NMW can be made to work

Faulty mod­els un­der­pin the pre­dic­tions that a na­tional min­i­mum wage would cause huge job losses in SA

Financial Mail - - ON MY MIND GILAD ISAACS - Isaacs is the co-or­di­na­tor of the Na­tional Min­i­mum Wage Re­search Ini­tia­tive at Wits

The na­tional min­i­mum wage (NMW) is a po­lar­is­ing is­sue. A re­cent ar­ti­cle ( , Au­gust 11-17) ex­em­pli­fied this by po­si­tion­ing two NMW re­search projects — by economists at UCT and Wits — as oc­cu­py­ing op­pos­ing cor­ners. This is un­help­ful. Min­i­mum wages aim to re­duce poverty and in­equal­ity. To do so, they must raise wages for poor and lower-in­come house­holds — and do so faster than the wages of mid­dle- and up­per-in­come earn­ers rise.

Our col­lec­tive start­ing point should be to ask how an NMW can max­imise ben­e­fits, min­imise risks, and sup­port work­ers and the wider econ­omy.

Though there are im­por­tant dif­fer­ences be­tween the work com­ing from UCT and Wits (the lat­ter I co-or­di­nate), there are also ar­eas of con­sen­sus. Wits and UCT reach sim­i­lar con­clu­sions in their re­view of the in­ter­na­tional lit­er­a­ture. That ev­i­dence in­di­cates nei­ther a “jobs blood­bath” nor un­bounded eco­nomic pros­per­ity as the re­sult of an NMW alone.

Re­gard­ing em­ploy­ment, the UCT re­search quotes in­ter­na­tional re­views that show the “im­pact of [min­i­mum wage] reg­u­la­tions tends to be ei­ther in­signif­i­cant or mod­estly neg­a­tive [on em­ploy­ment]”, with “lit­tle or no em­ploy­ment re­sponse to mod­est in­creases in the min­i­mum wage”. UCT con­curs with Wits in con­clud­ing: “Within some fea­si­ble range a min­i­mum wage will not have sig­nif­i­cant nor large dis­em­ploy­ment ef­fects.” Out­side of this range, job losses could oc­cur.

The cen­tral ques­tion is how SA’s econ­omy would ad­just to a wage in­crease.

In­ter­na­tion­ally, ad­just­ments in­clude: pro­duc­tiv­ity in­creases; re­dis­tri­bu­tion from high earn­ers to low earn­ers; re­duced profit mar­gins; and a slight in­crease in prices. Ef­fects on em­ploy­ment have been found to be slight. In ad­di­tion, in­creased spend­ing from work­ers has been shown to stim­u­late the econ­omy.

But, as the Fi­nan­cial Mail noted, a key dif­fer­ence be­tween the UCT and Wits re­search is the pre­dic­tions they make based on their sta­tis­ti­cal mod­el­ling.

The tech­nique used by UCT can­not ac­com­mo­date the re­al­world ad­just­ments just de­scribed. As a re­sponse to higher wages, only price rises or job losses are pos­si­ble in their model. The as­sump­tions im­posed mean wage in­creases can lead only to job losses and eco­nomic de­te­ri­o­ra­tion. These con­straints lead to UCT’s con­clu­sion that an NMW as low as R1,619 can re­sult in up to 450,000 job losses. This is sur­pris­ing, given that R1,619 is be­low the low­est cur­rent sec­toral de­ter­mi­na­tion in place.

UCT es­tab­lished a “fea­si­bil­ity range” for the NMW some­where be­low R1,619. If its pre­dic­tions are right, then the de­bate is over: the NMW is a bad idea.

But these pre­dic­tions dif­fer from the global lit­er­a­ture, which shows mod­est min­i­mum wage in­creases don’t lead to job losses.

Wits uses a dif­fer­ent model, built on the ba­sis of ob­served re­la­tions in SA: the econ­omy re­sponds in line with the ad­just­ments that have been ob­served in­ter­na­tion­ally.

It pre­dicts that at an NMW of R3,500-R4,600 there will be a large rise in wages for low­in­come earn­ers, an in­crease in con­sump­tion spend­ing, and pro­duc­tiv­ity gains. The re­sult is a mod­est rise in out­put and growth — but with re­duc­tions in poverty and in­equal­ity. The im­pact on em­ploy­ment is slightly neg­a­tive, pro­jected to be up to 0.3% lower. The “fea­si­bil­ity range” for this model is higher and more realistic.

UCT’s Ha­roon Bho­rat cor­rectly notes that no-one should be putting their “heads in the sand” and ig­nore the po­ten­tial em­ploy­ment im­pact. But his im­pli­ca­tion that the Wits study does so is disin­gen­u­ous. The mod­el­ling de­tails which sec­tors stand to gain and lose, and the pol­icy re­search pro­poses ways to max­imise gains and min­imise risks.

Col­lec­tively we can de­sign an NMW pol­icy ap­pro­pri­ate for SA — one that re­duces poverty and in­equal­ity, with sus­tain­able ef­fects for the econ­omy.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.