips on average. Second, the quantity of goods Americans buy have been rising, while the amount of time spent shopping has declined. All of this, the authors conclude, points to higher levels of stockpiling by Americans.

What explains this changing behaviour? Surprisingly, it is not technology innovation, which is often considered the source of most disruption. Instead, the authors show, the increasing stockpiling is a result of the emergence of warehouse stores, like Costco, that sell larger quantities of goods at lower unit prices. “As these stores have expanded throughout the country since the 1980s, it has become easier for households to stock up in ways that were not feasible in the past, consistent with the decreased frequency of shopping that we observe.”

Technological improvements like mobile payments, digital receipts and online shopping is aimed at reducing transaction costs, making it easier and cheaper for consumers to do their grocery shopping. Such lower costs should result in a higher frequency of shopping. And yet, the trends, at least for the US, point in exactly the opposite direction: fewer visits to the supermarket, with consumers preferring to buy in bulk and on the cheap.

Perhaps South African consumers behave differently. Perhaps the digital revolution will reverse these trends quickly; once your fridge can order canned beans automatically from the local supermarket when supplies run low, we won’t need to buy in bulk. But any retailer worth their salt would do well to be aware that the promise of technology can often overshadow deeper forces pulling in the other direction. Technology reduces transaction costs, but the benefits of buying bulk seem to outweigh the costs. Now to convince my wife.

*An edited version of this first appeared in Finweek magazine of 18 May.

Written by Johan Fourie

June 13, 2017 at 05:48

Can South Africa’s empirically-minded public intellectuals please stand up?

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BigBangTheory

Much has been said about South Africa’s economic situation in recent months. Even more has been written about the underlying ills that explain everything from protests at universities to the persistent poverty in the former homelands. This piece by Raymond Suttner, a principled intellectual who paid a heavy price – seven years in jail – for his political activities during apartheid, perhaps best exemplifies the tomes of op-ed pieces trying to make sense of the situation.

And then Dan de Kadt*, an MIT student in Political Science, wrote the following on Facebook in response to the Suttner piece:

In my opinion this is the type of article we need fewer of in South Africa. Not because Raymond Suttner is fundamentally “wrong”, but because this article is a platitudinous summary of what we already know. And somehow it even gets the summary wrong, by being deeply non-empirical.

1) Pretty much everyone who is not a racist bigot (e.g. all those white folks posting on “White Genocide” groups or commenting on News24) knows that South Africa is still living through the legacies of Apartheid – political, sociological, economic, geographic, etc. The structural challenges facing people in South Africa clearly cut along race lines, and the consequences of that are deeply troubling. Egregious inequality, limited inter-generational mobility, social violence, state violence, etc, all following racial lines. It is anecdotally obvious, and empirically obvious too, if you bother to look at actual data.

But understand that the racist bigots aren’t going to change their opinions because of the nth article stating these facts, no matter how well written or persuasive it is. Trying to convince Apartheid dinosaurs is a fruitless (and actually unnecessary) enterprise.

2) While the above claims are undeniable, they are also stylized – they are generalizations and simplifications. As Suttner points out, a lot of progress has been made since 1994. But then he turns around and says things like “Black people’s life opportunities are little different from that of their parents.” On average, that’s simply false for any reasonable definition of “little different”. And it’s obviously false if you just look at the (slow, but real) emergence of the black middle class, a group that tends to be young and upwardly mobile. There’s ample census and labour force data that backs this up – for black South Africans there is better inter-generational mobility now than before, and income and wealth are slowly (far too slowly) being redistributed to the emerging urban black middle class.

The same is true of many many things in post-1994 South Africa. Electricity, water, sewerage, refuse collection access? Virtually non-existent for black South Africans in 1994, much more existent now. If you actually bother to look for it, we have the data needed to examine where the country is failing and where it is not, where Apartheid persists, and where it does not. That is what we need from our public intellectuals, rather than endless repetitive platitudes about how “things are essentially the same”.

