Impact mining strikes have on the South African economy

Topics: Macroeconomics, Inflation, Monetary policy Pages: 8 (2027 words) Published: March 4, 2015
South Africa is a world leader is terms of mining. Mining constitutes a major part of its economy; one of the major players in the sector is platinum mining. Due to its size any changes in platinum mining would have an impact on the economy as a whole and to a lesser extent the world. The Recent strikes in this industry have caused negative effects on the economy. My essay will look at these effects in terms of output, prices and employment. I will also look at the macroeconomic variables that have caused the real GDP trend in South Africa between 2007-2013. South Africa has been experiencing platinum mine strikes. The Association of Mineworkers and Construction Union (AMCU), which is the majority union in the platinum belt, has been demanding R12 500 salary for its members (sanews.gov.za, 2014). The main employers Anglo American Platinum, Impala Platinum and Lonmin signed a wage agreement to end the 5 month strike. The agreement provides for a R1,000-a-month increase each year for the two lowest bands of employees (Vecchiatto, 2014).The Platinum strikes have caused what is called an adverse supply shock. Adverse supply shocks cause prices for a given amount of output to increase. Firstly, the strikes cause a decrease in production and when employers give in, an increase in wages. The price setting rate is given by the equation (W/P) W being wages and P Price, therefore an increase in wages causes price setting rate to increase. This increase in real wages will cause the mining companies to lay off employees and the natural rate of unemployment to decrease. Alternatively the wage increase can be put on consumers by an increase of the mark up. The price setting rate is given by the equation (1/1+m), therefore an increase in mark up (m) causes this rate to increase. The effect of the price setting increase is strong because the mining sector is a big employer. The industry is the largest employer, rivaled only by the public service which employs over a million people (sanews.gov.za, 2014). The seasonally adjusted unemployment rate increased marginally to 25 percent in the first quarter of 2014, the bank said. (SAPA, 2014). The AS/AD model shows the relationship between Aggregate supply and Aggregate demand. In the short run represented by Fig.1 an increase in the price setting causes the AS curve to shift right to AS1. This shift represents a decrease in consumption due temporary loss of wages and a drop in investor sentiment. As shown in Fig.1 prices to go up. Consumer price inflation breached the upper limit of the inflation target range in April this year (SAPA, 2014). Output also decreases. The negative growth in the first quarter of 2014 was mainly brought about by a marked decrease in the real value added by the mining sector, reflecting the impact of a prolonged strike in the platinum mining sector. (SAPA, 2014).Real gross domestic product shrank at an annualised rate of 0.6 percent in the first quarter of 2014 following fairly strong growth in the final quarter of 2013. (SAPA, 2014). Price (P) AS2

AS1 AS

AD Output (Y) Y(n) Y1 Y AS/AD Model Fig.1 Overtime prices continue to increase to AS2. This is...
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