High food and fuel prices have prompted trade unions to make bigger wage demands, which will exert upward pressure on longer-term inflation.(Photo by EMMANUEL CROSET/AFP via Getty Images)
Workers in South Africa are taking on their employers in what have already proven to be tense wage negotiations.
Last week, steel giant ArcelorMittal struck a deal with unions that will see workers earn a 6.5% increase across the board. Although the number ArcelorMittal and unions landed on was lower than the initial demand of 10%, workers will still receive an above-inflation increase.
What is clear from the recent negotiations is that workers — hit hard, like most South African consumers, by food and fuel price shocks — are worried about being choked by inflation.
In its updated economic outlook for South Africa on Monday, PwC noted that in the current environment of elevated inflation, workers are setting their sights on substantial cost-of-living adjustments to their remuneration. In a previous analysis, the professional services firm warned that higher wage expectations signal further cost pressures on South African companies.
Wage inflation, driven by higher labour costs, has been red-flagged by central bankers as being behind red-hot prices, especially in advanced economies.
Inflation and ‘the great resignation’
The United States, which experienced a spirited rebound from a Covid-19-induced slump, has paid the price after huge labour shortages forced companies to offer more competitive wages. Labour shortages in the US were the result of what became known as “the great resignation”, during which millions of workers chose to quit their jobs during the pandemic.
Wages in the US increased 11.69% in March compared with the same month in 2021. Higher labour costs translate into high production costs, which ratchets up the price of food items and merchandise.
Inflation has recently hit 40-year highs in the US, prompting the Federal Reserve to hike the interest rate by the highest margin in two decades. But sharp hikes, while necessary to cool soaring inflation, threaten to chill demand and send the economy into a recession.
Wage inflation is more dangerous than inflation that is directly driven by shorter-term trade shocks such as a pandemic or a war. This is because it is difficult to reverse wage increases, which affect longer-term wage expectations, once they have already been agreed to.
A close-to-home example of this dilemma was witnessed in the battle over South Africa’s public sector wage. As the public sector wage bill ballooned, becoming a bigger and bigger strain on the national purse, it became near impossible to deflate other than by cutting down the workforce.
Public sector unions and the state have recently embarked on a fresh round of negotiations, which will determine what pay hike workers will receive this year and next. Labour has called for a 10% increase across the board, citing escalating inflation and high petrol and electricity costs as reasons for their demand.
Although public sector wages may have an effect on services, they have less of a direct bearing on inflation than what happens in the private sector. But above-inflation public sector wage demands signal that labour across both sectors expects that high food and energy prices are here to stay.
Wages in the private sector have, according to the South African Reserve Bank, recovered substantially, reaching 98.6% of their pre-pandemic level by the fourth quarter of 2021. Earnings remain below their pre-Covid-19 averages across all subsectors, except for mining as well as community, social and personal services.
The faster recovery in average wages supported household consumption, but this is expected to slow in 2022 as consumers start to feel the effects of sharply higher inflation, high fuel and electricity prices and rising interest rates.
Inflation not a flash in the pan
Although local consumer price inflation is still contained in the Reserve Bank’s 4% to 6% target range, there are startling indications that the worst is still to come.
Data released by Statistics South Africa last week showed that producer inflation — which measures the change in prices that are being absorbed by manufacturers — rose for a second consecutive month, hitting a record high of 13% in April.
If higher input costs are sustained, producers will be forced to pass on these costs to retailers, eventually affecting consumers. When that happens, it will become difficult to convince consumers that inflation is a flash in the pan.
According to a survey by the Bureau for Economic Research (BER), average five-year inflation expectations edged up to 5% in the first quarter of 2022, compared with previous expectations of 4.7%.
Expectations by businesses and trade unions, which are contained in the survey, have a significant effect on inflation. If companies and their workers expect inflation to be 5%, employers will tend to increase prices by 5% or more and employees will demand wage increases of 5% and more.
Trade unionists expect wages to rise by 6.1% this year, while on the lower end analysts foresee an increase of only 5.3%. The average is at 5.7%, according to the BER’s survey.
The Reserve Bank has forecast that nominal wages will increase by 5.5% in 2022, 6.7% in 2023 and 6.1% in 2024 — noting in its monetary policy review that high wage demands will further exert upward pressure on headline inflation, even if external price shocks fade quickly.
[/membership]