3) The failure to recognize this subtler empirical reality means that Suttner fails to capture emergent intra-race class cleavages. There are indeed many young black South Africans whose opportunities/lives are as limited/horrifying as their parents’ were. But these are, for the most part, not students at universities (certainly not UCT). They are, for the most part, not the people participating in RMF or FMF. They are the children of some 17 million exclusively black (read almost half) South Africans who are still forced to live in, essentially, Apartheid-era Bantustans, the only parts of the country where service provision is systematically worse now than it was in 1996. They are the children who eagerly went to school in grade 1 only to find their teacher absent 3/5 days a week. They are that young man on the trash heap while Gareth and Dali walk by laughing. An entirely contrary reading of the RMF/FMF movement is that it is an expression of the emergent black middle class, and its ignoring of (not to say dislike of, or indifference to) the plight of those who remain “below” them. Free university? For whom, the 5%?

4) What this country needs is intellectuals who write articles that explain how to FIX the legacies we’ve inherited. Suttner gives us a brief paragraph about how “we could have done better” on NSFAS because “other places have”. Like where!? Tell us!? That’s valuable f*cking information! Problems in the education system limit black South Africans prospects? No sh*t! Now, please tell us how you think we should fix it, or at least start a debate about how to fix it, preferably one based on actual evidence.

There are so many brilliant minds in this country, and so many brilliant ideas worldwide about how to address the kinds of problems we face. Our problems are not unique. But all we deserve, it seems, is yet another article from a celebrated public intellectual telling us what’s wrong (and with little empirical evidence to back it up, to boot).

Diagnosing the ills of South Africa in broad strokes is, to be honest, extremely straightforward. Apartheid makes it so. What we need are bright minds and public intellectuals leading empirically grounded debates about policy and about how to fix the problems we (smart/not-bigoted people) know exist.

Yes, yes, and yes! First, this is why South Africa’s best and brightest students should study fields (and equip themselves with tools) that will allow them to address these serious questions. Second, we need to expect more of our public intellectuals. A research paper or policy document or even an op-ed cannot simply be a few bundled ideas and theories without empirical proof. Third, there is way too much emphasis in South Africa on who says something, rather than what is being said. Science should be anonymous. Regardless of the nationality, gender or religion of the scientists, if results are falsifiable and repeatable, then they are all that matters. This is not entirely the case in the social sciences, because the real world is not a laboratory. But empirically-grounded research where social scientists analyse large data sets of household earnings, voter behaviour or race relations, for example, depend less on who is doing the research and more on what is being done. To use one example: we don’t care about the nationality, gender or religious orientation of the researcher who showed that less than 9% of South Africans use state-sponsored public transport (trains and buses) to get to work. Instead, we care about what this finding tells us about the inefficient transport system in South Africa, and the policies that could best fix it. I accept that not all research is quantitative, and that not everything can be reflected in numbers. (I’m an economic historian; sometimes numbers just don’t exist.) But what we should be cautious of is opinion (i.e. arguments not grounded in empirics). The ease of publication these days means that opinion often gets more attention than it deserves.

Dan’s last sentence is therefore indeed very important, so let me repeat it: What we need are bright minds and public intellectuals leading empirically grounded debates about policy and about how to fix the problems we know exist.

Can South Africa’s empirically-minded public intellectuals please stand up?

*I asked Dan’s permission to quote him. I tried to cut, but it was all just very good, and very valid. Thanks Dan.

Discrimination on the job market

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Interviews

Job market discrimination has been at the centre of the last few months’ furore about the lack of transformation at universities across South Africa. On the one hand, those appealing for faster transformation believe, I surmise, that black candidates are not hired or promoted because of discrimination by the panels making the appointments. In contrast, those citing practical difficulties of hiring black staff believe, I surmise again, that the constraint rather lies with a shortage of black candidates.

I suspect both these premises are true. To solve the second – i.e. to increase the supply of black candidates – is a time and resource-intensive process that universities have neglected for too long but which the events of the last few months have certainly hastened. Perhaps that is the topic of a future blog post. Instead, I’ll focus on the former: discrimination at the hiring and promotion level. If this is indeed happening, and I think there is some evidence to suggest that it is, what can be done to forestall such discrimination and speed the much-needed transformation of universities? I should note that discrimination in the workplace may be overt through an undisguised preference for a specific race or gender. When and where this happens, there should be immediate action through the correct channels. But my suspicion is that it more commonly manifests unconsciously – a preference for the culturally familiar (“he went to the same school as I did”, or “she speaks the same language”) which reduces transaction and decision-making costs. Discrimination is then borne through a rational desire to hire the best candidate in a world of asymmetric information.

