SA economy pays high price for wage raises

Increasingly violent labour protests sweeping South Africa during its mid-year “strike season” are stoking worries about inflation and dealing blows to the long-term prospects of Africa’s largest economy.

Unions representing hundreds of thousands of workers in the mining, steel, chemical and petroleum sectors have walked off the job or are threatening to do so, demanding wage increases about triple the 4.6% inflation rate.

The strikes and threats, punctuated by sporadic assaults on non-union members and management, are an annual event typically settled before September with generous wage deals that drive up costs for employers.

Average increases over the last few years have been about double inflation.

This year, the central bank sees global food and fuel prices pushing inflation briefly beyond its 3% to 6% target in the first quarter of next year. Lofty wage deals are likely to cause it to cast a colder eye on its inflation outlook.

“This month with their meeting and in September, they may be talking a bit tougher,” said Christie Viljoen of NKC Independent Economists.

The Reserve Bank’s monetary policy committee (MPC) has left its repo rate unchanged at its three meetings this year after reducing it by 650 basis points to 5.5% between December 2008 and December 2010.

In a Reuters poll, economists forecast inflation edging up this year, and the central bank raising interest rates by the end of the year.

“If these wage settlements continue to push significantly higher than inflation, at some stage both retailers and producers are going to have to pass these on into their prices,” said Jeffrey Schultz, macro strategist at Absa Capital.

Chronic pain
The longer-term risk is that South Africa prices itself out of jobs, to the gain of lower-cost rivals.

The average factory worker now makes R10 983 ($1 632) a month in wages and benefits and is typically less productive than a comparable Chinese worker getting 1 783 yuan ($276).

Despite a series of wage hikes seen by economists as unsustainable, unions are again looking at increases of about 13% to 20%, tacking on non-salary benefits such as housing aid that push the bill even higher.

“I can’t see how, with inflation at 4.6% and wage increases in excess of 13%, people or businesses would want to create more employment opportunities,” said Freddie Mitchell, an economist at the Efficient Group.

The economy lost one million jobs in a 2009 recession, the first in nearly two decades, and has shown few signs of recovery due to rigid labour laws that make it costly to hire new workers. Wage hikes only add to the burden.

The government has unveiled plans to cut unemployment, stuck at around 25% for years, but with no relief in sight for employers, the goals look unattainable.

“It will not translate into declining growth rates but it will definitely cap at what we can grow,” said Viljoen. “We will not be able to keep up with many other economies on the continent that have easier labour systems.” — Reuters

Jon Herskovitz
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