# General Business Category > General Business Forum >  What about the poor workers?

## duncan drennan

I picked up a snippet on the news last night about inflation and pay raises that confuses me a lot (and has for a while). This is my understanding, which I know is not complete, so please correct me where I'm wrongÃ¢â¬âmaybe you can help me get to an answer to my question.

I know that pay raises are a source of inflation because they put more disposable income in people's hands which results in more spending, which results in inflation (alternatively people could use that money to saveÃ¢â¬âdoes that positively impact on inflation?). Inflation pretty much means that the reserve bank has to increase its supply of money to the market.

In our current monetary regime the reserve bank targets inflation (CPIX in particular) which effectively means that they are trying to keep the cost of living and doing business from rising too quickly. To keep pressure under control the reserve bank raises interest rates, which effectively takes money out of people's pockets and curbs consumer spending (and hopefully encourages saving too, as better returns can be made with higher interest rates).

So as I've said, pay raises are a source of inflation. Let's assume that an average blue collar worker can pay their bills and put food on the table, after that there is not too much left over (just an assumption for this question). The reserve bank is effectively saying that pay raises should be around about the inflation levels (i.e. 0% real increase in pay) to keep inflation under control. So if pay raises increase with inflation, all that your "average" worker can do after a pay raise is still just pay bills and put food on the tableÃ¢â¬âno room for saving or an increase in lifestyle (both of which stimulate the economy?).

My question is, *if the "average blue collar worker" wants to increase their standard of living, how can they do this?*

My _perception_ is that managers and higher level workers get pay increases above inflation. It just seems like the poor workers can't win. Am I missing some important factor or understanding of the situation?

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## Dave A

> My question is, *if the "average blue collar worker" wants to increase their standard of living, how can they do this?*


By increasing their value to the company, a combination of increased experience and aquiring additional skills that improve productivity. To me the core concept is you pay the post according to the worth of the post. If the employee wants to earn more, they need to climb to a better paying post or improve production from the post.



> My _perception_ is that managers and higher level workers get pay increases above inflation.


I suspect you are far from alone in that thought.

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## duncan drennan

> By increasing their value to the company, a combination of increased experience and aquiring additional skills that improve productivity. To me the core concept is you pay the post according to the worth of the post. If the employee wants to earn more, they need to climb to a better paying post or improve production from the post.


Is increasing output (i.e. economic growth) the thing that balances the equation? So, if monetary supply remained stable (say growing at 3%) and the economy was growing faster then monetary supply (say 6%) would that put a downward pressure on inflation, which would allow greater pay increase to get inflation into the targeted band?

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## Dave A

Hmm. When quickly scanning that earlier you had me scratching my head. Reading it properly, I now see why.



> So, if monetary supply remained stable (say growing at 3%) and the economy was growing faster then monetary supply (say 6%) would that put a downward pressure on inflation


Yes.

For the rest, you've still got me scratching my head. I suspect to many arguments in the equation for me to resolve  :Huh:

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## duncan drennan

> For the rest, you've still got me scratching my head. I suspect to many arguments in the equation for me to resolve


Yes, scratching of my head is what tends to go on when I think about economics  :Huh:  I've got this article on macroeconomics tagged for reading which will hopefully give me some insight...or not  :Stick Out Tongue: 

Maybe time to go back to university?

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## Dave A

Maybe if we break this down into little steps? I get the idea that one idea kinda flows into the other, but I'm struggling to find the crux...

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## duncan drennan

> Maybe if we break this down into little steps?


That reminds me of the movie, "What about Bob?"......"Baby steps, baby steps"

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## Hans

I completed economics up till 3d year level at the University of Stellenbosch, so maybe I can clear some things up for you.

I will use some generalizations and simplifications for your benefit.

The fist thing one needs to realize about the Reserve Bank is that it is suppose to be a separate entity from the state. Before this was the case politicians where blamed for interest rate hikes and they then make stupid decisions based on political pressure.

You should not think of the Reserve Bank as an entity that increases and decreases the supply of money. The bank has a policy on how much money should be in the economy at a certain time and the amount is increased at a steady pace over time. This is done to compensate for the so called upward stickiness of inflation. When you go off this curve and just print more money, that would lead to hyper inflation, see Zimbabwe. 