This type of discrimination was most famously demonstrated by Claudia Goldin and Cecilia Rouse in a 2000 American Economic Review paper. They showed that a change in the auditioning procedures of symphony orchestras – adopting a ‘blind’ assessment with a screen to conceal the candidate’s identity from the jury – increases the probability that a woman will be hired. Because conductors are often male and orchestras male-dominated, male musicians were considered (by the judges, also male) to be better than their female counterparts. Anonymous assessment (playing the violin behind a screen so that the candidate’s gender could not be seen) reduced the bias and meant that more females joined the orchestra.

There is a long history of studies showing similar biases for race. In the US, studies have repeatedly found that résumés with traditional white names are substantially more likely to lead to job interviews than identical résumés with distinctively black names. Roland Fryer and Steven Levitt have found that these effects, though, are not causal for later life outcomes: “we find no compelling evidence of a causal impact of Black names on a wide range of life outcomes after controlling for background characteristics”. Instead, black names better predict life outcomes for the parents than the children.

But given the evidence that people discriminate on race or gender, how does one mitigate the possibilities of such (unconscious) discrimination? Of course, it would help to have more diverse appointment and promotion panels, but given the much-highlighted current racial profile of staff, this will either not be feasible or it would impose heavy costs on black staff who now would have their days filled by sitting on appointment and promotion committees. Another option is to have anonymous résumés and promotion applications. Anonymous résumés or CVs would, theoretically, allow all candidates to be judged according to the exact same criteria, with the top five chosen for the interview process. It is difficult to imagine how to conduct anonymous interviews, but it is not entirely impossible: technology may allow each interviewer and interviewee to create a digital avatar, with the conversation through a Skype session and a mechanical voice transformer. It sounds silly, but it may be the only way to rid the selection committee of any biases (good or bad) they may have towards the candidate. Similarly, promotion applications could be done anonymously, with theoretically only the best candidates making the grade.

So why aren’t we seeing more of this? Well, a new paper just published in the American Economic Journal: Applied Economics suggests we should be cautious. The authors

evaluate an experimental program in which the French public employment service anonymized résumés for firms that were hiring. Firms were free to participate or not; participating firms were then randomly assigned to receive either anonymous résumés or name-bearing ones. [They] find that participating firms become less likely to interview and hire minority candidates when receiving anonymous résumés.

They ascribe their surprising results to two things: 1) self-selection into the voluntary programme and, 2) anonymization prevents the attenuation of negative signals when the candidate belongs to a minority. The latter may be most revealing for South Africa: it simply means that making things anonymous makes it harder for the adjudicators to account for the poorer performance of some candidates at a younger age. Here’s one example: the high school marks of a black South African who attended a poor school may be lower than a white South African who attended a better school, despite the two of them having the same capabilities. An anonymous panel – where school names are removed – would not allow adjudicators to see the high school marks in the context of a poor-performing school. (Education economists in South Africa know that a 80% math score for a kid in a poor school is a much stronger signal than a 80% math score for a kid in a wealthy school.) Instead, anonymous procedures do not factor in past inequalities. Anonymization perpetuates past inequalities; everyone is treated equally but unfairly.

The French government, having hoped that the system would lead to greater representation of minorities, actually abandoned the system as soon as the results became known. It just shows again that what might sound plausible in theory is not always the policy reality. The equal treatment that anonymity provides does not result in equal opportunity. That’s why policy evaluation is so important, and why addressing inequality so difficult.

Written by Johan Fourie

June 29, 2015 at 07:09

How Zuma’s words disempower black South Africans

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Who wears South Africa's diamonds? Source: BBC

Diamonds (and colonialism) are forever. Source: BBC

Black South Africans have suffered a lot over the last two centuries. I am an economic historian and, together with some of my students, have recently begun a project which hopes to quantify the material inequalities between black and white South Africans over the last 200 years. It is not easy, because the colonial records have often ignored the black experience. And yet, there are clues everywhere. From early nineteenth-century government payrolls (where black translators earned one-tenthousandth of what the white governor earned) to mid-twentieth century cadaver heights (where blacks are significantly shorter in height than their white compatriots).

