The National Minimum Wage for South Africa (NMW) – will it be helpful or harmful to the poor of SA? We beg to disagree with the expert panel.
A reality check
It is always salutary to be reminded just how dire are the economic circumstances of the average South African and how slowly their economic conditions have been improving. Over 51%, some 29,733,210 of our people, live on less than R1,036.07 per month. These and many other shocking statistics are reported by the Panel of Experts appointed to recommend the level of a National Minimum Wage (NMW) and on a process for its effective implementation (“Recommendations on policy and Implementation; National Minimum Wage Panel report to the Deputy President”).
The table calculated by the panel, included below, provides helpful detail about the lack of income and the associated unemployment.
The panel has no doubts about the helpfulness of an NMW in principle – only reservations about practice
The panel seems to have no doubts that a NMW would be a very helpful policy intervention in principle. To quote selectively from its substantial report of 128 pages”
“On its own it will not solve all of the challenges we face, but it is an implementable policy which is designed to have a measurable and concrete benefit on the poor. The minimum wage is therefore seen as one of the tools to close the wage gap, including between the genders, and thereby to overcome poverty.
“Furthermore, under the correct conditions and at the correct wage level, it is possible for minimum wage policies to contribute to improving economic growth. ……Given that the national minimum wage is essentially a policy to help the poor, it is generally accepted that exemptions and exclusions should be kept to an absolute minimum.”
Striking a balance – recognising employment dangers in scenario exercises
The panel was required by the social partners in Nedlac, who agreed to an NMW, to recommend an appropriate level for the NMW. Since it recognised a relationship between wages and employment the MNW had to strike a balance between the effects of increasing wages to a higher prescribed minimum level and its consequences for additional unemployment of which SA already has a great abundance. Some 26% of the labour force, those in work or looking for work, are currently unemployed, while many more potential workers have been discouraged from looking for work and have fallen out of the labour force. Adding them to the work force would imply a more broadly defined national unemployment rate well into the 30% plus range.
The panel recommended a NMW of R3500 per month or R20 per hour to be phased in by 2020 with 90% of the NMW to be applied in agriculture and 70% in Domestic Service provided to Private Homes. It also recommended annual reviews of the NMW and a gradual move to uniformity across all sectors of the economy. Using a so-called Computable General Equilibrium model of the SA labour market (as described and developed by Professor Harron Bhorat of UCT) that included assumptions (not predictions based on past performance) about the trade-offs between percentage increases in minimum wages and percentage reductions in employment (the relevant employment elasticities in economic speak) .
The aggregate employment losses were estimated as between 100,000 and 900,000 jobs lost in exchange for the recommended NMW. Clearly in the view of the Panel, the NMW had to be set high enough to make its contribution to poverty relief and yet low enough to be able to treat the extra unemployment as the acceptable price to the panel members of them doing such good for society. Another argument for breaking eggs to make omelettes from those unlikely to be harmed by the action and who might even benefit from helping to give effect to a new dispensation.
However the panel did qualify its judgment. It noted correctly:
“…..that there is no research or data that can accurately predict the outcome of any policy intervention. It is for this reason that strong emphasis has been placed on the need for good solid research to support the work of the NMW institution into the future. Any future changes to the level of R3,500/R20 per hour should be based on solid evidence of the impact of the national minimum wage.”
Would it be unkind to recognise that this would also be more grist for the economist’s mill?
The relationship between minimum wages and employment – what may be self-evident to the panel is not so to the society at large
It would have been helpful had the panel used the report to explain more fully why employment offers are negatively related to the wages or rather employment benefits provided by employers in exchange for hours worked. The relationship is much less self-evident than the panel may have presumed it to be – especially by members and leaders of trade unions who are inclined to attribute wage differences much more to political forces and bargaining power and even to race – than to the differences in skills and therefore of the contributions to output made by the well and poorly paid. And they are very inclined to believe that the wage gaps can be easily closed, with little consequence for economic growth by taking more from the well paid and giving to the poor. And so for ever higher NMW.
The relationship between skills, incomes and employment
The panel is well aware of an obviously important and highly consistent relationship to be observed of the SA labour market between measures of skills and wages earned. And as statistically significant is the relationship between incomes and employment. The lowest income South Africans have the highest rates of unemployment. The full income and employment details are shown in the table below (Table 5 Household Indicators of the Panel Report). Other reports from Stats SA have demonstrated the links between educational attainments and income and employment.
It may be seen in the Table, that of the 16,306,000 people in Quintile 1, 31.2% of the population with the lowest share of income, only 15,9% are employed, 25% strictly unemployed and the broad unemployment rate of this group is estimated as 65.8%. The average wage of those employed in quintile 1 is only R1017 per month. The second poorest quintile counts for a further 24.6% of the population, has a lower unemployment rate, a much higher participation rate in the economy and average wage incomes of R1707 per month. A large improvement but still a very low average wage.
