Business

Pay hikes must relate to value

Daan Groeneveldt

Agreeing to increases without assessing their effect on the market poses risks for investors

Jobs in the private sector will only be created and maintained if there is value created by the person doing the job. (Delwyn Verasamy, M&G)

The recent warning by Minister of Public Service and Administration Lindiwe Sisulu that salary increases for public servants higher than the rate of inflation (6.4%) are not sustainable is also relevant for the private sector. This is because the trade unions have, for many years, successfully aligned pay levels for entry-level jobs in major industries such as the metal and engineering industry with those of the public sector.

In the private sector, jobs will only be created and maintained if the cost of the job is covered by an income stream linked to the value created by the individual performing the job. It is called “the value-exchange equation of employment”.

The simple measurement of this reality is the level of private sector employment, job creation – and job destruction.

Public sector jobs absorb wealth created in the private sector and a critical role of the government is to ensure that the tax burden on the private sector remains reasonable.

Employers in the private sector have no fall-back positions. It has been reported that 440000 small businesses have closed over the past five years. South Africans can no longer afford more business closures and the destruction of jobs through the loss of income and higher taxes.

In 2011 the entry-level pay in the public sector was R26.61 an hour plus full benefits. In the public sector there is one employer – the government – and many well-organised unions.

Limit of the inflation target
The rise in the public service entry-level wage rate from R6.35 an hour before benefits in 1995 to R26.61 an hour before benefits in 2011 represents an average annual increase of 9.4% for 16 years.

Over the same period, apart from spikes in 1995, 2003 and 2008, the average inflation rate was in the 3% to 6% range (in 2000, the Reserve Bank set 6% as the upper limit of the inflation target).

In industries in which big businesses and unions are strong, centralised bargaining through ­bargaining councils is applied. This means that wage levels are negotiated centrally between employers and unions according to the simple power of the numerical majority.

Nic Dawes, in his article “The great carve-up” (July 22 2011), explained that although the collective bargaining process was part of our transformation “[...] the pact among the ANC, big business and organised labour [...] now ranks with corruption and mismanagement as one of the main threats to economic and social progress”.

Dawes’s article, written 16 years after the implementation of the new labour laws, is strongly supported by the outcomes of the collective bargaining process.

Acceptable
In the public sector, occupationally focused unions are strong and, after a long period of bargaining with the government to structure “acceptable” pay and benefit packages, the government agreed in 2007 to the occupation-specific dispensation, which was intended to attract and retain skilled employees through improved pay and benefit packages.

The metal and engineering industry has one of the biggest private sector bargaining councils and consequently allows for the realistic comparison of jobs in this industry to equivalent jobs in the public sector.

In 2011, after a crippling strike, the hourly cost for an entry-level job in the metal and engineering industry was increased to R26.24 plus a further 38% for related employment costs. This is very close to the 2011 wage levels in the public sector.

In the same agreement, the hourly rate for an artisan was increased to R48.98 an hour. This created a pay differential of 1 to 1.8 between an entry-level employee and an artisan. But most job evaluation systems would show the differential of worth between these two job levels to be far higher – about 1 to 5. This amounts to nothing more than creating a continuous path of closing the wage gap between skilled artisans and low-skilled, entry-level workers.

By contrast, public sector artisans, now occupation-specific dispensation employees, were paid an equivalent hourly rate (including benefits) ranging from R53.30 to R175.64 in 2011. At R175.64, the pay differential between the entry-level worker and an artisan is 1 to 5. This pay differential is correct, but are these jobs in the public sector sustainable?

Over the years the bargaining council has asked the minister of labour to extend the agreed pay rates to all employers regardless of size. This has had the effect of giving big businesses structural protection from competition by smaller employers. The irony is that, at present, big businesses are not creating new long-term jobs, but the high rate of average annual increases for low- and semi-skilled jobs, which have followed similar patterns to those in the public service, have created a barrier to smaller employers entering and growing the industry.

Ministerial determinations
In industries in which centralised bargaining does not take place, the minister of labour generally fixes wages through sectoral or ministerial determinations. In these industries, which are normally dominated by smaller and medium-sized employers, a lower rate of inflation has resulted in much lower entry-level wages.

For instance, in 2011 wage rates fixed by such determinations were R6.55 in forestry, R7.44 in the taxi industry, R7.71 in farming, R8.34 for domestic workers, R10.17 in the hospitality sector, R11.08 in wholesale and retail, R12.51 in contract cleaning and R18.97 in civil engineering.

It is interesting to note that the 2011 hourly rates in some of these industries are similar to what would have been the entry-level public sector rate in the mid- and late-1990s (these figures are available on the website of the department of labour).

Another cause for concern is that bargaining councils have put greater emphasis on increasing the pay of entry-level workers rather than that of skilled artisans. For instance, artisans are the primary creators of the wealth required to support jobs and business in the metal and engineering industry. But in this category the agreed wage levels have been allowed to fall behind relative to those of entry-level employees.

Any manufacturing or other work processes, whether in the private or public sectors, require employees with different value-creating capacities and consequently different cost levels. In the private sector, all job costs must be covered in the pricing of the products or services. Where any job costs are not in line with an equivalent level of value-adding capacity and cause prices to increase, the employer runs the risk of customers looking for cheaper substitutes. The result is that, although value is created, it does not translate into income and taxes.

Public sector jobs, by contrast, have no value as pay-level benchmarks because the only value-exchange measurement is the evaluation of the alternative cost of outsourcing work to the private sector as the number of public sector vacancies grow.

The practice of agreeing pay increases at a bargaining council without assessing their effect on the market is becoming a significant risk for investors. Clearly, the consequences of ignoring Sisulu’s warning need to be explained to both public sector and private sector unions.

Daan Groeneveldt is an adviser to the National Employers Association of South Africa

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