All this evidence points to the incredible material injury of black South Africans. And this is to say nothing of the psychological scars and social strife that has accompanied this material hurt.

This suffering is much longer than the colonial experiences of many other Africans on the continent. Although Van Riebeeck already arrived in 1652 and first contact with the isiXhosa’s at the infamous Fish River was more than a century later, this was still much earlier than the colonial experiences of other African countries, which started around the end of the nineteenth century. True, many countries across Africa suffered the vulgarities of the slave trade, most pronounced during the seventeenth and eighteenth centuries. But South Africa’s colonisation, I would argue, was worse, with Europeans subjugating complex agricultural societies to material inferiority by taking their lands, stealing their cattle and, above all, exploiting the minerals that they had claim to. (Is it not ironic that the Queen of England still wears Africa’s most prized diamond?)

When and where black societies adjusted to the new reality of colonialism – proverbially pulling themselves up by their shoelaces – they were punished, either through higher head and hut taxes to ensure that they remain docile labourers, or through more sinister (but also more effective) policies, like building a railroad circumventing the black areas, excluding blacks from the vote despite their immense contribution (to both sides) during the Second South Africa War, or, most infamously, by providing rubbish education (with the 1953 Bantu Education Act). For two centuries, at least until 1994, whites did their best to discourage, disrupt and, when those two did not work, destroy, African innovation and entrepreneurship.

All this changed in the new South Africa, for although blacks were (and many remain) at a serious disadvantage, there was no one to now stand in their way. And so, we witness the rise of the black middle class and the black diamonds. Sandton today is perhaps the epitome of this black entrepreneurial class; confident, successful, prosperous. South Africa has moved from a nation of between-group inequality (i.e. white vs black inequality) to a nation of within-group inequality. As an example, if all of South Africa’s whites were to leave the country tomorrow, the Gini coefficient (the measure social scientists use to quantify the inequalities of a country) would remain exactly the same. Over the last two decades, millions of black South Africans have escaped poverty and moved into the middle class; some studies estimate that this group is now close to 5 million people, larger than the total white population. And yes, whites have prospered too, despite their complaining and moaning about everything from BEE to racial quotas in the Springbok team. None of this hurt them (on aggregate), and the only things that do hurt – violent crime, corruption, blackouts – hurt black South Africans even more.

But the post-1994 South Africa is not a narrative about a minority group that represents less than 10% of South Africans. Instead, it is a story of a people rising up from the depths of economic and social deprivation. It is a remarkable story of courage, determination, and perseverance and triumph-against-all-odds. Black South Africans have claimed their birth right and begun to overturn centuries of injustice. They have had to skill up, build up collateral, educate the next generation, all with relatively little support from a government that first had to steer a sinking ship through shallow waters. And more: they have had to reconcile with racists, so magnanimous a step that we forget it is called a miracle.

And yet, when Jacob Zuma blamed apartheid for Eskom’s blackouts and when he branded Jan van Riebeeck the scapegoat for the country’s high levels of inequality, he changed the narrative again. Suddenly, South Africa was not a country where black South Africans had the agency to affect their own destiny, but one where whites had (again) the starring role. This tiny minority, Zuma implied, was the lead actor in the South African story; his statements suggest that black South Africans are, at best, supporting characters, much like in the days before 1994. While whites are up in arms at being blamed for everything, they are happy to be part of the conversation again, happy to be listened to, happy to have their say. (For, really, why should South Africans otherwise care about the opinions of a former presidential secretary?)

Zuma does this, I would argue, because it gives him legitimacy (much like Bob Mugabe gets legitimacy by blaming the whites in Zimbabwe, now less than 1% of the population). But Zuma is wrong. While this may still be a country home to millions of whites, it is certainly not a country about them. By blaming whites, Zuma is denying black South Africans the right to take ownership of their own future.