The top income quintiles present very differently. Unemployment rates are much lower and participation rates and average incomes from work of the employed are much higher and well above the recommended NMW. Though it should be noted that the average wage income of those employed who fall into Quintile 3 of R2651 per month, is still well below the R3500 per month recommended NMW.
The implications of a NMW set so far above average wages- is there precedent that can help us predict the employment effects with any confidence?
This begs the question – is there any precedent for a NMW or a sectoral minimum wage determination –be set so far above average earnings – and if so what have been the consequences for employment? Or put in another way is there reason given the facts of the labour market to think that the employment elasticities in SA are a lot more negative than the range of assumptions considered by the models. Time will tell much more about the consequences of the recommended NMW as the Panel complacently assumes and adjustments can then made to the model and the recommendations. But who will care for the unemployed and their dependents in the meanwhile?
How can an NMW help the poor – who are now mostly not employed?
It is very difficult to understand why the Panel should believe that the NMW can be helpful to the poor of South Africa or reduce inequality. Because fundamentally the poorest South Africans those in first and second quintiles, are mostly not employed. And when employed they are able to only command wages far below those of the recommended NMW that still leave them objectively poor.
The recommended NMW will surely make it even more difficult for them to find work that might for some, especially young workers, prove a path out of poverty. Thus the NMW is very likely to increase further the unemployment of low skilled potential workers in SA and to widen the gap between the average incomes of the high earners and the low earners, mostly no earners of the population. The poor of SA deserve better opportunities to work and more so the opportunity for their children to acquire the education and skills that would help them qualify for and find well paid work. They do not need further interference in their search for work.
Employers will make the adjustments that will confuse the observers
Though to complicate the numerical outcomes to be observed in due course, structural adjustments to employment practice will be made by employers in response to higher minimum wages. The adjustments will include more reliance on mechanisation and automation- requiring more carefully selected and skilled employees, forces that substitute capital for labour, especially less skilled labour, that are already well at work in the economy.
Other adjustments employers will make will be to offer fewer hours of work and significantly less by way of other important employment benefits, food and accommodation and contributions to pension and medical aid for example, the cost to employers and value to employees the panel refuses to recognise in its money wage only determination. Evidence of such reactions so unhelpful to low income workers comes from previous minimum wage adjudications in the agricultural sector. Fewer workers were employed permanently – less accommodation was offered on the farm – and higher transport costs was incurred byr workers busing in from informal settlements. And there is also bound to be less compliance with the law given the availability of cheaper labour and additional employment offered to illegal immigrants.
Why does the labour market only work well for the higher income earners? Is it because they are much less encumbered by regulations and collective bargaining?
A further observation of the inconvenient and uncomfortable truths of the SA labour market is that the supply and demand for labour are very well matched for the well paid and very poorly matched for the low paid. A very high unemployment rate – a large number of potential workers unemployed at current wages – is surely evidence of wage levels that are too high rather than too low to the important purpose of providing work for those who would wish to work- at prevailing wage rates.
These are not considerations that receive much attention from the panel. Other than a presumption of “structural imbalances” or why these structural forces that discourage employment do not apply to the most expensive of workers in SA who are so readily employed?
It is to be conceded that employment at low wages for those with limited skills cannot overcome the poverty of the working poor. But then what can – other than them acquiring the valuable skills that are in short supply and well worth hiring. Wishful thinking- waving magic wands in the form of un-affordable to potential employers of high minimum wages will not solve their problem.
But unemployment makes their condition more onerous and denies them the employment and low wage benefits that they would be willing to accept. A willingness demonstrated by their seeking work. And being unemployed prevents the potential worker from acquiring skills on the job and the opportunity to demonstrate their capabilities that add to their employment credentials. These opportunities are particularly important to young, unskilled entry level workers whose unemployment rates are regrettably but understandably well above average unemployment rates as is well recognised by the panel.
The panel might have sought an explanation of the high rates of unemployment of low income South Africans in the structural impediments to their employment in South Africa. Barriers to employment offered or accepted in the existing highly pervasive regulations of their employment contracts. It is not as if minimum wages have not been tried in SA. They are widely practiced and have surely had their effect on the employment of the lowest paid and least skilled.
The current regulatory barriers to employment in SA
There are in fact 124 separate such sectoral minimum wage determinations. They cover approximately 5m workers and 33% of those employed leaving only 35% of workers uncovered including presumably many of the better paid also without Union representation. The lowest such monthly determinations in 2015 ranged from R1813 for Domestic Workers to R2844 per month per Contract Cleaner in the lowest grades. The highest sectoral minimum determinations – for more skilled work- were R6155 for workers in private security and R6506 per month in Retail and Wholesale businesses.
