Wage ‘price spiral’ warning for South Africa
The South African Reserve Bank (SARB) says that although the country has a high unemployment rate, the labour market for high-skilled jobs has always been tight.
“In South Africa, the unemployment rate remains exceptionally high, at 32.7% in the fourth quarter of 2022. At face value, this may suggest substantial slack in the labour market. However, the duality of South Africa’s labour market is such that the market for high-skilled jobs has always been tight,” SARB said.
“This, combined with the strong bargaining power of labour unions, means that wage increases have historically tended to be high. ”
In its latest Monetary Policy Review, the central bank reported on the tight labour market and inflation in a global context – focusing specifically on the United States but also domestically.
The central bank said that alongside the aggressive hiking of interest rates over the past two years to stem inflation, output growth has slowed in major economies. However, labour markets have remained unusually tight.
This, in turn – especially during periods of high inflation – raises the odds of inflation offsetting wage increases, potentially leading to a wage-price spiral, the bank said.
This has already materialised in wage negotiations in South Africa, where unions have been demanding inflation-busting increases. If these types of increases (10%-plus) were granted, inflation would skyrocket as more money enters the system.
South Africa’s inflation rates have already surpassed the target range of 3%-6% set by the SARB, primarily due to stubbornly high food inflation and elevated fuel prices.
In February 2023, headline inflation increased slightly from 6.9% in January to 7%, and in March, contrary to market predictions, it rose further to 7.1%.
Employers and employees have had to deal with a very challenging operating environment, exacerbated by near-permanent load shedding. Because of this, businesses are less likely to accommodate larger real wage increases in line with or surpass the inflation rate.
SARB noted that given the sharp inflation levels, the elevated expectations and an adaptive wage setting, material risks attach to the real wage growth outlook, with implications for monetary policy.
According to the central bank, nominal wages in South Africa saw a recovery post-pandemic, but real wages have, on average, declined as seen across the globe.
In February 2023, Statistics South Africa’s latest Quarterly Labour Force Survey (QLFS) for the final quarter of 2022 showed a slight drop in the country’s unemployment rate.
In the fourth quarter of 2022, the official unemployment rate inched down by 0.2 percentage points to 32.7% compared to the previous quarter.
Meanwhile, the expanded definition of the unemployment rate, which includes discouraged job seekers, also decreased by 0.5 percentage points to 42.6% in the same period.
Although unemployment is exceptionally high, open positions requiring highly skilled South Africans are becoming harder to fill.
On 16 March, the StatsSA recent Labour Market Dynamics report found that even those that have undergone the schooling system and obtained a matric can not find a job.
From 2016 to 2021, there was a rise in unemployment rates across all educational levels, with the largest increase observed among those with a matric education level, which surged by 8.9 percentage points.
As a result, it is required that a jobseeker in South Africa needs more than a matric to find a job – especially one that requires skills.
Read: Reserve Bank making changes to how it models interest rates in South Africa
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