Written by Johan Fourie

February 3, 2015 at 10:43

The economics of apartheid

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Why did apartheid end? Who benefited from apartheid? What was the National Party ideology when it instituted apartheid? Why did the ANC government have so little room for redistribution when they were elected in 1994? These and many other vexing questions are answered in the December issue of Economic History of Developing Regions, a journal published by the Economic History Society of Southern Africa, in a special issue on the economics of apartheid. All 11 papers have now been published online. The introduction, written by Martine Mariotti and myself, spells out the reasons we decided for a special issue on the economics of apartheid twenty years after it was abolished:

It should surprise no one that the weight of our history hampers our attempts to create a prosperous society. This has been a constant theme in presidential State of the Nation addresses. Of the 25 such addresses since 1994 (two in election years), 20 have mentioned the word ‘apartheid’ at least once. In 2004 Thabo Mbeki, celebrating 10 years of democracy, said that ‘we have always known that our country’s blemishes produced by more than three centuries of colonialism and apartheid could not be removed in one decade’. In 2011 Jacob Zuma said that ‘the legacy of decades of apartheid underdevelopment and colonial oppression cannot be undone in only 17 years’. In more recent addresses, President Zuma has observed that ‘apartheid spatial patterns still persist in our towns and cities’ (2013), and that ‘the culture of violence originated from the apartheid past’ (2014).

The Economics of ApartheidResearchers confirm these views. Poverty levels remain high for black South Africans (Van der Berg 2011; Leibbrandt et al. 2012; Bhorat & Van der Westhuizen 2013; Gradín 2013), their educational attainment and health outcomes continue to lag behind those of white South Africans (Van der Berg 2007; Harris et al. 2011; Spaull 2013; Barbarin & Richter 2013), and unemployment, which was already increasing during the 1970s and 1980s, shows no signs of declining (Banerjee et al. 2008). The distrust and non-cooperation induced by apartheid persist to this day (Burns 2012).

While economists and policy-makers are rightly interested in addressing these consequences of apartheid that affect South Africa today, the task seems to have fallen to economic historians to discover precisely how policy decisions taken during the apartheid era determine the country’s economic growth in the twenty-first century. The stagnation in employment opportunities is a case in point. The shortage of semi-skilled workers caused by the apartheid regime’s statutory job reservation policy obliged manufacturers to overinvest in capital technology, with the result that South African manufacturing became capital intensive rather than labour intensive. The consequence for employment has been low levels of job creation at the unskilled level, precisely the level of skills that the Bantu Education Act of 1953 and subsequent policies had envisaged as being required.

Economic historians are interested in the economics of apartheid not just because apartheid continues to affect South Africans, but because we see analogous situations elsewhere today. Ethnic divisions remain a feature of our times worldwide, perhaps nowhere more overtly than in the continuing conflict between the Palestinian Independent Authority and Israel. Former American president Jimmy Carter (2006) famously called for ‘peace not apartheid’ in this region. In the US, discussions of poverty and inequality often reference apartheid (Massey & Denton 1993).

In South Africa, we continue to extract lessons that hold the promise of not repeating past mistakes. We look for clues to understanding ideologues and their ideologies (Giliomee 2013; Koorts 2014): can we find similarities between Afrikaner nationalism in the early twentieth century and black nationalism in the twenty-first? We investigate apartheid policy counterfactuals (Bhorat & Ravi Kanbur 2006) because they provide a sobering perspective on current trade-offs: should government focus on high quality education for a select few, or education for all, but of lower quality? And at the macroeconomic level we consider the global response to apartheid policies (Kaempfer and Lowenberg 1988; Moll 1991): do economic sanctions force a regime change, or do they instead strengthen the oppressor’s hand?

The good news is that we are getting better at understanding how the past affects us and recognizing analogies between past and present. With the tools of econometrics, South African economic history studies are adding a valuable quantitative analysis to the rich qualitative analysis that is growing larger each year (Fourie & Schirmer 2012). The digitization of data previously buried in archives and libraries is beginning to make the apartheid era more accessible. Studies of apartheid can contribute to important themes in the economic history literature, such as the longevity of institutions and path dependence (North 1990; David 1994; Acemoglu et al. 2005). The era provides natural experiments with which we can analyse human behaviour in response to distorted incentives. The benefit of such experiments is that the inferences drawn are causal (Diamond & Robinson 2010). And because South Africa’s twentieth-century experience is a microcosm of global development, with the incomes of rich and poor diverging, the apartheid and post-apartheid periods serve as an analogy for the process of globalization and the potential effects of greater integration (Dalby 1998).

