Wage Regulation in Industry

 

One of the consistent demands by workers is for wages that are ‘decent’, ‘living’ or similar terms.  Employers are consistently criticised for paying wages that are too low.  The use of Labour Brokers is viewed as evil and anti-democratic, primarily because a part of the cost to the ultimate employer accrues to the broker, rather than to the worker, as it would in a direct employment relationship.

One of the very important factors that appears to be forgotten in this discussion is that workers have a right and an ability to select their employer, and one might reasonably believe that those workers do so rationally.  An employee has the right to terminate the employment relationship in a way that is not open to the employer.  The employee can decide to move to another employer without giving any reason, and with a short notice period.  The employee is not obliged to pay compensation to the employer for such termination, even though the employer might have invested a considerable sum in the training and development of the employee.  It is not unusual for an employer to carry the cost of the employee for some time, ranging from a couple of months to a couple of years, before the employee reaches a level of capability to actually earn the wage he or she is paid.  The employer, on the other hand, cannot simply terminate the employment relationship without cause.  It is usually obliged to pay some compensation to the employee for the termination, usually based on the length of the employment.

The corollary of the freedom of movement of the employee is that he or she has the ability to leave an employer to seek employment with another employer for any reason, including the level of wages paid, the benefits, the working conditions or any other imaginable cause.  In these conditions, the probability exists that the wage paid will amount to what the workers’ contributions are really worth.  Stability, in an economic sense, will be achieved.  Employment will, once again, represent a situation in which Party A trades what he or she is able to offer to Party B.

Of course, the ideal market will quickly show up the advantages or disadvantages of each participant.  Labour will flow to the employer able to extract the greatest utility from it.  Workers with greater capabilities will be paid more than those with lesser capabilities.  The market will force each participant to maximise its’ or his or her, benefits to the other.  Higher qualifications, including education, training, skill, willingness to put in an honest day’s work, will be rewarded, and lack of those qualifications will be punished by lower rewards.  That is how the world works, on a scale of countries, and on a scale of person to person, even at the housewife-maid level.  Any action taken in an attempt to enforce different rules will ultimately result in a flow of economic activity away from that market inefficiency to a more economically beneficial place.  The introduction of a minimum wage for household workers resulted in a massive loss of jobs in that sector.  The imposition of high wages for miners has resulted in the number of mining jobs halving within a decade.  The dominance of Union-inspired wage and working conditions has resulted in South Africa becoming one of the slowest-growing economies on the continent.

The origins of the Trade Unions lie in the old conditions, in which the employee was comparatively immobile and the employer was, in all likelihood, one of a very few employment possibilities in the area.  The employee was, in all probability, bound to a particular employer.  It was necessary to regulate the conduct of the employer, to ensure that the employees had a reasonable deal. 

Those conditions no longer apply.  Employees have a wide variety of employment possibilities and opportunities.  If there are not enough such opportunities in the area in which the employee lives, he or she is free to move to another area, as is frequently done.  There has been a massive migration between employment areas.  Half the population of the Northern Cape has migrated away from that Province in search of employment.  A large proportion of the Eastern Cape has moved to Gauteng or the Western Cape in search of employment.  The problems at Marikana and numerous other mines have illustrated how many workers come from other areas, even other countries, to obtain employment at those mines.  This is not the fault of the mining companies.  They fulfil their economic function in making employment possibilities available.  If a worker migrates from another area to take up those opportunities, it is at the choice of the worker.  It is a clear indication that the worker is not able to find a comparable employment opportunity in his or her own area.  The mine owner cannot be blamed for that condition.

The emergence of Trades Unions was justified in the circumstances of the time and place.  Over time, they became a business, generating a good income for the management of the Unions, and they evolved ever more clearly to becoming organisations for the protection of the members, not for the advancement of society.  By virtue of their size, they became a more dominant force that the businesses that gave their foundation cause – there are dozens more employees of businesses than there are business owners – and they have used that dominance to exert influence on Governments and on society.  In a way, the myths that they perpetuate have become something of a religion.  Very few people ever question them or their real purposes, and it is easy to justify their existence to the members – they are preaching to the converted.

However, in this day of rampant DEMOCRACY, it might be wise to question some of the fundamentals of the current order. 

