Inflation and Annual Salary Increases in the South African Economy.
Posted on 23 Mar 2017
Inflation and Annual Salary Increases in the South African Economy.
The South African inflation outlook has become increasingly dim with inflation currently at 6.8%in December 2016. Factors such as the depreciation of the Rand and the drought experienced in various parts of the country are some of the significant reasons for this negative inflation outlook. The inflation rate has already breached the upper limit of the South African Reserve Bank’s inflation target and if the inflation forecasts are correct, it could remain above the upper limit for some time to come.

While April maybe the most popular month for passing annual increases (according to 21st Century's Salary Increases Report www.21century.co.za) coming up January is the month employees ask for increases and, it is only logical that employees would have higher increase demands than in previous years given the inflation outlook. This however, comes at a time when the South African economy is under pressure and expecting even further reduced levels of growth than were forecast last year (according to Treasury and the International Monetary Fund). These two indicators are working against each other. The unemployment rate currently stands at 27.1% (Stats SA) with speculation of even more job losses being forecast in the media. The impasse between labour and employers is simple. Labour will want higher increases in order to protect their real income (income adjusted for the effects of inflation) whereas employers will want to cut costs in order to ride/survive the economic challenges of reduced growth.
According to the 21st Century Increases Report, between 2001 and 2015 the median annual increase given to employees has only been below inflation in 2002 and 2008. This means that at the median, worker’s real incomes have increased over this period. The table below indicates the average annual increase in total guaranteed package, by occupational level over the last five years:

Over the same period, the annual inflation rate has averaged 5.5% which means that all occupational levels enjoyed an increase in their real income over this period. The total guaranteed packages of unskilled and semi-skilled workers have increased at a much faster rate than the other occupational levels. This is in part due to factors such as unionisation, the equal pay for work of equal value legislation and the drive to reduce the wage gap between the highest and lowest earning employees within organisations.

This trend is not likely to continue in the future because we expect salary increases to revert to being depressed in tough economic times like 2002 and 2008. At the moment, the South African economy is expected to be characterised by relatively high levels of inflation and low levels of economic growth (Treasury forecasts 0.5% GDP growth in 2016 and 1.7% in 2017) which will certainly put pressure on the wage negotiation process in the coming years.

South Africa cannot afford protracted wage negotiations and industrial action for a number of reasons – it will exacerbate low economic growth. Economic growth is already forecast to be very low with the possibility of further downward revisions in the forecast.. This will affect businesses’ decisions regarding their finances and will put pressure on employers to cut costs and consolidate their position in the market so that they can ‘ride out the storm’. This has the potential to result in below inflation, annual salary increases and/or job losses due to affordability. Employers will look at creating efficiencies that are more people productive – like downsizing its work force through organisation re-design, mechanisation and employing new technologies. If an impasse between business and labour is reached in the negotiation process and wide spread industrial action takes place, this will not only further affect the productivity of South Africa but it will also potentially negatively affect South Africa’s credit rating. South Africa is already under pressure on this front and is engaged in a campaign to ensure that its credit rating is not lowered to ‘Junk Status’.

So what are the options facing employers and employees? The current economic environment requires business and labour to negotiate in good faith and reach agreements which are fair to both parties. If business is coerced into accepting large wage increases, this will almost certainly come at the cost of increased unemployment. Similarly, if businesses are inflexible and provide salary increases which are below the inflation rate, employees’ standard of living will drop. No matter, how you look at it, 2016 will be a difficult year for wage negotiation, however, it is possible to find a middle ground between business and labour as long as both parties act in good faith, which is in the best interest of all South Africans. South Africans will have to see the big picture and all take some of the pain to get through this period successfully.

Written by:
Bryden Morton, B.Com (Hons) Economics, Data Manager – bmorton@21century.co.za

Chris Blair, B.Sc Chem. Eng., MBA – Leadership & Sustainability, CEO – cblair@21century.co.za