Unions, like bankers, are hip to the power of compounding

South Africa is enduring a public sector strike.  The strike has lasted two weeks or so, and may end up lasting 3 weeks or more depending on how long the unions drag their heels in coming up with a compromise to get their members back to work and actually adding some value in the economy.

Many have pointed out the seeming madness of it.  These workers are losing around 3 weeks (15 working days) of pay.  Given that we generally get paid for around 250 days of work in the year (including paid leave), this is roughly 6% of one’s annual salary.  The unions are demanding an 8.6% pay hike.  Government offered them 7.0%.  They’ll probably settle somewhere around 8.0%.  So basically that is a 1% net gain by the unions on the original offer from the state.

So, having lost 6% of their salary and having gained a net 1% in their salary per year, it doesn’t take a genius to work out that it’ll take these folk 6 years just to break even again on the losses they incurred in reaching a settlement.

Sounds like a bum deal right?

And in the short term it’s actually worse than that.  The 6% they lose now equates to an actual rand value, which they will earn back in nominal terms over the coming 6 years.  So let’s say a nurse currently earns R100,000 per year.  She is losing R6,000 during this strike.  The net 1% gain equates to R1,000 per year.  However, because we live in an inflationary economy, it is far better for her in real purchasing power terms to earn R6,000 now than R6,000 incrementally over the next 6 years.  Assuming a +-5% long term inflation average in South Africa, in real terms she will actually be earning less than R1,000 extra per year and therefore it will take her even longer (+-8 years) to break even in real purchasing power terms.

The unions have to be dumb right?  Wrong.  Our friends in charge of the unions know exactly what they’re doing.  Over the span of a working life unions have worked out that the sacrifice of income during protracted strikes is worth it, and all because of the magic of compounding.

Assuming the average working life is around 45 years, average annual price inflation is 5%, average net pay gain from a strike is 1% above the original wage increase offer, and the average strike length is 2 weeks, union members lose out in real terms to non-strikers for the first full decade of their working lives, but then over 45 years earn about 20% more ‘lifetime’ income.

For two people currently earning R100,000 per year ($13,500), the one that strikes every year and earns 7% increases earns nearly R1.2 million extra real income in present value terms compared with the one that doesn’t strike and only earns 6% annual increases.  In the first 30 years the benefits to the striker are only about R300,000-400,000, but in the last 15 years of their working lives, the striker really starts to see the benefits as it shoots quickly up to R1.2 million.

Folks, unions might be crass, stubborn, economically ignorant, self-interested, revenue maximising, business hampering, economy retarding louts, but stupid they are not.  They know how to look after their special interests as well as anybody, and they, like the bankers who benefit so richly from our system of unjust monetary privilege, understand the long term power of compounding.  Fighting tooth and nail for 1% more pay than you would have received looks like a stupid strategy over the coming decade, but stretch it out over a working life and watch the benefits come rolling in.

Of course this is not to say that this is a wise strategy for the economy as a whole, but simply that for those entrenched in state-protected jobs, protected by labour laws steeped in favour of labour, it is a very good personal financial strategy.  What’s more is that unions are benefiting richly from the increased contributions of their members.  Sure, for the first 10 years they lose out, but over the working life of their average members they earn 20% more than they otherwise would have.  Over tens or hundreds of thousands of members each earning lifetime incomes of say between R3-7 million, this is a great business strategy by the unions.  It means higher union revenues to invest in new branches and build their power and size, hire larger staff compliments to run the union and harvest new members, and to give union leaders nice large salary increases each year as well.

Meanwhile the national wage bill gets increasingly skewed toward unionised workers.  If they are government workers it either means less tax money to spend elsewhere, often on basic services, or it means more state-debt to pay for it, crowding out capital from the private sector and reallocating it toward more inefficient sectors.  Both these consequences mean a largely ineffective government sector and a constant drain on productive private capital that would be used for investment now being funnelled into current wage expenditures of unproductive public servants.

If unionised workers are in the private sector, it means companies’ wage bills have to get spread over fewer workers, meaning job losses or less new hiring.  If companies need the labour and can afford the increase, it means less capital spent on new business investment projects, less spent on R&D, less spent on rewarding higher skilled managers and technicians, lower profits to entice new investors, and lower margins to entice new competitors into the sector that would reduce prices for everyone.

The simple fact is this, when unions demand and receive real wage increases in excess of their gains in real marginal productivity, they make unemployment worse, hurt businesses, discourage local investment and FDI, reduce SA competitiveness in offshore markets, transfer resources from productive to less productive factors of production, exacerbate income inequality as the truly poor without jobs remain excluded from employment, and play a role in keeping South Africa from becoming a truly productive economy that draws in all its people into the productive process.  Instead, the unions will ensure that SA remains geared toward capital intensive, high-skilled sectors, benefiting the already-wealthy and exacerbating the wealth gap.

They also ensure that their members lucky enough to remain employed will have a very comfortable and protected privilege over other classes of employees and to the detriment of the unemployed.

Which is why HumanAction has, does and will always argue that union members are one of the most legislatively protected and economically privileged minorities in the country.

Evil cronyism maybe, but not stupid.