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The Economy-Wide Impact of Increasing Wages in the South African Mining Sector, a CGE Approach by Gloria Kgalalelo Setou

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The Economy-Wide Impact of Increasing Wages in the South African Mining Sector, a CGE Approach by Gloria Kgalalelo Setou The economy-wide impact of increasing wages in the South African mining sector, a CGE approach by Gloria Kgalalelo Setou 1 Abstract This paper examines the economy-wide impact of increasing wages by an average of 117 per cent for the majority of mineworkers in the South African mining sector. This is in line with the demands by the mineworkers, particularly in the platinum and gold sectors, which saw them embark on major strike action in 2012, 2014 and also eminent in 2015 to demand a minimum wage of R12500. 2012 and 2014 were crises years for the South African mining industry. The incidents at Marikana and the subsequent strike action which ensued over wage disputes, will forever be engraved in the memories of many South Africans, not only for the tragic loss of 44 lives on that fateful day of 16 August 2012 , but also because they marked a turning point for South Africa's mining industry and raised critical questions of whether the mining charter was being complied with, what a minimum wage is or should be and also whether mining companies are in a position to afford to meet the demands of the mineworkers. Computable general equilibrium modelling (CGE) is the methodology used and mining sector wages are shocked by 117 per cent; which is the average percentage increase in wages demanded by the majority of mine workers earning between R6001 and R8000 to evaluate the overall economic impact both in the short run and in the long run. An Upgem14 model of the University of Pretoria is used which comprises of 14 sectors and 14 industries of the South African economy. JEL Codes: J31 - Wage Level and Structure; Wage Differentials Keywords: Wages, wage demands, minimum wage, strike action 2 Table of contents CONTENT CHAPTER 1 PAGE 1 Introduction 5 1.1 Overview 5 1.2 Economic developments in the mining sector 5 CHAPTER 2 2 Literature review 7 2.1 History and evolution of mining in South Africa 7 2.2 Minerals currently mined in South Africa 10 2.2.1 Mining Production 10 2.2.2 Mining Sales 15 2.2.3 Mining exports and exchange rate 17 2.2.4 Mining profitability 18 2.2.5 Market Capitalization 18 2.3 Mining working conditions and Labour law 19 2.4 Mining contribution to GDP and Employee compensation 23 2.5 Mining sector employment per skills level and wages 25 2.6 Mining wages in other economies (evidence from abroad) 27 2.7 Problem Statement 29 CHAPTER 3 3 Methodology (CGE model) 32 3.1.1 Introduction 32 3.1.2 Description of model and database 32 3.1.3 Description of model closure 33 3.1.4 A back of the envelope (BOTE) representation of UPGEM14 34 3 CHAPTER 4 PAGE 4 Data Analysis 37 4.1 Interpretation and explanation of results 37 4.1.1 Standard DPSV short run closure 37 4.1.2 Standard DPSV Long run closure 37 CHAPTER 5 5 Conclusion and Recommendation 40 5.2 Discussion 40 5.3 Conclusion 40 References 41 List of tables and figures List of tables Page 2.4.1 Gross domestic product by industry 23 2.4.2 Compensation of employees 24 2.5.1 Mining sector employment per skills level and wages 23 3.1.4.1 UPGEM10 BOTE model 36 List of figures 2.1.1 Gold ore 8 2.1.2 SA’s platinum corridor 9 2.2.1.1 Physical volume of mining production 10 2.2.1.2 South Africa’s mined gold production, 1940-2011 11 2.2.1.3 Platinum ore 11 2.2.2.1 Mineral sales 15 2.2.3.1 Mineral exports and real effective exchange rate 17 2.3.1 Mining in Africa 19 2.6.1 Mario Go’mez, one of 33 Chillean miners trapped underground in 2010 27 2.7.1 Marikana strike 2012 30 2.7.2 Marikana strike 2014 30 3.1.3.1 Short-run closure in UPGEM14 model 33 3.1.3.2 Long-run closure in UPGEM14 model 34 4 1. INTRODUCTION 1.1 Overview The year 2012 was a crisis year for the South African mining industry. The incidents at Marikana and the subsequent strike action over wage disputes, will forever be engraved in the memories of many South Africans, not only for the tragic loss of 44 lives on that fateful day of 16 August 2012 , but also because they marked a turning point for the industry. Thirty four (34) platinum sector mineworkers in Marikana lost their lives in a violent confrontation with members of the South African police force, one of the saddest and most regrettable episodes in the history of the mining sector which necessitates that the right options are taken to ensure that it is an occurrence that is never repeated (South African chamber of mines, 2012/13: 9). Marikana unleashed some centripetal forces within the mining industry, and exposed socio- economic realities that spurred organised business, organised labour and government, as the three main industry role players, to recognise the need for closer co-operation to avoid similar tragedies in the future. This also served to acknowledge the need to protect a sector that remains critical to the growth and development of the national economy. 