Unions do not create jobs.  In many ways, they destroy them, and by so doing, they act against the fundamental interests of society.  Businesses create jobs. 

The unions have achieved a situation of crass inequality vis a vis the employers.  When did you last hear of business owners marching to demand lower wages and better work contributions by employees?  When do businesses simply walk out on their employees, except in conditions in which the businesses are no longer viable (often because the cost of labour and their associated expenses have become prohibitively high)?  When a business fails, who enjoys preference in payment from the assets?  The business owners are the last to stand in the queue for distribution of assets, while the employees enjoy preference second only to the South Africa Revenue Services, a parasite that made no contribution to the existence of the business in return for the blood it sucked out of that business.  And then, to cap it all, Patrick Craven, the spokesman for Cosatu, claims that the employees carry a much greater risk than the business owners!  If he was saying what he and his organisation believe, it is a frightening thought that the organisation that claims to provide a reasonable interface between employers and employees can have so little understanding of the reality of the economic situation. 

It is worth stating the facts again.  Businesses create jobs.  Employees do not.  Without businesses, there would be no employees, no tax, no Trades Unions.

Is it not time to reconsider the balance of the relationships between labour and employers?  Is it not essential to give businesses an equal say, and equal force, in the relations between them and employees?  If the mutual conditions were to become more fair, there is a good possibility that the potential for conflict between the two groups will be reduced, and that will be good for all, except, possibly, the Trades Unions, which would find that their role will be reduced to what they claim it to be – reducing the imbalance between employers and employees.  It would also act to ensure that businesses remain in South Africa, or come here, to create the jobs that are needed, rather than seeking an environment abroad, where they will be rewarded for the risk, the capital investment and the contributions of skills, innovation and effort that they make.

It is essential for the South African economy to become more free, more fair, and more democratic if the South African citizens are to enjoy the sort of growth that is an absolute essential.

The Salaries Freeze

A call on the executives of the country by the President of South Africa, to freeze their salaries in the interests of ‘reducing the gap between the rich and the poor’, misses the point entirely.  The problem in South Africa is not that the top executives of the country are earning too much – it is that the workers and the unemployed are earning too little.  Their earnings are probably above the economic level at which they should be paid.

Before we go into this, let us redefine some terms.

‘Earning’ means just that.  It does not relate to the amount paid (which can be referred to as the ‘wage’ or ‘salary’), but much more to the input that the worker makes in order to justify the amount paid.  That, in the long term, can only be determined by the market.  If a worker increases the value of his or her input to the enterprise, the amount paid for that input will increase, assuming that the demand for that input is not limited in some way.  Because of this reason, the amount paid to top executives is high in comparison with that paid to other workers – ‘other’, because contrary to political and labour union rhetoric, top executives also work.  They are not parasites on the system, as the Union bosses seem to believe (consciously ignoring their own participation in this capacity!).  If a particular contributor of labour is part of a scarce group, the payment for that input will rise, and if the value of the input is high, the payment will rise.  On the other side of the coin, if the supply of a particular category of labour is abundant, the payment for that input will tend to be lower, and if the value of that input is low, the reward will be low.  That applies within an economy, and between economies. 

‘Competition’ is another term that needs to be understood.  It implies that there is a demand for a good or service that is supplied to the market and purchased by the market.  In a free market, competition ensures that the good or service flows from the most efficient producer or provider (read ‘lowest price or highest utility’) to the user that is able to use it to the greatest benefit.  Once the demand is satisfied, the price settles at that level that will meet the needs of all who can use it at that price.  If the price increases, or the utility decreases per unit of price, the off-take will reduce until a new point of stability is achieved.  If the price is increased artificially (by factors that are not directly involved in the supply-demand interaction, such as Government, Trade Union or similar) this adjustment will take place.  A perfect example was the imposition of Rent Control on accommodation, with the objective of ensuring that ‘affordable’ housing was made available to certain classes of people.  The move had the effect of preventing the rental price of the affected properties from increasing.  That was in the short term.  In the longer term, however, the price able to be demanded by the providers of capital was insufficient to attract new capital to the construction of low-cost housing units.  The move was self-defeating.  The supply of rental housing plummeted and the rental soared.  Another example is the increase in the cost of labour to the mines.  As the cost went up, the numbers employed (‘able to sell their labour units to the mines’) declined.  An industry that previously employed 1 200 000 workers only a decade ago now employs only about 500 000!  The drive to higher wages (cost of labour) without a higher input value (productivity) at least sufficient to compensate for the higher cost will inevitably result in a lower demand for that labour.  That is exactly what has happened in the mining industry.

