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How fast should wages be growing?

Greg Becker

Wage growth is always topical because we all want to know how our salaries and wages might grow. We all want to know if we are being short changed, and if our wages are fair.  As workers, we want more, many employers want to pay less as a matter of course and as HR professionals, we want to know what to advise management so that key staff are retained and morale is maintained, while costs are not unnecessarily increased.

Economists have analysed the complex and interrelated reasons for wage growth. There are many factors which directly contribute to wage growth, and this is only compounded by external forces.  

In a capitalist economy, supply and demand determine the level of wages in the short term, and this means that scarce skills are bargained up, while unskilled, easily replaced workers always have the unemployed masses keeping a lid on increases.  Over a longer horizon, wage growth is because of inflation and real wage growth.

Economists like to split increases into their inflation and non-inflation components

These are known as the real and nominal components. This split happens so that the impact of the changing value of money (or inflation) is separated out and doesn’t cloud the question at hand.

If you ever want to understand the reason for splitting out wage growth into these components, just consider someone in Zimbabwe about a decade ago: Their entire wage growth was because of inflation, and the real wage growth was almost like a pebble placed on top of a mountain! 

By separating out the components, the effect of inflation can be taken care of separately.  When most people ask about their wage increase, they are referring to the nominal increase.

Many people forecast inflation and the long term estimates are unreliable

The International Monetary Fund (IMF) has made an inflation forecast for the coming five years for most countries. Their estimate in April 2013 for South Africa was to have inflation between 5 and 5.5% in each of the next five years, with an average of 5.1%.  

Many organisations have looked at wage growth, and the International Labour Organisation’s (ILO’s) analysis of recent real wage increase shows that in:

  • Much of the first world, real wages have been close to zero,
  • Africa, these have been slightly higher, and
  • The recent history of South African, real wage increases (increase over the period 2006 to 2011 were 1%, -0.2%, 4%, 9.7% and 2.7% respectively) have been 3.4% on average.  (This is substantially above the African average (2.6%) or the world average (1.9%) for the same period.)

Nominal wage increases will be a little higher than inflation

This is because wage increases are the aggregate of inflation and real wages.  If the recent increases continue, and inflation is as forecast by the IMF, wage increases would be in the region of between 8 and 8.5% a year, although many could argue that South Africa’s recent above-average increases could imply that a correction is on the horizon.

With political posturing before the election in 2014, the rise of new unions like AMCU and unsustainably high increases in recent years in the public sector, we are in for an interesting time.  Workers are in a particularly poor position as their personal inflation rate may be meaningfully higher than that of the products and services their work produces.  It is certainly conceivable for workers to have a real increase when compared to the national inflation rate, but not to be able to buy the same essentials.  

All we can really hope for is that:

  • Good employers pay a fair wage,
  • Good workers earn their fair wage through diligent work, and
  • Workers gain valuable experience and skills so that they are able to convert these into increased earnings faster than the world is able to devalue the services and products they produce.

Monitoring wage increases over the coming year will be more exciting than usual.

Greg Becker is a South African actuary who has seen work take him far and wide, from Japan to the US and from the UK to South Africa.  He is the founder of which helps people get comfortable with important decisions.