The interaction between labour, firms, and the government is one of the most important and most fascinating to observe in Economics, depending on your school of thought of course. Whether one is a proponent of the Free-market, Mixed market or Command Economy, one central theme remains: The decision of one player affects the decision of the player(s), a concept elegantly presented in Game Theory.
In layman’s terms, Game Theory, a branch of Microeconomics, refers to a strategic interaction between two or more players, where the strategy of one player not only affects the strategy(ies) of the subsequent player(s) but also the payoffs attached to these actions. As followers of economics we may be tempted to attribute the origin of the theory to the Nobel laureate John Nash, however, it was first introduced to literature by Emile Borel in 1921. Borel's ultimate goal was to determine whether a "best" strategy for a given game exists and to find that strategy.
While Borel could arguably be called the first mathematician to envision an organized system for playing games, he did not develop his ideas very far. The idea was later popularized by John Von Neumann in 1928 after realising that strategic interactions were not only guided by probability theory but “bluffing” also played a significant role. This was the significant contribution of Von Neumann to the work of Borel: formalizing the idea of players using strategies that are meant to deceive the other players and hide information from them.
Equally fascinating to history is the application of Game Theory in modern-day economics. The interaction between Monetary Policymakers and Labour is one of a plethora of examples. In most economies such as South Africa, Labour unions base their wage demands on the policy announcements made by the central bank. That is, as the first-mover the SARB can announce a low Repo rate stance (Low expected inflation) or high Repo rate stance (high expected inflation) monetary policy. As the second movers, Labour unions observe the policy stance. Taking into consideration all the possible pay-offs, labour will then adopt a strategy that guarantees them the highest possible pay-off, given the SARB’s decision as the first player. All else constant, if inflation expectations are low (high), unions will demand low (high) wage increases.
However, such a clean-cut model is often the furthest from the reality in the real economy, the factors that affect the wage demands of labour can be multifaceted and complex. It can be argued that institutional governance factors have disrupted the conventional interaction between Monetary Policy and Labour in the SA context. The dynamics can be observed from the interaction between Eskom and Labour Unions on wage increases. While the policy stance of the SARB has forecasted a stable outlook for inflation (4.4%), Eskom labour is contesting for a 15% wage increase, among other benefits, as they argue that although the State-owned Entity is heavily indebted, it is should be able to meet their demands given the government’s intervention.
As an employer, the government has also faced wage increase demands from public sector labour, challenging the government’s decision to increase wages by 0% for the 2021/22 fiscal year to reign in the public sector wage bill as an expenditure control measure. Considering the government’s reason, the tabling of the 0% increase is a credible strategy on the part of the government, however, it appears that labour has perceived it as an incredible strategy/ “bluff”. Will the government concede? What impact would its concession have on the credibility of its fiscal decisions in the future?
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Yours in Thoughtful Learning,