1.2 ECONOMIC DEVELOPMENTS IN THE MINING SECTOR According to the South African Chamber of mines, since the advent of the global financial crisis, the South African mining sector has been marred by volatility ascribed mainly to the slowdown in economic growth in China; which is one of the main importers of South African minerals; the below potential growth performance of the American economy, and the on-going economic recession in Europe. These negative international developments caused sharp reductions in commodity prices as a result of reduced demand Over a six-month period into the financial crisis, the price of gold dropped by more than 20per cent and a declining demand for catalytic convertors in the vehicle-manufacturing industry was the cause of a similar drop in the price of platinum. For the South African mining industry this translated into a situation where more than 50per cent of gold and platinum operations found themselves in loss- making situation; three of the world’s top rating agencies: Standard & Poor’s, Moody’s and Fitch downgraded South African’s sovereign credit rating as a result. 5 Compounding these damaging interventions were the results of a Fraser Institute survey of mining countries, in which South Africa was downgraded 10 places to position 64 out of 93 countries. Given mining linkages and induced impacts on many other parts of the economy, it is not surprising that the mining industry is a significant investor in the South African economy. On a direct basis mining accounts for 12per cent of total investment in the economy (public and private), and accounts for 19per cent of total private sector investment. If indirect multipliers and induced effects are considered, the total contribution of mining to fixed investment is estimated at about 25per cent of the total. So one-quarter of all investment in the economy is somehow related to mining according to the South African chamber of mines. Mining production registered an increase of 12 per cent year-on-year in December 2013, with the highest positive growth having been recorded for building materials at 39,9 per cent. The main contributors to the 12 per cent increase in production were iron ore (contributing 5.8 percentage points), PGMs (contributing 3.6 percentage points) and gold (contributing 1.8 percentage points). Mineral sales also increased by 7.9 per cent year-on-year in November 2013 with the main contributors being iron ore and PGMs, contributing 6.8 and 4.8 percentage points respectively. Gold was however a major negative contributor to mineral sales, contributing -8.0 percentage points (Statistics South Africa, 2013: 4) The South African mining industry, now the fifth largest in the world, accounts for over 8per cent of South Africa’s GDP on a direct basis. A recent study by Quantec and the Industrial Development Corporation (IDC) found that in 2012 the mining sector helped to create 1 365 892 jobs in the South African economy. This accounts for approximately 14 per cent of the total formal non-agricultural employment in the country. Mining created 524 632 jobs directly and another 841 260 jobs were created in the industries that either supply goods and services to the mining sector, or use mining products for downstream value addition, or which are related to the spending multipliers from mining and mining employees in the economy. The social multiplier of mining is very significant for South Africa. Given a dependency ratio of about 10 to 1, this means that about 13 600 000 people were directly dependant for the daily food on their table on the 1 365 892 jobs created by the mining sector. 6 2 Literature review 2.1 History and evolution of mining in South Africa Mining in South Africa dates back to very long before our current age, It was a diamond found in Orange River that started mining in South Africa in 1867. Not long after, gold was discovered in Pilgrim’s Rest and in Barberton. This led to an even bigger gold discovery at the rocky hills of the Witwatersrand in Gauteng where an estimated 40per cent of the total gold ever found in the world came from. According to miningsa other precious metals and minerals that can be found in the country are platinum, chrome, vanadium, manganese, vermiculite, zirconium, limonite, rutile, and palladium.
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