SA needs wages accord to avert more jobs cuts

Thanks to our strong banking sector, South Africa’s financial system was largely unaffected by the 2008 global financial crisis. Yet the crisis severely battered our economic growth performance and employment levels.

Gross domestic product (GDP) fell 2.7% in the nine months from July 2008 to March 2009. More than 1-million jobs were lost — a fall of more than 7%. Few emerging economies experienced so large a contraction or such severe job losses.

In its 2010 report on South Africa, the International Monetary Fund (IMF) noted that an important reason for the high job losses was that the rise in real wages in South Africa was one of the highest recorded in the midst of the economic slowdown. We traded 1-million jobs for higher real wages for those who stayed employed. Other countries did not do this.

Real wages have continued to rise rapidly since the low point of the business cycle in 2009. Reserve Bank data show that by the third quarter of last year, real remuneration per worker in the public sector had risen 16% compared with the second quarter of 2009. In the private sector real wages per worker increased 11%. Because output growth was slow, no new jobs were created in the private sector, where employment has not changed since 2009 and is 4% lower than in 2008.

In contrast, employment in the public sector rose 10%. While this helped reduce unemployment, the combination of rising numbers and substantial real wage increases is becoming a problem. It places a burden on national, provincial and local government budgets, but slow economic growth limits the revenue stream to fund this wage bill. As a result, the scope for spending on other priorities, such as social welfare and infrastructure, is becoming increasingly constrained. And we know that growth will be even slower in the immediate future.

So far this year, annualised economic growth was a miserable 0.9% and the Reserve Bank forecast for the year is now only 2.4%. If strikes damage mining production, it will be even lower. Weaker growth is being accompanied by escalating wage demands. In the mining industry one union has demanded a wage increase of 60%. In other sectors wage demands are also high. It is easy to understand why workers are seeking better pay, frustrated by the slow pace of economic improvement, poor service delivery and continued wide inequalities. Inter-union rivalry is an added complication.

South Africa now faces the potentially lethal combination of falling growth and high wage increases. This equation can only be balanced if more jobs are shed. At the same time, legal changes are suggested that might ban labour brokers and curtail mining rights, which will spark even more job losses. Extensive layoffs like those in 2008-09 are a growing possibility. This would worsen inequality, unemployment and poverty, enflaming the heightened social and political tensions.

So far the unions’ reaction to possible job losses has been to threaten more strikes. This will further weaken firms that are already struggling. The government, aware of the damaging impact of mine stoppages to the industry and the whole economy, is attempting to broker talks between employers and the rival unions. While saving jobs and output in mining is a priority, it is critical that any outcome balances the need for jobs, growth, profits and worker welfare more broadly across all sectors of the economy.

The IMF’s 2010 report noted that South Africa’s labour legislation "provides important and necessary protection for workers". But, it argued, "the large decline in employment during the recession suggests that some hard choices must now be confronted". It called for "a closer look at the bargaining framework so that it encourages employers and employees to conclude more flexible wage contracts". It noted that "such provisions should allow companies to adjust more easily to economic fluctuations in a way that preserves jobs".

Preserving jobs requires that workers benefit in the upside of the business cycle when profits are high, but also bear some of the pain of adjustment in the tough times, other than through lost jobs. This means linking wages more closely to firms’ economic performance. Increases to the base wage would be smaller and supplemented by bonuses and profit share schemes. Indeed, they could benefit more than at present through wage settlements that include profit-related bonuses when times are good. And in bad times a lower overall wage settlement would obviate the need for job cuts. The result is more equitable sharing of gain/pain, and more sustainable employment levels.

Both the National Development Plan and the New Growth Path recognise the need for a national accord around social and economic priorities. However, there appears to be little will to reach such an overarching agreement like this at present. This mind-set needs to change quickly if we are to avoid large scale job losses in the near future.

By Gavin Keeton

Keeton is with the economics department at Rhodes University.

Source: Business Day