Impact of Strike and Subsequent Wage Increase in the South African Economy

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Use the AD-AS framework to critically analyse the impact of the strike and the subsequent wage increases on the South African economy

Many feared that the Transnet strike would cripple the South African economy; even the South African Chamber of Commerce and Industry were concerned that such action taken by the labour force may have such consequential results that would lead to a shortage of fuel supply to the shipping and airline companies that import vital necessities to the South African economy. As shown in the image below: “Transnet’s reach” (Transnet Limited Annual Report 2010) we can see the large influential basis that Transnet has in South Africa, and specifically the huge scale on which they operate- indicating the impact that such a strike could have on the economy. The strike fortunately did not cripple the South African economy; however it did incur them with huge cost and setbacks, which I intent to research and analyze using the AD- AS framework as a tool. Transnet’s reach

|  | Corridor |  | Primary commodities transported | | Sishen to Saldanha |  | Export iron ore |
| Capecor |  | General freight |
| Southcor |  | Automotives, manganese and general freight | | Natcor |  | General freight such as steel, domestic coal, containers, liquid bulk, refined, synthetics, crude, avtur and gas | | R. Baycor |  | Export coal, magnetite and chrome |

| Maputo Corridor |  | General freight |

In May 2010 Transnet workers embarked on a prolonged strike against low wages, the strike impeded all freight rail, shipping and harbours, and fuel and coal line services (Matharu, 2010). The trade unions finally settled with the agreement for an 11% increase, the consequences and impact was felt significantly throughout the South African economy, there were halts in production to certain extents, inventory levels rose, and exports decreased. When Satawu’s leadership finally made a decision to accept and sign the 11% increase, putting an end to the 17-day no work no pay strike the pinch had already been felt and according to Business Unity SA the estimated cost on the economy that the strike had caused in total was about R7 billion, as well as Transnet suffering from damages to their assets, which were estimated to be about R24 million (Transnet, 2010). The rise of 11% in wages is more than double the inflation rate of 5.1%, I intent to analyze the effects of such a demand on the economy and observe any outcomes that have arisen from this strike whilst using the AD- AS model as a framework. As we know, the strike was all for the sake of a wage increase- however surely an 11% raise in wages is absurd, as it will be a major source of inflationary pressure on the economy. With a drastic increase in wages, due to the now higher cost of production that are incurred by Transnet- they are going to have to raise their prices to an extent in proportion with the unexpected wage increases. The consequences of the firm increasing the prices, in order to protect their profit margin, will cause cost push inflation. This can be shown as a leftward shift in the short run aggregate supply (SRAS) curve, which will also affect the aggregate demand (AD) curve- causing a decrease. So in conclusion to the raise prices there will be a decrease in real GDP.

Figure 1: Graph showing cost push inflation (

The most apparent impact of the strike was the huge influence that it had on production and sales. The strike definitely disrupted the economy, and certainly a number of industries felt the pinch. The agricultural industry certainly carried a load of the consequences, Cherry Smit, CEO of National Bread Improvers, told I-Net Bridge that her company has lost about R700000 in revenue due to the strike (Mahlangu, 2010). The strike not only forced agricultural industries to use more expensive means of transportation such as road, which had an upward influence on the...
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