NMW can be made to work
Faulty models underpin the predictions that a national minimum wage would cause huge job losses in SA
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.