Thursday, May 14, 2015

Impact of strikes can be on economy

Strikes can be effective in raising actual worker income, but not if these continue beyond ‘tipping points’. The recent strikes at Marikana and its tragic loss of
lives mark one of the darkest chapters in the history of our country. The ripple effect of what happened at Lonmin mining company may have consequences
beyond what is currently foreseen. Paper, Rolls, Styan, Ashton and Wasserman (2012:9) state that the impact
of the ‘Marikana massacre’ will be felt for many years into the future, particularly by the ruling party, union politics, industrial relations and policing. Nevin (2007:64) commented that excessive wage
increases could push inflation out of its 4% to 6% target range, with increased interest rates the inevitable consequence. According to The Economist Intelligence
Unit (2009:11) in commentary on international risk rating, labour market risk plays an important role in
determining the overall risk rating of a country. South Africa scored 57% (out of a 100% for maximum risk) in its 2009 risk rating for labour market risk. Employees in South Africa currently face considerable erosion in their lifestyle levels and quality of life. This is
due to, among other factors, increases in energy and food costs and the general upward trend in consumer price inflation. Workers seek relief from these economic
hardships through the wage negotiation process. In South Africa the major bargaining tool at the workers’
disposal is industrial action. In order for the wage negotiation process to benefit workers, it must leave them in a better position than if they had accepted the
employers’ initial offer. The purpose of this article is to gain new insights in establishing the effect of industrial
action on the income of workers.
Background According the Gini index, which gives a measure of the
degree of inequality in the distribution of family income in a country, South Africa is ranked as one of the most unequal societies in the world. With South Africa being the largest economy in Africa, employees are becoming more restless in their need to gain better wages. Labour
unions have justified their demands for above-inflation wage increases by pointing to the fact that workers need
to feel an improvement in their living standards and not just keep abreast with inflation.
Approach and assumptions
For the purpose of accessing financial data, it was decided to use a case study approach and to gather the appropriate data from three big South African business institutions that had recent strike activity. Some general assumptions had to be made to facilitate consistency
and comparability of calculations.
Assumptions The average remuneration in terms of cost to company in each case amounts to R130 000 Employers have implemented the ‘no work no pay’ policy and lost wages due to industrial action
are deducted equally over a three month period Salary negotiations occur in 12 month cycles The effects of taxation, both from a company and an employee perspective, are ignored. Case studies
The profitability of embarking on a strike, from the viewpoint of the worker, is determinable by using both
quantitative and qualitative factors. In this study we seek to measure only the quantitative gains of industrial
action. The profitability of industrial action is measured as the difference between the final increase settled on
and the employers’ initial offer. We measure the gain or loss in nominal terms and then take into account the
time value of money by discounting the monthly gain or loss by the prime lending rate (at the time of the study being 9% per annum). Each of the three scenarios is based on actual wage negotiations where industrial action was employed by
workers as a negotiation tool. These are now briefly discussed.
TRANSNET
Workers of this major publicly owned enterprise embarked on strike action in early May 2010 that lasted for 17 days, demanding an across-the-board wage
increase of 15%. Management’s initial wage offer was an 11% increase. The parties finally agreed on the following:
An 11% across-the-board increase
1% one-off increase in May based on annual salaries 1000 contract workers were to be given permanent employment by October 2010 and an agreement was reached regarding the placement
of the remaining contract workers.
It was widely reported that the economy lost R7 billion as a result of the prolonged strike action. In this case workers ended up accepting managements’ initial offer
of 11%, as it was significantly above the inflation rate of 5.7% that prevailed at that time. Although the settlement did result in employees getting a premium above inflation, the industrial action erode those gains as a result of lost wages incurred during the period. The net result of the industrial action for workers was that
they were worse off, both in nominal terms and present value.
Passenger Rail Agency of South Africa (PRASA)
On 17 May 2010 workers declared a dispute with management, demanding a 16% wage increase, while management revised its initial offer from a 3% to an 8%
wage increment. The industrial action lasted for 13 days and 12,000 workers engaged in the strike, disrupting train operations of both Metro Rail and
Shosholoza Meyl. On settlement of the dispute, the parties agreed on the following:
A 10% across-the-board wage increase
A 12.5% salary increase for Shosholoza Meyl workers earning less than R70,000 per annum A 12% salary increase for Metro Rail workers earning less than R70,000 per annum All workers would receive a one-off payment of R1,000 in June 2010. Members of Automotive Manufacturers Employers’ Organisation (MAMEO) On 11 August 2010, 31 000 workers in seven vehicle manufacturing plants embarked on industrial action.
The strike lasted for 8 days. Workers demanded an across-the-board increase of 15%, while employers offered a wage increase of 7%. The parties agreed to the
following:
A 10% across-the-board wage increase
Medical, pension and other benefits to be
extended to short-term employees
The discontinuance of the use of labour brokers by January 2011. Table 1 contains a summary of the results and calculations for the three strike actions.
Table 1: Summary of results of three strike actions
Note 1
This annual salary not only includes the increase settled on, but also the wages not earned because of the strike.
Note 2
For the purpose of calculating the net benefit or loss of the strike action from a worker’s perspective, the difference between what was settled on and what was offered initially was first determined on a monthly basis for one year. Using the bank rate of 9% (adjusted for a period of one month), these differences were then
discounted to take into account the time value of money and added together in order to determine the present value of the net benefit or loss.
From Table 1 one can deduce the following:
TRANSNET
The workers made a loss due to the length of the strike period and the low premium negotiated of 1%. The nominal loss was R4,755 and the present value of the loss amounts to R4,675 per worker.
PRASA The 2% premium negotiated, coupled with the R1,000 once-off payment resulted in a nominal net gain of R5,470, and in terms of present value there was a gain of R5,102 per worker.
MAMEO
In nominal terms workers had a gain of R1,051 and when the time value of money is taken into account, a net gain of R909 per worker is calculated. Duration of strikes and breakeven strike days
From the calculations contained in Table 1 it is clear that the number of strike days plays an important role in the financial outcome for the worker. The longer the
strike is prolonged, the heavier the penalty of no pay and the greater the likelihood of a net loss from the worker’s perspective. Ndungu (2009:91) points out that
the majority of strikes in South Africa since 1996 have been of short duration because of lockouts and the ‘no
work, no pay’ principle. The results for the three case studies are presented in
Figure 1.1 and it indicates clearly that the breakeven strike days are 3 for TRANSNET, 27 for PRASA and 10
for MAMEO (rounded to the nearest full day). The greater the percentage difference gained by the strike,
the longer the strike can continue before breakeven is reached. The graph clearly shows that there are net gains for strike periods shorter than the breakeven days
and net losses for longer strike periods.
Figure 1.1: Net present value of benefit/loss relative to the number of strike days
Conclusions Strike action has proven to have far-reaching implications – for economies, corporate institutions
and employees alike.
This article attempts to shed some light on the feasibility of a strike from an employee’s perspective by
analysing the wage increases and relevant strike data for three South African institutions that experienced
strike action during 2010, namely TRANSNET, PRASA
and MAMEO.
The findings are that for TRANSNET, purely from a financial perspective, the workers would have been better off if they accepted the initial offer and did not
strike. For PRASA and MAMEO, the strikes did result in net gains for the workers and this was accomplished to a large extent by the relative short durations of the
strikes.
It is also pointed out that the longer the strike lasts, the smaller the net benefits become in terms of present value and that a breakeven point in strike days is
reached when the net benefits are zero.
If the strike carries on past the number of breakeven days, the negative impact of losing wages causes the present value of the net loss to increase in magnitude.