This special issue brings together the work of economists and historians to showcase recent developments in the study of the economic history of apartheid. We hope that the papers will inspire scholars to continue to work on this topic, to explore underused data sets and to maintain the conversation about this definitive era in South Africa’s history.

It is especially exciting to see younger researchers tackling this tough research area. As we report in our contribution, newly digitised, micro-level South African data, often with spatial features, allow for much deeper insights into not only the South African past but in things that are important to social scientists in general, like the political economy of policy-making. We discuss, for example, the fascinating work of LSE PhD-student Ed Kerby, University of Illinois PhD-student Nicolas Bottan, Harvard PhD-student Martin Abel, UCLA PhD-student Katherine Eriksson, MIT PhD-student Daniel de Kadt and Columbia PhD-student Laurence Wilse-Samson. Their affiliations include some of the leading economics departments in the world. That alone should be an indication of the treasure-trove of research possibilities the apartheid period offers.

But challenges remain. Although some are South African, these PhD-students are all based at universities outside South Africa. They are also all white. Let’s hope that the excellent research being done by a younger generation of (foreign-based) economists can act as a catalyst to encourage South African students to delve into an economic past that will remain with us for some time to come.

Written by Johan Fourie

October 22, 2014 at 11:37

The truth about domestic workers in South Africa

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Superwomen: Domestic workers will become more, not less, frequent (Image from: http://thehypnotic00.tumblr.com/)

Superwomen: One out of every five women in South Africa is a domestic worker. (This image is obtained from here. The same image appears on the side of an apartment building in Market Street, Stellenbosch.)

Domestic workers are ubiquitous in upper-middle class households in South Africa. And because of our peculiar history, domestic workers are often black while upper-middle class households are still mostly white. This feature of South African life strikes many visitors who spend time in South Africa. One interpretation is that domestic workers are being exploited. Last year, in a post that circulated widely, Maria Hengeveld, a graduate student at Columbia University who lived in South Africa for four years, questioned why employers don’t pay their domestic workers a “decent wage”. In July, Haji Mohamed Dawjee raised the ire of many Mail & Guardian readers when she wrote about her experience driving through an upper-class neighbourhood in Johannesburg:

I stepped into an alternate universe the other day, which literally stunned me – a dog park filled with domestic workers and white babies. I may as well have been a fly on the wall from the movie The Help – set in the United States in the 1960s. There were no dogs, just a community of maids and children who were not their own.

While Dawjee’s criticism was mostly aimed at (white) parents who don’t have time to walk their children but nevertheless have time to take the dog on an evening stroll, her reference to The Help insinuates an undertone of slavery. A week later, Victoria John of the Mail & Guardian summarised this viewpoint well:

But don’t for one second think that being kind to someone doesn’t mean those of us privileged enough to afford domestic help are not benefiting from a hideously perverted system. A system that is rooted in the roughly 350-year-old oppression of black people by white people, and a system from which mostly white people have benefited.

Strangely, none of the above stories consider the latest research on the domestic worker industry. Two largely neglected research papers have appeared within the last year that shed light on two aspects of domestic workers: their incomes and their standards of living.

But let’s establish some facts about the industry first. Personal services, of which domestic work is one component, constitute 5.4% of GDP. More importantly, it creates jobs: roughly one in five South African women work as domestic workers. Four out of five domestic workers work full-time (more than 28 hours a week). They are predominantly black and Coloured women, with an average of 6 to 7 years of education. This should suggest that they are the poorest of the poor, but in truth they are not. Because they have a job in a country that has a broad unemployment rate of 40%, they are not within the poorest four deciles; in fact, many of them may even be above South Africa’s median income. That is because domestic work is mostly an urban phenomenon, while poverty is most rife in South Africa’s rural areas.

Mostly because of concerns similar to those raised above, the South African government introduced a minimum wage in 2002. According to Taryn Dinkelman (of Dartmouth College), Vimal Ranchhod and Clare Hofmeyr (both of UCT), authors of a paper investigating the impact of this minimum wage, the increase in wages government proposed was substantial. Full compliance with the law would lead to a huge increase in the total wages to be paid to the majority of domestic workers. Economists and others were sceptical: Economics 101 would tell you that a price floor (a minimum wage) will introduce a gap between those demanding work and those willing to supply work, i.e. unemployment would increase. Also, experts doubted the ability of government to enforce the policy, given the decentralised nature of the industry. So what happened? Did workers’ incomes increase, or did unemployment in the industry increase?

