Could salary cuts be the better devil instead of retrenchments?

It took SA five years to recover from the 2008 recession and the country can’t afford another million job losses.
Catch-22 … retrenchments might reduce a company's salary bill, but it also means consumers' buying power is taken away. Image: Shutterstock

Every sector locally and globally faces job losses as a result of the Covid-19 pandemic.

South Africa’s unemployment rate is likely to surge. The country is in recession and its unemployment rate has continued to increase in recent years, coming in at 29.1% in the fourth quarter of 2019.

Momentum researcher and economist Johan van Tonder says that since the great recession in 2008 South Africa has lost about one million jobs. He was speaking on Tuesday during a webinar on the impact of salary cuts and retrenchments.

Van Tonder says the country has basically been sending jobs overseas since 2009, because it is producing less in the way of manufactured goods, and importing more.

“We have been in effect exporting jobs [to] other countries,” he says, adding that the jobs lost in the private sector have not recovered to the same levels as in the public sector.

Structural shift

“If we exclude government and we look at the great recession, we already know that we have lost a million jobs, but the gross operating surplus of the country increased … operating costs were cut by companies, but the compensation of employees increased,” Van Tonder says.

In short, the jobs that were retained or created subsequent to the great recession are paying more.

“This led me to thoughts of whether we can afford another bulk of job loss as indicated by the government,” Van Tonder says.

During the great recession many more jobs were created in the public sector compared with the private sector, as indicated in the graph below.

Source: Momentum

National Treasury estimates job losses of between 690 000 and 1.79 million due to the impact of Covid-19 on the South African economy.

Van Tonder says the country has already seen the hardships caused by the initial hard lockdown and the subsequent Level 4 lockdown, including salary cuts and people queuing for basic groceries.

He points out that if companies decide to cut jobs it means they are “shrinking” their own market.

He says after the great recession the country could afford to stimulate the economy through fiscal spending, but it can no longer afford to do so because GDP is no longer growing by 5% per annum and it can hardly service its own debt as it did 12 years ago.

SA now has twice as much debt as it had then, with government’s debt repayments forming one of the largest items in the national budget.

Von Tonder says the South African Reserve Bank can’t afford to cut interest rates by as  much as it used to either.

“So we can’t afford another million bulk job losses.”

He suggests that the country focus on the long-term effects of Covid-19, with government, the banking sector, small and medium enterprises (SMEs) and unions working hand in hand to prevent large scale job losses.

“In this respect is it possible to focus on the long-term effects rather than the short-term vested interests?” Van Tonder asks.

He believes salary cuts might be the best possible solution instead of retrenchments.

“Is it also possible for us to establish new companies and reduce imports because during the great recession we started importing rather than producing.”

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Salary cuts for civil servants and SOE employees too? Never in a million years will we see that happen

The SOEs need to do both retrenchments and salary cuts.

“it is producing less in the way of manufactured goods, and importing more”

I just did a Google search and found that between May 2019 and April 2020 South Africa has had 9 months of trade surplus and 3 months of trade deficit. Can we fact check before publish everything that experts say?

The category “Manufactured Goods” that the JvT references is only one component of the trade surplus. I think the point is valid in the context of a reduction in the size of the manufacturing sector and the growth in import replacement.

On another point, the idea of salary cuts would work if the economy was efficient. Unfortunately SA’s isn’t so sadly this will not happen soon. We need a Thatcherite revolution to reduce the involvement of government in the economy & a curtailment of the influence of unions.

The unions would rather have the country go to total waste than except a pay cut

According to the economist Mike Schussler SA government employees are over paid by a third, in terms of world standards.

Cutting government salaries by a third will free up, up to R200bn, that can be used for poverty relief and job creation.

In effect, a small minority of government employees are eating the lunch of the poor majority.

The issue not addressed here is why the economy shed jobs in the past. I think the answer is simple, the corrupt, hypocritical ANC and its policies were and continue to be anti-business, except when they run out of money and need someone to partner with them because they have wrecked things. On another note, the bloated, overpaid, under performing civil service needs to shed jobs (retrenchments).

I may sound like a socialist after this, but I’m not.

Yes obviously if pvt sector workers take a cut the state should do the same.

My difficulty is whether and how and when the reduced salaries will recover to what it would be? After watching how the hired help in large companies gorge themselves to the tune of tens of millions per year per person with no skin in the game and no accountability, I fear that all that will happen is the C’s carry on being paid twenty times what they are worth and by 2025 the ratio between the 0.01% and the 95% is 400 instead of the current 250.

Johan you obviously have a massive grudge against executives ?

What happened Bru , didn’t you get that promotion you always dreamed off ?

Oracle:

I have no problem with founder managers that by nature of their founder shareholding generate immense wealth, they tend to run companies well. I am offended by executives being paid R4m a month with no skin in the game and all they have to do is arrive at the office, breath and play the musical chairs game to get into the next circus.

No, not passed over – I have not worked in corporate in my life and have worked for myself the past 18 years.

To date, with one exception (Thys of Remgro) I have not met a south african C that I would employ. These oxygen thieves lay claim to deserving their pay because they are in demand globally, yet 9 out of 10 have entirely messed up their international gambles. We have not seen world class managers since the days of SA Breweries in the 80’s and 90’s.

This is the major reason I am invested 99% offshore.

South Africans have been taking a pay cut since 2009, inflation has killed any meaningful increase ever received.

The recent spike in food prices has again eroded no only yesteryears increases but forced people to dig into their saving.

The sugessestion of salary cuts is not a great idea at least not for the private sector.

Government on the other hand needs both staff reduction and salary cuts of 50% but that will not happen because ZA is the most polictised country in the world. This would Save South Africa at the cost of destroying the ANC.

There has never been a time like right now to grow your own fruit and Veggies at home. The next 7 years are going to be rough ride.

End of comments.

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