Could salary cuts be the better devil instead of retrenchments?

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.

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.”