Hendri Pelser
Acting Digital Editor
2 minute read
4 Mar 2015
6:00 am

Wage increases: what a load of junk

Hendri Pelser

South Africa is on the brink of having at least one of its credit ratings being cut to junk status.

Hendri Pelser

This might sound like some arbitrary macroeconomic mumbo jumbo, but it does represent some very tangible consequences. Investors will avoid our economy and take their money elsewhere. This means less investment and eventually fewer jobs. In short, it affects us all.

One of the yardsticks rating agencies use to review South Africa’s investment potential is government’s wage bill. If the country cannot reign in this behemoth monthly expense, it will soon simply no longer be able to afford its oversized state workforce.

In this year’s budget, government’s wage bill will make up 40.6% of noninterest spending. This is scary stuff and largely a result of massive increases in recent years where unions have been able to strong-arm the state into a corner.

So, as government and the two main municipal unions engage in their annual parrying and thrusting of demands and offers, we should all hold our breath. According to a recent report, the two unions representing municipal workers want a 15% or R4 000 increase, whichever is the highest. The South African Local Government Association (Salga) has countered with 4.4%.

Salga’s logic is sound and based on best economic principles: unions received above-inflation increases in recent years and at some stage the balance needs to be restored. If not, government will simply not have the money needed to pay salaries (you can argue this is already the case).

The unions are not biting. According to the SA Municipal Workers Union (Samwu), the minimum wage agreed upon last year was R5 621. This year, unions are demanding a minimum wage of R9 625.

It also wants a single-year wage agreement. And this, is where the truth finally rears its ugly head.Unions demand exorbitant increases. Employers counter with inflation-related offers. Unions reject and go on strike. Eventually, employers are forced to agree to something above inflation.

There are many arguments one can use to debate the validity of using inflation as a gauge for annual increases. With food inflation, rates and taxes increasing and the price of petrol and transport, most people find themselves not much better off each year.

However, employees in the private sector – especially middle class white-collar workers – simply do not have the luxury of going on strike and sowing chaos. Your increase has been worked into a budget and if it does not make sense on the bottom line you are simply out of luck. Your increase has been determined for you – take it or leave it.

Government has budgeted for a cost of living increase of 6.6% so we know that Salga’s 4.4% offer is part of the game.The investment world is watching the game closely this time around and the ripple effects will be felt throughout the economy one way or another.

If municipal unions are able to strong-arm the government into a corner once again, prepare yourself for more tax increases next year.

Oh, and an inflationary increase if you are lucky.