Unemployment is perhaps the single biggest challenge facing South Africa: without jobs, people slip into a vicious cycle of poverty and dependency that is very hard to break. So businesses are under constant political and social pressure to “create jobs”.
But there’s no magic wand that will create these jobs out of nowhere. Every job has a price, which must be paid by whoever creates the job. Most of this price is the salary or wage that must be paid regularly, but there are other costs as well.
Some of these are direct costs like taxes, unemployment fund contributions, workers’ compensation, skills levies, leave pay, pension fund and medical aid contributions. There are indirect costs too.
First, the organisation must pay bookkeepers, accountants, HR staff and other people who administer the direct costs. Second, it must pay those who manage or supervise the work of each employee. Finally, employees must receive regular training to grow in their jobs and keep up with changing technology and practice.
So far, so obvious – although judging by some of what South Africa's political leaders say in public, it’s not as obvious as it should be. The key point is that it costs money to create a job. The only way to create a sustainable job is to make sure that each employee brings in enough new revenue to at least pay the direct and indirect costs of their employment – or frees up the time of others so they can do it.
There’s another complication. Inflation means the cost of living rises each year, so wages and salaries must increase by the same amount if employees are not to get steadily poorer. If wages and salaries increase by more than inflation, then employees are getting richer.
But here’s the catch: what if revenues aren’t increasing as fast as wages and salaries? In that case, employees won’t enjoy feeling rich for very long – sooner or later, the organisation won’t be able to afford them anymore and some jobs will be lost.
This is exactly the problem facing South Africa’s workers right now. On the one hand, they have above-inflation wage increases. Last October the government reached a wage settlement with public sector unions that granted a salary increase of 7,5% – more than double the inflation rate of 3,4% in the previous 12 months.
And where the public service goes, others will expect to follow – so there is pressure on all employers to grant wage increases at least above 5%.
At exactly the same time, a lot of small and medium businesses are being told by large customers that they won’t accept price increases above inflation.
This isn’t an issue for businesses whose end customers are individual consumers – consumers may complain, and a handful of them may switch, but individuals can’t affect the health of the business one way or another.
The story is entirely different for the vast number of small and medium businesses whose customers are mainly other businesses. If a business is one of 20 or 50 or 500 small suppliers to a large national enterprise – or government department, even – their ability to negotiate price increases is very, very limited.
So these small suppliers agree to limit their price increases, or be undercut by rivals and lose the customer entirely. Then they have to find a place to cut their costs so they can stay afloat – and what’s the largest cost to most of these businesses? Employees. So at best, there will be no new jobs created; and when people resign or retire, they won’t be replaced. And at worst? Hello, retrenchments.
The desire for above-inflation wage increases is understandable – but the real root of inequality and poverty in South Africa is not wage disparities, but unemployment. Next time the government or unions call on that vague entity “business” to do more to create jobs, they should first consider how they themselves are standing in the way.