Using evidence from the Labour Force Surveys of the 2000s, Dinkelman, Rancchod and Hofmeyr explain:

First, the introduction of the minimum wage appears to have had an almost immediate positive effect on the average hourly wage of domestic workers. The rise in hourly wages was substantial, at approximately 20%. The pre-law average wage was R3.67, rising to R4.37, which was actually above the stipulated minimum of R4.10 (for full-time domestic workers in urban areas).

Secondly, there was no significant reduction in the number of hours worked. This was reflected in the fact that average monthly earnings also rose by approximately 20%. Moreover, the probability of being employed as a domestic worker (for somebody in the labour force) did not decline, indicating that the law had no negative impact on the employment prospects of domestic workers.

This, remember, in the context of little or no enforcement. So why were the economists wrong in predicting a rise in unemployment? The authors of the paper do not venture a guess, but let me try. First, not everyone complied with the new law. Those employers on the margin of using domestic help probably continued to pay the low price instead of letting their workers go. (Actually, 60% of domestic workers still did not earn above the minimum wage.) Second, the fear of the consequences (penalties, social stigma) of non-compliance for those who could afford to pay more may have been worse than the additional cost of compliance, even when enforcement is low (although perceptions about enforcement may have been different). Third, the minimum wage law may have improved information asymmetries. Because the industry was unregulated for so long, and collective bargaining was non-existent, employees mostly determined wages with very little information or failed to adjust it annually for inflation. The new law afforded an opportunity to identify the common denominator.

So the new minimum wage law improved the incomes of domestic workers significantly. But wages are not the only benefits domestic workers get. Ronelle Burger, Marisa Coetzee and Carina van der Watt (all of Stellenbosch University) examine, in a Working Paper published last year, whether there are any additional gains from being a domestic worker rather than, say, a cleaner in a hotel. They consider two groups: domestic workers, and people similar to domestic workers in terms of income, location, marital status, household size and other such variables but employed in a different industry. They find that the households of domestic workers, in comparison to the control group, are significantly less likely to suffer from both adult and child hunger. Household members of domestic workers are also less likely to be discouraged work-seekers and spend less time searching for employment. They are also more likely to own a TV and radio, but not more likely to own books. Interestingly, despite being more likely to receive education bursaries, their children are not more likely than the households in the control group to attain a matric certificate.

What causes these benefits? Burger, Coetzee and Van der Watt attribute these benefits to the social ties that are created between domestic workers and their employers, social ties that reduce inequality:

In the South African context, where there is large-scale social exclusion and socio-economic divides between individuals of different races, education levels and income, domestic workers mostly find themselves on the wrong side of the divide. However, in most of the dimensions we consider we find that these women appear to benefit from their regular and close contact with their employers. Broadly, this can be interpreted as evidence that linking ties may help to improve the lives of poor households in South Africa and that there may be significant benefits to repairing these deep divides in the social landscape.

Different to the pundits above, who base their research on anecdotes and their own non-representative observations, the average domestic worker is not exploited. While the old adage says that you can tell a lot about a man by looking at how he talks to his mother, you can learn much more about someone by looking at how they manage their (domestic) workers. Of course there are instances of abuse which should be eradicated, but this is not unique to the domestic worker industry. (Marikana comes to mind.)  Instead of vilifying an industry because of sporadic and isolated incidents or because it highlights the stark realities of South Africa’s income distribution, let’s recognize that domestic workers benefit from higher incomes and the additional benefits of closer social ties with richer households. More than any other industry, it is here where we begin to tackle inequality and loosen the shackles of the past.

Written by Johan Fourie

August 1, 2014 at 10:03

More knights in shining armour, please: Why we need YOU! to do a PhD in Economics

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This morning, Jonathan Jansen, vice-chancellor of Free State University, posted the following message on Facebook: ‘Dear students, your education will be incomplete unless you all read Pikkety’s new book Capital in the 21st century. What he discovers about inequality over time, and how to remedy it, might just save our country from social and economic doom. Required reading!’