The newly fashioned NMW is intended to remove all this administrative complexity – and presumably also the possibility of recognising very different labour market conditions – supply and demand – that may apply in the different sectors and regions of the economy. Conditions that participants in specific labour markets, unencumbered by regulations would be much better informed about than even diligent officials to the advantage of workers and their employers.
The case for best leaving the determination of an employment contract to willing buyers and sellers of labour does not get any hearing from the panel. While the collective bargaining process in SA that can easily be shown to protect the established interests of employees and their employers – the insiders – at the expense of the employment opportunities of the outsiders – receives nothing but uncritical approval from the panel- and with an appeal for the wider application of collective bargaining arrangements.
The influence of welfare on employment
Nor did the influence of SA’s extensive welfare system on poverty and employment receive much more than perfunctory and rather condescending attention from the Panel as follows.
5.43. “While wages are low relative to living levels, there are arguably some offsetting effects from the social wage spending by Government. About 35% of South Africa’s budget is spent on programmes targeted at the poor, including free basic education, health care, water and electricity, and income support grants for children and the elderly”.
They may, as did the Davis Committee on Tax Reforms, have referred to a report of the World Bank on the influence on incomes and their distribution of SA of its welfare system. To quote this study:
“But while incomes earned in South Africa may well be the most unequally distributed in the world – the distribution of expenditure is much less unequal. The World Bank shows, in a recent study, that South Africa does more to redistribute income in cash and kind to the poor than its developing economy peers with similar average incomes , Armenia, Brazil, Bolivia, Costa Rica, El Salvador, Ethiopia, Guatemala, Indonesia, Mexico, Peru, and Uruguay (South Africa Economic Update Fiscal Policy and Redistribution in an Unequal Society, World Bank, November 2014).”
As this World Bank study also reports:
“South Africa ranks as one of the most unequal countries of CEQ (Commitment to Equality Methodologies applied by official statisticians in income measurement) participant countries, if not among all middle-income countries, given its Gini coefficient of 0.69. The proportion of the population living in poverty at 33.4 percent measured by the international benchmark of $2.50 a day(purchasing power parity, PPP, adjusted) — is also higher than in many other middle income countries with similar levels of GNI per capita. For example, the poverty rate is 11 percent in Brazil and 4 percent in Costa Rica”
To quote further from the World Bank report:
“Briefly, this Update has two main findings. First, the burden of taxes falls on the richest in South Africa, and social spending results in sizable increases in the incomes of the poor. In other words, the tax and social spending system is overall progressive. Second, fiscal policy in South Africa achieves appreciable reductions in poverty and income inequality, and these reductions are in fact the largest achieved in the emerging market countries that have so far been included in the CEQ. Yet despite fiscal policy being both progressive and equalizing, the levels of poverty and inequality that remain are unacceptably high. South Africa is currently grappling with slowing economic growth, a high fiscal deficit, and a rising debt burden. In this context, addressing the twin challenges of poverty and inequality will require not only much-improved quality and efficiency of public services but also higher and more-inclusive economic growth to help create jobs and lift incomes.” (p22)
These income transfers and benefits in kind may moreover, influence the willingness to supply labour services at prevailing wages – especially when wages on offer are very low. By providing an alternative source of benefits welfare raises the reservation wage – the wage at which it makes good sense to work or to seek work, work that may well be physically demanding and less than enjoyable for its own sake. The panel might have paid much more attention to the supply side of the SA to help explain low rates of labour force participation. Also to help explain why immigrants from Africa are much more likely to be employed – at market related wages.
Economic growth and employment – ignoring the evidence
The panel remarks somewhat self-evidently that:
“An additional problem faced by the country is that there is evidence that the growth in the demand for labour in South Africa has not been sufficient to keep up with the much larger growth in labour supply.”
The panel quotes with seeming approval a study that apparently shows growth and job creation are not well correlated. To quote the Panel:
“Recent empirical work by Mkhize (2016) finds that the economy’s capital intensity undermines its ability to generate jobs in times of economic growth. He finds that, in the long run, growth and job creation are not correlated, although there is some sectoral variation. This points to the broader economic policy challenge facing South Africa, which is that there are structural barriers that exacerbate unemployment, the solutions to which require more than economic growth”.
A surprising conclusion it would be thought, given the fact that in the developed world incomes (GDP), population and the size of the labour force have grown together, as indeed it did in SA until the 1980s – as our own work has shown (see below), though such work on the relationship in SA between GDP and numbers employed is complicated by the absence of an official continuous long time series of numbers employed. Though the structural break in the relationship in the 1980s is easy to recognise and to be self-evidently explained by the increasing degree to which the SA labour market came to be regulated and the increasing bargaining power conceded to trade unions in the 1980s.
The recommended NMW represents more of the same lack of faith in market forces that encourage regulation, rather than regulatory interventions to generate growth and employment.
Another case I would suggest of economists as are the governments they usually serve, being part of the economic problem rather than the solution. 28 November 2016
