The cost of strikes

In a previous post I hinted at the destructive capabilities of union power. I also noted that it is odd that SA's yield curve remained unstable despite all the recent media attention regarding industrial strike action. Well, yield curves have finally started to move and the exchange rate plummeted. Markets are finally valuing the impact of bad governance.

Unions are important for societies in as much as their power is constrained within well defined limits. However, once unions grow in numbers their influence on our daily lives increase. Mancur Olsen theorised that unions form over time and form lobby groups to influence policies. These policies do not always have the best interest of the economy at heart and are characterised by him as protectionist and anti-technology which hurt economic growth. This makes perfect sense from the union's perspective as technology is often associated with improvements in the means of production and this is usually done by machines which replace labour. The union is interested in growing in numbers and thus reflect policies that would suit individuals rather than the economy as a whole. Most individuals want to be paid more. It thus makes sense for an individual to join a group that could exert pressure on companies and governments to pay higher wages. The irony is that on a macroeconomic scale higher wages translate into fewer jobs. This is a paradox where the gains of the individual are the loss to society (similar to the paradox of thrift). Furthermore, nation-wide strikes have enormous costs to society. It tears down the social fibre of a country, makes investors risk averse, leads to decreases in economic activity which could result in increases in structural unemployment, erodes potential tax collections which are vital for servicing the budget deficit and sovereign debt, it leads to capital outflows which balances the current account deficit and ultimately reduces economic growth.

Wage demands are often justified when employers exploit employees. However, wage demands in South Africa are simply absurd. The department of labour annually compiles reports on the industrial action plans (strikes). In these reports the number of work days lost and number of employees involved in strikes are summarised by sector. The sectors responsible for most workdays lost are the manufacturing, mining and transport sectors. These are also the sectors with the most frequent number of strikes. An interesting study shows that strikes in South Africa have a very long history and is usually associated with violence. Perhaps here history is a good predictor of the future...

There are a number of ways to calculate the effects of strikes on the economy. One way is to analyse revenue lost per sector due to the strikes and simply subtract that from gross domestic product. Of course one has to take account of the indirect effects such as a loss in tax revenue and the loss in potential investments. These losses are simply incredible. Another quick and dirty calculation would be to use use a production function (in this case a Cobb-Douglas (CB) production function) and subtract the number of people involved in strikes from the employment variable. Simply put, the CB function has capital and labour as inputs for production. Employment numbers are obtained from both the South African Reserve Bank and Statistics SA's websites. This employment number needs to be reduced by an effective employment number that subtracts the number of people absent from work for a certain period. This new measure of employment gives us an alternative input measure. Use the share of labour then to calculate the loss in GDP. Of course this measure is fraught with problems, but it serves as a rough guide on the impact of strikes historically. Unfortunately the Department of Labour does not have recent data on strikes. This restricts the analysis to previous years.

The figure below summarises this "quick" calculation. The blue line is a counterfactual of what GDP would have been had there been no strikes. The black line is the actual GDP. The grey bars (values reflected on the right axis) show the loss in GDP. It is notable that strikes at times costs the economy as much as 2 percentage points of GDP (roughly R60 bn). My guess is that this is still a conservative measure. The results would more striking once the 2011 and 2012 data becomes available!

More worrying is the slow response of government intervention. Already the transport sector is holding the government ransom. Local government employees also warned that they are set to join in their own strike.Something is seriously wrong!

Unions should be able to make demands. But these demands need to be accompanied by some sort of agreement. It is unreasonable to suggest real wage increases in excess of 2% annually. A solution to the problem would be to have wage increases follow some measure that takes the productivity of a sector into account. Such a measure would serve as an incentive for employees to work harder since their wages would be linked to the performance of the sector. Having wages linked to inflation creates a massive problem. If a person's wage increases he will most likely spend it which will increase inflation. Once inflation increases his wages will need to keep track. This is a vicious cycle. Your wages should be a measure of your performance/productivity and not the amount of goods you consume! Eating too much makes one lazy! These targets and measures should be made transparent so that both employees and employers are held accountable.

South Africa needs to intervene quickly. The outlook is bleak. Yet, it is not impossible to turn things around.