South African wages are not keeping up with inflation, meaning they are getting poorer every year. However, raising wages significantly may result in higher inflation for longer.
This is according to Renѐ Richter, the managing director of Remchannel, who spoke on 702’s The Money Show.
Richter pointed out that if your wages or social grants are increasing at a rate below inflation, you are getting poorer in real terms.
With inflation at 7% in South Africa, wages or social grants would have to increase at or above 7% for South Africans to get wealthier.
However, this is not happening, with a gap between average wage increases in South Africa and the prevailing inflation rate.
On a positive note, Richter said this gap has been closing and was more significant in the past than it is now.
She cautioned that it is unlikely corporates will be able to continue raising wages at such a rate given South Africa’s low economic growth.
If economic growth does not pick up, businesses will have to choose between protecting jobs or raising wages at or above inflation for some employees while the rest are retrenched.
South African employers expect to award wage increases of 4% to 6% in the next 12 months, substantially below the current 7% inflation rate.
This will reduce disposable income and pressure companies to find new ways to keep staff engaged and retain critical skills.
The gap between wage increases and food inflation is much greater, with food inflation at 14% in South Africa.
The stuff we need is the stuff that is going up the fastest, said Richter. This has led to South Africans turning to debt to cover necessary expenses.
A larger problem will occur if the inflation rate does not decrease significantly or wages do not increase – South Africans will become perpetually poorer.
There would be widespread effects with increasing discontent among South Africans should this situation continue.
Richter noted this was a global phenomenon not unique to South Africa that has developed since the Covid-19 pandemic.
Labour’s share of global income is at its lowest level ever, partly due to the rate of inflation outstripping wage increases.
Dangers of increasing wages
There is increasing pressure on employers to raise wages at or above inflation to ensure South Africans become wealthier in real terms.
This month, wage negotiations kicked off in the steel and energy sectors, which involved Numsa, South Africa’s largest trade union.
Numsa said it’s mobilising for the “mother of all strikes” at ArcelorMittal SA after wage talks reached a deadlock at the beginning of April.
Eskom unions demand a 15% wage increase for utility employees, including performance bonuses, housing, electricity and cellphone allowances, and a once-off danger allowance.
Wage negotiations took place from 19 to 21 April, and the unions have rejected the utility’s offer of a 3.75% wage hike.
However, such large wage increases are an inflationary pressure themselves and may thus result in inflation staying higher for longer, said senior economist at PwC South Africa Xhanti Payi.
Payi also noted that, with wage demands above inflation, it is unlikely that the Consumer Price Index (CPI) will move lower in the short term.
Disposable income has been declining in real terms and will result in high wage demands, such as the Eskom unions’ demands for a 15% increase.
Inflation, particularly core inflation, is proving to be sticky, with the South African Reserve Bank’s (SARB) rate hikes having little effect on CPI.
This is because structural economic issues, such as load-shedding and inefficient logistics services, drive South Africa’s inflation. These issues cannot be solved with interest rates.
Thus, Payi expects interest rate hikes to continue, but the SARB’s space to raise rates will be limited if the country slips into a technical recession.