The same applies to the cost of doing business in a country.  If the total cost increases without a comparable addition of utility, that country will fail to attract the capital necessary for expansion of the activity base that provides the jobs.  Jobs provide wages, wages provide economic activity, and economic activity provides tax revenue on the one hand, and reduction of Government support for unemployed people on the other.  The textile industry in South Africa is a good example of economics in action.  No amount of posturing or threatening by the Trade Unions and the Government was able to do anything to save the jobs.  Only lower wages could do that.

In a country in which 6 000 000 taxpayers support a bloated and inefficient Government, a huge corruption bill, and 16 000 000 people on social support, one would be forgiven for assuming that the leaders of the nation would be doing everything in their power to ensure that every job is retained, that every cent of investment capital is attracted.  Unfortunately, one would be incorrect in making that assumption.

In an industry in which there has been such a dramatic loss of jobs due entirely to the effects of the demand-supply linkage as has taken place in the mining industry, one could be forgiven for assuming that the Trade Unions would ensure that their members understood the linkage, that they did whatever was necessary to upgrade the skills and productivity of their members (increase the utility of their contribution to at least match the increase in the cost of that contribution), thereby protecting the interests of the workers, which, in the long term, amounts to no more than them receiving a level of wage that correctly compensates them for the value of their input.  Again, sadly, that assumption would be far from accurate.

It is a fact that market forces always work to ensure that the supply-demand linkage in the long term.  Those market forces can be ignored, or acted against in the short term, but they will always win.  Even in the socialist ‘workers’ Paradises’ that appear to be the basis of so much of the thinking of our Government and the Trades Unions, the supply-demand linkage operated, and the result of the desire of those in power in those economies to ignore the linkage is clear to see.  Most of those countries no longer exist, having collapsed ignominiously and catastrophically, leaving the rest of the world to rescue the remnants, and those few that remain can certainly not claim to be models of how any civilized nation would want to exist.  The only one that might be argued to have survived – China – has done so only in a very mutated form, and with the virtual slave labour of its multitudes of citizens who will certainly not continue to tolerate the conditions under which they exist for many decades more.

The South African Government and their close associates, COSATU and the South African Communist Party, obviously believe that they are exempt from the laws of supply and demand, and they appear to be intent on proving that, even though it must be clear to even the most obtuse of them that they will bring down the country in which they operate.  They have failed abjectly in doing what they claim to desire – creating more jobs – simply because it is not possible to heap costs and taxes onto the employers without ensuring that they value of what those employers receive in return is increased commensurately.  The signs have been clear since 1997, when those in power decided that ‘South Africa belongs to Africa’, when the lure of the vast amounts of wealth they were shuffling proved to be too attractive to ignore, so turning the country into a kleptocracy to rival any one of the newly-independent African States, when the harebrained theories of Marx and Stalin were turned loose on a nation once powerful in economic terms.  Their efforts have now succeeded in bringing South Africa to its knees.  The increasing wages of the workers are beneficial to them only for the short time before they are eaten up by rampant inflation they will cause. 

The financial power of the nation has been stolen and squandered to the extent that the Ratings Agencies are downgrading the country.  The previously dominant position of the country in Africa is not only sliding, it is collapsing at an ever-increasing pace.  The standard of education of its citizens is declining, both absolutely and in relation to its African peers, while the Minister of Basic Education declares that she ‘did nothing wrong!’  The Courts are increasingly being called upon to correct the actions of the Government, or to force the Government to do what it is obliged in terms of the Constitution to do.  (Potential investors from Germany, Britain and the USA constantly express amazement that there is such a high incidence of Court intervention in forcing the Government to obey the Constitution – they see it as a clear sign of the Wild West thinking that characterises the activities of the Government.) 

