South Africa’s average wage is rising – here’s why that might not be a good thing

 ·6 Oct 2021

While the broader economic recovery from the Covid-19 pandemic has been robust, some sectors remain constrained, and labour market improvements are very partial, says the South African Reserve Bank.

Of the over two million jobs lost during the depth of the Covid-19 crisis in the second quarter of 2020, only around 793,000 had been recovered by the second quarter of 2021, the central bank said in its six-monthly Monetary Policy Review.

“Recovering jobs lost was always going to take time, and while there have been jobs added in some areas, on balance, the shocks to the economy suggest that the distribution of jobs across the economy may be permanently affected.”

More striking in the economy’s bounce-back is the sharp recovery in earnings to date, the Reserve Bank said.

“Whereas employment has tended to move sideways, nominal average wages in the non-agricultural sector were 5.4 percentage points above their pre-pandemic level by the first quarter of 2021. Real wages have also recovered well, being just 0.2 percentage points below their 2019 level.”

Why average wages are rising

Higher wage growth typically indicates stronger labour market conditions, as it signifies rising demand for labour. However, the Reserve Bank noted that the strong recovery in average wages occurred even though the unemployment rate has climbed to record-high levels.

South Africa’s unemployment rate was 34.4% in the second quarter of 2021, up from 32.6% in Q1 2021. “The composition effect and overtime work can explain this apparent puzzle,” the Reserve Bank said.

“When lower-wage workers disproportionately lose jobs, average wages rise, with the wage bill more fully reflecting the earnings of higher-paid workers who remain employed and creating an illusion of high wage growth.”

Employment of low-skilled workers fell by 13.1% year-on-year in the first quarter of 2021 and remained 12.4 percentage points below the pre-pandemic level. Job losses among high-skilled workers (0.5%) was less severe, and employment has also recovered relatively faster for this group.

Rising average wages can also be explained by firms’ reliance on overtime work to meet growing demand, the Reserve Bank stated.

“Overtime payments in the formal non-agricultural sector increased by 8.6% in the first quarter of 2021. Increased use of overtime work – a short-term response to rising demand – enable firms to produce more output and support higher worker earnings, without committing to expanding permanent jobs.”

Hiring new employees comes at a cost, and the higher these costs are relative to the overtime wage rate, the more willing employers are to delay hiring, contributing to low labour utilisation, the SARB said.

“Addressing the low labour utilisation in South Africa requires policy efforts to be directed at improving the transition from school to jobs, enhancing product market reforms for increased competition, creating public (and private) institutions to enhance job matching and increasing labour market flexibility.”

The monetary institute forecasts total non-agricultural employment – public and private sector – to increase by 1.9% year-on-year in the third quarter of 2021, after declining by 5.4% in the first.

Over the medium term, employment is expected to decline by 1.4% in 2021, before ticking up again by 0.8% and 1.4% in 2022 and 2023 respectively, it said.

SA wage data

Statistics South Africa published wage data at the end of last month, September, showing that basic salary/wages paid to employees in SA increased by R7.3 billion or (1.1%) from R646.7 billion in March 2021 to R653.9 billion in June 2021. Year-on-year, basic salary/wages increased by R55.2 billion or (9.2%) between June 2020 and June 2021.

Year-on-year, bonus and overtime payments increased by R15.1 billion or (32.9%) between June 2020 and June 2021.

Average monthly earnings increased by 1.7% quarter-on-quarter, from R23,127 in February 2021 to R23,526 in May 2021. Year-on-year, average monthly earnings increased by 9.7%.

Total employment meanwhile, decreased by 86,000 or (-0,9%) quarter-on-quarter, from 9.652 million in March 2021, to 9.566 million in June 2021.

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