It is better to think of the Reserve Bank as an entity that changes the cost of borrowing money. They do this by altering the Repo Rate(the rate at which they lend money to the banks). 

The Reserve BankÃ¢â¬â¢s main mandate is to control inflation. 
The next bit is a little hard to explain without a graph. 
If you think about economic growth, of the country, over time.
If  the Reserve bank did not change the Repo rate the growth would have periods of high inflation and high growth, followed by periods of negative or slow growth and low inflation.

The SARB increases the Repo rate when growth is high, in an attempt to cool the economy and lowers it when the economy is in a slow growth phase. This levels off inflation.

How does the system benefit unskilled labour?  The more mature a market becomes the cheaper items become in real terms. Think of someone that lived in the 1800, if he wanted to buy a pair of boots it would cost him 2 weeks wages.
Unskilled labour in South Africa is very cheap because there is an over supply of it, 30% unemployment. In a mature market it should be about 5% and labour should cost more.

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## duncan drennan

> If you think about economic growth, of the country, over time. If  the Reserve bank did not change the Repo rate the growth would have periods of high inflation and high growth, followed by periods of negative or slow growth and low inflation.
> 
> ...
> 
> How does the system benefit unskilled labour?  The more mature a market becomes the cheaper items become in real terms. Think of someone that lived in the 1800, if he wanted to buy a pair of boots it would cost him 2 weeks wages.
> Unskilled labour in South Africa is very cheap because there is an over supply of it, 30% unemployment. In a mature market it should be about 5% and labour should cost more.


I think these two paragraphs touch on the answer that I'm trying to get to. Here is what I asked a CA friend about this,

"I'm guessing that if there are downward pressures on inflation then wage increase can be above inflation to counter the downward pressures. What situation will cause downward pressures? Does economic growth have to be higher than inflation? Will this cause inflation to decrease (other than a recession, which is also bad for the worker)?"

So what you are saying is that when the market slows, there are downward pressures on inflation. I don't really know too many businesses who are keen to give above inflation increases at the time of an economic slow down, regardless of the possible positive impact that it could have on the economy.

Effectively what you are saying is that in a growing economy the reserve bank needs to keep inflation under control. The reserve bank essentially encourages business to help keep inflation under control by controlling the repo rate (as this results in money being more expensive for businesses). Businesses can help keep inflation in check by making sure that wage increases are around inflation levels.

It just seems like a vicious circle to me.

So, let's narrow this down....*in a growing economy what needs to happen for businesses to be able to give workers above inflation wage increases?*

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## duncan drennan

> So, let's narrow this down....*in a growing economy what needs to happen for businesses to be able to give workers above inflation wage increases?*


I've been thinking about this again, particularly in the wake of the public sector strike. Here is the conclusion that I have come to, which seems to make sense in my mind, simple as it is...

Inflation is effectively a measure of the change in price of the cost of goods and services. If there is lack of supply (versus demand) this creates an upward pressure on inflation. Alternatively, if the supply outstrips the demand, then this puts a downward pressure on inflation.

So, to put downward pressure on inflation, we must increase the supply (but on the costs). That means that the workers must be more productive, or more efficient. If that happens then it means the the market demands can be met without having to increase the price. This puts downward pressure on inflation, which means that the workers can get a higher wage increase, because profits are going up, as costs per item are going down.

So to frame that in the context of the public sector strike that means a lower cost per service, e.g. nurses see more patients that brings down the cost per patient, police solve more crimes that brings down the cost per crime, teachers teach better and have more matriculants, etc.

So it is really what we have known all along (and how Dave answered originally) Ã¢â¬â add more value and get paid better. To me that means that unions only have one role, to ensure that workers are actually seeing the benefits of their productivity increases. To picket for pay raises without increases in productivity just ruins the economy, and in the end there is no benefit for the workers.

The only way to truly benefit is to increase productivity Ã¢â¬â everything else cancels itself out.

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## Dave A

> The only way to truly benefit is to increase productivity Ã¢â¬â everything else cancels itself out.


That sets the foundation and is the win/win scenario.

But now if someone starts getting more than their value-add portion, they're taking away from someone else's deserved share - a win/lose scenario. The larger the organisation, the harder it becomes to directly equate contribution to reward - and so the games begin.

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