And through it all, the Nero-surrogate, Jacob Zuma smirks as he fiddles while the country burns, making one meaningless pronouncement after another.  He calls on top executives in the country to make salary and bonus sacrifices, while he arranges for another R258-million rip off of State funds to pass into his hands.  He hints that, if those top executives do not play according to his wishes, at best the country will fall apart and at worst his Government will pass another law compelling it.  This, of course, continues to ignore the economic reality that any such process will result in an acceleration of the brain drain at a time when South Africa can least afford it.  If a top manager can earn R20 million per year in South Africa, there is at least a good chance that he can earn R25 million per year elsewhere in the world, and particularly where the Government understands the economic rules that say he is earning that, not simply being paid that.  There is a difference!

If the ANC continues to follow this line of economic insanity, by re-electing Jacob Zuma as President, and by choosing (in a wholly undemocratic way) the same people to set the policies for the country in the same way as they have so clearly demonstrated in the past eighteen years, to be incapable of doing anything other than continuing along the same route to total collapse, any sensible investor, any top executive, any worker who has a skill that can be sold in a country that values their contribution, will be well advised to seek their fortune elsewhere before the stampede that is surely coming. 

Let us hope that this will not be the way to go.

Wage Strikes and Economic Sense

South Africa is presently deeply immersed in wage demands, supported by strikes.  The demands are generally for increases well above the rate of inflation, and are based on the ‘needs of the workers’.  In the short term, that is possibly justifiable in many ways.  However, in the longer term, the real world will come back to bite the workers.

Wages are one item of input cost, along with raw materials, fuel, electricity and numerous other items.  All of these items are subject to the constraints of the market, with the possible exception of electricity, where the cost is administered and simply imposed, regardless of the market.  However, even that cost factor is independent of the larger market only in the short to medium term.  The market will adjust to increases in a factor cost by replacing all or part of that factor with another factor which has a lower cost in total, either directly or by reducing the total cost of the output.  Thus, when mine labour costs increase, mine operators will look for ways to reduce that cost, probably by replacement of the labour input by machines or by means of seeking productivity increases to offset the increase in cost.  Either way, an increase in the cost of labour will ultimately lead to a reduction of the labour input, measured in terms of man-hours, to at least compensate for the higher cost per man-hour.  The problem with an extremely high labour cost increase demand is that it sets the investors’ thinking to ways of replacing the labour to a greater extent than is required to simply offset the increased cost.  An example of this was publicised this week, when a gold mine announced that the full mechanisation of its mine will result in the production of 700 000 ounces of gold using a labour force of only 5 000, against a traditional mine producing 1 000 000 ounces of gold using 32 000 workers.  Certainly, there are particular conditions enabling that sort of mining, but the picture remains very clear – a high and increasing cost of labour will act to reduce the demand for labour, often dramatically.  This is not an isolated example.  It is a picture of industry of all kinds the world over.  Extending that picture to South Africa in general, it is not unreasonable to project that the increasing cost of labour will result in at least half the number of jobs in the mining industry being lost over the next ten years.  And this will happen not only in mining.

To come back to the cost of electricity, it is worth considering that every input cost, including even those often not recognised as input, has an effect on the viability of all industries.  Eskom does not operate in a closed system.  One of the indicators of industrial activity is the quantity and cost of electricity.  Electricity is one of the drivers of industrial development.  When the cost of one of the major input elements into production of anything increases at a rate exceeding that of its competitors (in the broadest terms), that cost increase works to drive the industry, and the investor, to seek a replacement input.  Where that is not possible, as is usually the case with electricity, the investors in industry look elsewhere, to markets where the total package of costs is more favourable to the investment.  If you don’t believe that, look at the textile industry.  The countries that have captured the textile industry jobs are those that offer the most favourable package of costs.  It is worth noting that the same thinking applies to all elements of cost, including roads and rail transport.  The imposition of high and increasing road tolls has a marked effect on the cost of getting goods to market, whether it is by adding to the cost of labour in getting to work, by increasing the cost of delivering raw materials to the factory, or by delivering the finished product to the market, whether that is local or abroad.  Similarly, the high rate of increase in airport taxes as a result of the greed of the Airports Company has been one of the factors leading to a downturn in the tourism industry in South Africa.

