National Minimum Wage Panel – do your duty and offer tough love and resist the arguments for economic miracles.
The government has (thankfully) decided to kick the National Minimum Wage (NMW) into touch. The hope must be that the panel come to advise that any NMW high enough to make a meaningful difference to the circumstances of the working poor, is a very bad idea. It’s a bad idea because it cannot offer much poverty relief (to those who keep their jobs) without destroying the opportunity for many more in SA, particularly the young and inexperienced and those outside the cities, to find work.
The problem is that even many of those who find work (mostly in the cities), at the lower end of the wage scales, remain poor. The working poor in SA have been defined as those who earn less than R4000 per month. Yet the problem is that most of those with jobs in SA earn much less than this, while a large number of potential workers are unemployed and earn no wage income at all.
According to a comprehensive recent study of the labour market in SA by Arden Finn for the University of the Witwatersrand, 48% of all wage incomes, representing 5m workers, fell below R4000 per month in 2015 and 40% earned less than R3000 per month, about 2.7m workers out of a total employed of about 13m. The proportion of those employed who fall below R4000 are much higher in the rural areas, higher in agriculture (nearly 90%) and domestic services (95%). In mining, 22% of the work force earned less than R4000 per month in 2015, while in the comparatively well paid and skilled manufacturing sector, about 48% of the work force were estimated to earn less than R4000 per month.
How many would lose their jobs? And how many would hold on to them to receive the promised benefits of higher minimum wages? These are the numbers that would have to be estimated by the panel. They would have to allow for all the other independent forces at work, other than wages, that could favourably or unfavourably influence numbers employed. For those on the panel who believe that SA can repeal the laws of supply and demand for labour and that wages have little to do with what workers are expected to add to business revenues, and so higher minimums can happen without very unhelpful employment effects – there is a question they will have to answer.
If a higher NMW can make such a helpful difference to poverty without serious consequences for the unemployed and their poverty, why not set the NMW ever higher? If an NMW of R4000 a month is not enough to escape poverty, why not double or treble these minimums? They must surely agree that the number of job losses would increase as the distance between current wages and the intended minimums widened. Agree, that is, that the only way to avoid extra unemployment would be to set the minimums very close to actual minimum wages in the very different locales where they are earned, a symbolic rather than a practical gesture.
The panel could turn to the well-known relationship between employment, employment benefits and output (measured as value added or contribution to GDP) in the formal sector of the SA for evidence that improved employment benefits, for those who keep their jobs, leads to less employment for the rest. GDP has grown consistently while employment has stagnated and the numbers unemployed have risen as the potential work force has grown. Yet the real wage bills have grown more or less in line with real GDP. In other words, the percentage decline in the numbers employed has been less than the percentage increase in employment benefits paid out. Nice work if you can get it and too many South African have not got it. And wages and profits have maintained their share of value added. Firms have adapted well to more expensive labour; the unemployed have not been able to do so. Their interests should be paramount in policy action.
An NMW set well above market related rewards will reinforce such trends. It will not be fair to the non-working poor nor promote economic growth, the only known way to truly relieve poverty and raise wages over time. It is the duty of economists to practice tough love – to recognise the inevitable trade-offs should a NMW be introduced. We can but hope the panel will do its duty and resist politically tempting actions that have predictably disastrous effects. After all, if we knew how to eliminate poverty with a wave of a wand (the NMW is such a wand) we would have done so a long while ago.