Thomas Piketty, and his thesis, has certainly taken the world by storm. Paul Krugman called it ‘an extremely important book on all fronts’, Mervyn King called it a ‘serious, thought-provoking book’, and Tyler Cowen argues that the book aims to ‘answer a basic but profoundly important question’. This is true. Capital in the Twenty-First Century makes an important contribution to our understanding of inequality. But it is also voluminous and, to be honest, translated from the French edition, not wonderfully eloquent. It is a publishing sensation (it reached number one on Amazon!), but I doubt that many will actually finish it, especially given that the main thesis is better explained in the excellent reviews cited above. It will certainly not appeal to the average undergraduate student, given that many struggle to read a 5-page chapter in a textbook. As someone on Twitter noted, ‘Now the Thomas Piketty book has hit the mainstream I’d like to make it clear I knew about it and didn’t read it before you didn’t read it’.

Yet the book addresses one of the most fundamental challenges of our time – inequality. While inequality has reached the global policy agenda only recently (owing to the rapid increases in inequality within countries, even though inequality between countries is on the decline), it is an economic and social problem that South Africa has had to deal with for a long time. Professor Jansen is correct in asserting that we – students of the social sciences – need to spend more time thinking about the economic causes and consequences of inequality, even if it is not entirely to ‘save our country from social and economic doom’. (Mental picture: Knights in shining armour (Servaas, Murray, Haroon?) fighting the dragons of Nkandla.) But here is an alternative suggestion, prof Jansen: Why not recommend your students to study Economics? If we believe that poverty, unemployment and inequality are serious economic issues, why do we not encourage more students to understand (and transform!) the nature of the beast? Why recommend a book written by a French economist when it should be our best and brightest who, given our own long road to (economic) freedom, tell the world about the pitfalls and paradoxes of economic inequality?

unclesamSouth Africa desperately needs more economists – not more people who have read a book about inequality. Economists are trained to not only construct plausible hypotheses but to also test these hypotheses using empirical data and statistical techniques, and to contextualise these results. It is a field that accommodates many interests: development economists think about policies to alleviate poverty, trade economists identify constraints that allow South African businesses to find export markets, macroeconomics attempt to understand the business cycle and prescribes policies to reduce fluctuations around it, and economic historians, like myself, believe, much like Piketty, that the past has useful knowledge that will allow us to make better policies in the present.

We have excellent departments of economics in this country who deliver a steady supply of well-trained economists (who, incidentally, find work with relative ease). But we are not exempt of blame. We often talk to ourselves, mostly in economist-speak, and avoid forums where public opinion takes shape. (For example, how many South African economists can you name? But I’m sure many have heard the names of Paul Krugman, Joseph Stiglitz or Tim Harford.) I am also convinced that we do not do enough to encourage our best students to consider a PhD in Europe or, preferably, the US. On my brief visit to the US last year, I was surprised by the high number of PhD students in Economics from countries much poorer than South Africa. Close to 70% of all economics PhDs awarded at American universities are to foreign-born students. Very few of them, I fear, were South African.

We cannot improve as a discipline if we only train ourselves. (Piketty, even though he is French, studied at the London School of Economics and worked for two years at MIT.) My advice to any (bright) student who wants to tackle South Africa’s greatest challenges is to do a Masters-degree in Economics at a South African institution (preferably with a strong dose of mathematics and econometrics), and then enrol for a PhD at a US university. (Note: this need not be a PhD at an Ivy League university. Even the 50th best US university is likely to deliver a better, or at least different, product than South African universities.)  But these programmes are not for everyone; there is a strong bias towards mathematics. (Piketty warns of its overuse, but in South Africa we are still on the wrong side of this distribution.) And this is not to say that South African PhDs are not worth pursuing: they can be equally valuable (and much more affordable) if they offer students exposure to international networks, workshops and conferences. So, does this PhD-thing sound tempting? There’s some good advice online. Start here, then go here, here and here.

Lindiwe Mazibuko’s decision to do a Masters-degree at Harvard is an excellent example of someone who realises the many positives of a foreign education. She will be an example to many of our brightest students. Let’s hope, to save our country from social and economic doom, some of them return with PhDs in Economics.

Written by Johan Fourie

May 13, 2014 at 07:39