Included in the broader cost of production of any item, whether it is an ounce of gold or an hour of consultancy, is every element that goes to reduce the net profit to the investor.  Where it is required that a proportion of the shareholding in a company be handed to a BEE partner on any terms other than an equal contribution of financing (including equity and creditworthiness for loan capital), that represents a reduction of the net income to the investor and so must be compensated for.  An investor requires a competitive return on his or her capital, which includes cash, creditworthiness, borrowing ability, risk, know-how and proprietary knowledge.  If that return is not available, all of those elements of capital will migrate to where it is available.  This is not a denial of human rights.  It is simple common sense.  This is why so many companies that might have invested in South Africa have decided to look elsewhere.  The total package of costs and risks in South Africa is becoming weighted against the owner of such capital, and, increasingly, he is looking for markets with a structure of costs matched to the risks and benefits available.

The Minister of Trade and Industry has gone on record as saying that South Africa is not losing investment from abroad, citing a few investments that are planned.  It is not possible for anyone to say how much investment is being lost, and any claim to be able to do so can only be seen as pandering to the public.  It has been clear to many companies involved in assisting foreigners to establish businesses in South Africa in the past twenty years that South Africa has slid dramatically down the ranks of attractive investment destinations.  Potential investors cite high costs of labour and electricity as being deterrents to investment.  They add the high risks of losing all or part of their businesses to Government regulations, such as those pertaining to BEE, and they fear that the country has started to move down the slippery slope to Zimbabweanisation.  I can say from personal experience that South Africa has lost at least a thousand jobs to these factors in the past two years.  The total number lost is probably in the hundreds of thousands of sustainable jobs.  And the worst is that the Government appears to have believed its own advertising.  There is no sign that the country is doing anything to overcome these problems, to break down these hurdles, and, as the talk in the circles of the Tri-Partite Alliance lurches ever more towards Marxist-Leninist socialism and Communism, so the country becomes less attractive to investors.  There is good reason why so many strong companies that, at one time, were largely South African in their orientation, have become less so.  Many major mining houses have effectively left the country, putting their investment funds, their expertise and their energy into more attractive markets.  They have been joined by banks, insurance companies, retailers, manufacturers and many more.  They have been joined in this flight by those carrying the most precious of economic assets, experience, technical knowledge and management ability.  Sooner or later, it will become clear to even the economically handicapped that the only reason for investment in the country will be to exploit the mineral deposits.  Unfortunately, even these deposits are declining in world importance, and many other countries with those resources are moving up to take advantage of the world need for those minerals in order to jump-start their economies.  No doubt, they will become subject to the same pressures on wages and social politics in due course, but, in the medium term, their gain will be our loss, and we, as a country, appear to be unable to understand that, as a Third World country in economic terms, we cannot afford to behave as a First World country on the social and political front.

SAA and Common Sense

The Government has undertaken to provide a guarantee on behalf of South African Airways of five billion Rand in order to allow it to recapitalise.  The Government gave an answer to the obvious question of ‘Why should the Taxpayer continue to fill the bottomless pit caused by incompetent management? 

“This is only a guarantee, it will not come from the taxpayer!”

That is wonderful news!  That reason is the same as that given for the Government’s decision to grant a loan of R2 400 000 to the corrupt and undemocratic Government of Swaziland, shortly before the Swazi King demanded that the Government pay him a ‘loan-raising commission’ of R600 000.  This money does not come from the taxpayer, our highly-competent Minister of Finance declared!  It comes from money that South Africa raises on the capital market!  And, even better, it will be repaid!

This reasoning solves all the problems of the miners, who borrow money from micro-lenders at 30% per month.  It solves all the problems of the countless South African citizens who need a few hundred thousand to establish a factory and lift themselves out of the poverty trap.  All the Government has to do is issue a guarantee on behalf of each of those people, to allow them to borrow on the local or international financial market at five per cent!  Not one cent will be provided by the Taxpayer!  And the money will be repaid!  It is a brilliant plan – about as brilliant as the justification handed to the millions of unthinking citizens who will have to cough up the ultimate cost.  And it will be possible to arrange a loan-raising fee for each of these borrowers, payable to the person who makes the arrangement – almost certainly one of the favoured few BEE zillionaires, as well as to negotiate a purchase commission on the goods to be bought with the money – again one of the favoured few.

All that is now necessary to do is figure how to explain to the world financiers, who rely on the continued solvency of the South African State, how it is that a country can be managed in as amateurish way as it is!  Unfortunately, the Ratings Agencies have already noticed the slide.