South Africa: Inflation Threatens

Average wage settlement has far outpaced weak, below-trend economic growth, impairing productivity. South Africa’s unit labor costs had one of the largest increases in the world, a risk the IMF and OECD highlighted in recent reports. In the 2010 Article IV report, the IMF estimated a 16% increase in unit labor costs from 2007-09, driven by a near 11% increase in public sector wages. The increase in wages without a concurrent increase in labor productivity poses major upside risks to inflation, a concern of the South African Reserve Bank. Though wage increases fell slightly to 8.2% in 2010 from 9.3% the previous year, they far outpaced inflation, which eased to a 3.5% y/y pace by Q3 2010. As such, rising wages could counteract the other deflationary and disinflationary forces in the economy.

Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE Clients, “South African Labor Market: Holding Back Growth?

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