Economics is a science that has been proven to be difficult to define in a single statement. A few of the simplest definitions which have been put forward are, the study of scarcity, the study of how people use resources and the study of decision making. Combining these views, economics can be thought of as the study of attempting to satisfy unlimited wants with limited resources.
Human resources are one of the main resources in any business and the interaction with economics is often very interesting.
The interactions between employers, employees and the economy involve economic choices which are driven by the conditions that they face. Important metrics which will influence how employers and employees behave include:
- Consumer Prices
- Gross Domestic Product
- Tax Rates
- Employment Statistics
- Currency Exchange Rates
The reactions of employers and employees to these metrics are often in conflict with one another – union negotiations are a common example of this playing out. For this reason, a basic knowledge of economics is a valuable asset when dealing with these reactions as it will assist a party to understand the position of the other party when dealing with them.
Going through the metrics listed above, one can paint a picture of the economy and anticipate how employers and employees could be expected to react given current economic conditions.
Headline Inflation averaged 6.3% in 2016, which is above the upper limit of the South African Reserve Bank’s inflation target. This has put pressure on the purchasing power (the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy.) of both employers and employees. The lowest expenditure groups have been hit harder than the highest expenditure groups.
The lowest expenditure decile faced an inflation rate of 7.9% as compared to the highest income group which faced 6.1%. A contributing reason for this is that the lowest expenditure group spends a significantly large portion of their income on food which had an average inflation rate of 10.8%. Fruits, Vegetables and breads and cereals faced particularly high inflation rates as a result of the drought, increasing by 18.1%, 16.5% and 14.6% respectively. According to the 21st Century Increase Report (www.21century.co.za), 80% of organisations make use of headline consumer price inflation when making decisions regarding the value of annual salary increases.
Given how heavily the drought affected the price of food; one can expect that employees would want to recoup some of this increase in the form of above headline inflation salary increase demands. South Africa’s gross domestic product figures tell a tale of sluggish growth – which is expected to remain subdued into 2018. In 2016, the economy grew by a meagre 0.3% and is predicted by the South African Reserve Bank to grow by 1.1% in 2017 and 1.6% in 2018. High levels of inflation coupled together with slow economic growth are significant challenges for businesses to overcome if they are too survive. During times like these, businesses must consider all spending decisions particularly carefully before making them.
Another metric which is impacted during these times is the unemployment rate. In the third quarter of 2016, the unemployment rate peaked at 27.1% before easing slightly to 26.5% in the fourth quarter of 2016.
During periods when businesses are looking to curtail costs, they are hesitant to hire new staff and may even shed jobs in an effort to cut costs. When the unemployment rate is high, the percentage of employers that voluntarily resign their job declines as employees view the labour market with less optimism. According to the 21st Century Increase Report, staff turnover fell to 8% in 2016/2017.
Tax rates also impact on employers and employees as these impact on the financial positions of the parties. Although, companies’ tax rates were left unchanged in the 2017 budget speech, income tax only received one percent relief on the tax brackets.
The effect of this is that if an employee received a 6% increase they will pay more tax than in the previous year as the tax threshold increased by less than their increase. Although this effect would be small, it has the effect of eroding an employee’s disposable income in real terms.
The currency exchange rate also impacts on employers and employees in various ways depending on their exposure to foreign markets. In times when the Rand is weak, South African goods are cheaper when purchased in foreign currency and as a result our exports are more attractive. Conversely, any foreign goods imported are more expensive which can result in ‘importing inflation’. In times when the Rand is strong, the reverse is true.
The current economic conditions in South Africa suggest that employees will be seeking increases which are in excess of headline consumer price inflation as a result the high levels of food inflation and how they impact on the lower expenditure groups.
Employees are more likely to stay in their current jobs as their perception of the economy and labour markets have become more negative. Conversely, employers are seeking to cut costs and consolidate their financial position in the face of rising costs and the dim economic outlook (slow growth and inflation above the Reserve Bank’s upper limit). As a result, employers will be less likely to create new jobs and will want to limit the size of the annual salary increases they offer. As a result, we can expect a series of tough negotiation process in 2017 as employers seek to limit costs while employees seek to keep pace with the cost of living.
About 21st Century
21st Century is one of the largest full-spectrum specialist Remuneration and Reward consultancies in Africa, with national and international capability. We have more than 60 skilled employees, and service over 1700 clients, including Government, Parastatals and two thirds of the companies on the JSE. We place a large emphasis on sustainable remuneration, transformation and social upliftment, and are focused on your organisation’s strategy at all times… assisting you to achieve your business objectives, drive your company’s performance, engage and retain your staff and comply with legislation.