‘Season of outrageous demands for wage increases upon us’

As published in Business Day 10 July 2015: http://www.bdlive.co.za/opinion/2015/07/10/season-of-outrageous-demands-for-wage-increases-upon-us

THE season of outrageous demands for wage increases is upon us. And, more important, it is the season of wage agreements that appear to take little account of the hundreds of thousands of workers outside the mine and factory gates who would willingly accept employment for existing benefits.

Even more unsettling will be the loss of jobs, as managers replace unskilled workers with machines and more skilled and experienced workers productive enough to justify their higher costs of hire. The losers will be the newly unemployed with little opportunity for alternative employment on anything like the same conditions.

How, then, can one make sense of this seemingly irrational behaviour by the unions? How can they not be aware, it will be asked, as their members will continue to be retrenched in large numbers? Why do the unions do what they do? They are surely as well aware as any that higher real wages can lead to job losses in the sectors of the economy where they exercise the power to strike.

The answer must be that they are well aware of the economic circumstances and the trade-off between wage gains and job losses, which they make for their own good reasons. I would suggest that, in fact, unions are not in the business of maximising employment or employment opportunities. Rather, unions are in the business of maximising the total wages paid to their members. The objective they quite rationally and self-interestedly attempt to achieve is the highest possible wage bill, not the number of wage earners or members of the union. It is the total wage bill agreed to by employers that forms the basis for collecting dues from members. Therefore, (percentage) increases in employment benefits can more than compensate for fewer workers employed. And better paid members may be more willing and able to pay their dues.

It is theoretically and practically possible for the wage bill paid by firms to rise in both nominal and real terms even as employment drops. This is precisely what has happened in the mining and other sectors of SA’s economy. While employment has declined in recent years, total compensation paid to employees of all kinds has continued to increase, and so presumably have the dues paid to their unions (collected conveniently by the employers themselves).

To put these outcomes in terms familiar to the financial sector, the asset base of the unions and staff associations from which they collect their fee income — the wage bill — has continued to rise as the unemployment rate continues to remain damagingly high to the economy, but not necessarily to the unions. There is nothing ignorant or irrational in all this, just predictable self-interest at work. Such an explanation fits the facts of the economy and its labour market well.

The statistics help make the point. SA’s economy may well have become less labour intensive — fewer worker hours employed per unit of gross domestic product (GDP) — but the share of total remuneration in GDP or total value added has changed very little. The wage bill (not numbers employed) has risen more or less in line with output. The share of owners and funders and rentiers in SA output peaked at about 47% of GDP in 2008 (before the global financial crisis) and has been in decline since (now 44%) as the share of employees has been rising. Employment benefits now constitute 46% of GDP. That is despite or maybe because of slow growth that reduces the rewards for savings and the demands for labour — but not necessarily the rewards of the majority who hold on to their jobs.

A similar picture emerges for the mining sector. The share of mining output accrued by employees has been rising in recent years, from 35% of total output (in current prices) to about 42% in 2013. In other words, the unions appear to be successful if their objective is (as I infer) to increase the wage bill paid by the industry rather than the numbers employed at the expense of the other claimants — shareholders and creditors — on the value added by the mining sector

Thus, while mining employment was at 2008 levels in 2013, average employment benefits per worker employed have risen consistently, at an average annual rate of more than 11% in money-of-the-day terms, and equivalent to an average increase of 4.5% in real terms, using the GDP deflator to convert nominal into real growth of employment benefits or rather costs to owners. The average employee in the mining sector came with an average cost to employers of more than R220,000 per employee in 2013. Not bad work if you can keep it.

The data on compensation of employees supplied by Statistics SA goes back only to 2005. It is, however, possible to view mining output and employment over a much longer period. The mining work force declined dramatically in the 1990s, from nearly 800,000 employees to about 400,000 by 2002, whereafter the number rose to more than 500,000 in 2008. Volumes of mining output, having declined in the 1990s as metal prices came under pressure, increased significantly in the mid-naughties, only to fall away again after 2008. The producers of iron ore and coal produced significantly more during the commodity price super-cycle that accompanied the Chinese thirst for raw materials. The big losses of output were suffered by the gold mines, as they ran out of profitable grade to extract.

But a focus on mining volumes rather than mining revenues (volumes times price) misses the driving forces in the industry. SA’s mining industry had the advantage of rising prices, especially after 2000, and became significantly more profitable — enough to hire more labour as well as offer significantly higher rewards to its employees between 2000 and 2008, after the savage job losses incurred in the 1990s.

A better sense of the environment for SA’s mines, for their owners, managers and workers, can be gained if we reduce mining revenues to their real equivalents by deflating current revenues by prices in general, represented by the GDP deflator, rather than by the index of the prices of the metals and minerals themselves, which rose much faster than prices in general to the advantage of the mines. Real mining revenues measured this way show a strong growth pattern until 2008 and explain the employment and wage trends much better than mining volumes that have remained almost constant over many years.

Notwithstanding a better appreciation of SA’s mining environment, it can still be asked about employment of workers in SA that is so desperately needed. A better understanding of the self-interested behaviour of the unions (in the quantum of dues collected) and the shareholders in mines attempting to improve returns on their capital, which have led to fewer better paid and skilled workers, should lead us to expect more of the same in the years to come. This would be a trade-off of better jobs in the industry for fewer employment opportunities and more capital (robots) per unit of output.

What then can be usefully done to encourage employment in SA, especially of unskilled workers, of whom there is an abundance? The first step would be not to look to the established unions or firms as sources of employment gains. The right way to look for employment gains is to find ways to inject competition in the labour market. Competition for customers and workers and competition for work will help convert the pursuit of self-interest to better serve the broad interests of society; that is in more employment.

More competition for the established interests in mining and every other sector of SA (unions and firms) from labour-intensive firms needs to be encouraged in every way possible. This means, in practice, rules and regulations that allow willing hirers and suppliers of labour to more easily agree to terms (they may well be low-wage terms) without artificial barriers. These barriers to more competition in the labour market come particularly in the form of closed shop agreements that apply to all firms and workers, wherever located or regulated. Less regulation and more competition is the solution to the employment problem. Higher employment benefits for the fortunate few with artificially enhanced bargaining powers will not reduce the unemployment rate any more than it has to date.