Potential disemployment effect of minimum wage carefully weighed
It is mistaken to believe SA workers’ supposed elevated wages lead to high unemployment and further poverty
The release of the report by the advisory panel on the national minimum wage (NMW) and the subsequent agreement by the social partners announced by the deputy president has generated important debate about the economy’s future trajectory. There has been much commentary in response. Commentary from an informed, balanced and considered understanding of the issues, with the objective of contributing constructively to the debate, have been positive and negative.
There has also been ill-informed, ill-considered and ideologically driven contributions that display a remarkable lack of understanding of the nuances of the labour market. From the left and the right, commentary of this type is characterised by one objective only — without any understanding of the evidence, to “knock” an important set of proposals on the basis of an ideologically driven world-view. Sadly, Ann Bernstein’s contribution (Dramatic change to pay structure will set off dangerous chain reaction, February 10) to the debate falls in the second category.
Although she does not spell it out, the theory that underlies her view of how labour markets work is that any intervention in the labour market is undesirable.
In this view, labour markets operate just like a market for tomatoes — let the free market work and, just like tomatoes, labour supply will equal labour demand and unemployment problems will be solved.
In this world-view, there is one reason for SA’s high levels of unemployment: unskilled and low-paid workers in SA earn too much. Any proposal to increase wages for this group, as the NMW does, will, of course, result in the strident ill-considered response one sees from Bernstein and others who hold onto this view.
The truth is that labour markets do not operate like tomato markets.
Unlike a contract to buy and sell tomatoes, by its very nature, a labour contract involves an asymmetric power relationship.
Unlike a seller in a tomato market who is easily able to go to another buyer if the price offered is too low, a relatively unskilled worker has very little option (except perhaps to starve) but to take employment that is offered, however low the wage.
It is for this reason that, left unregulated and to its own devices, labour markets will generate lots of low-paid work.
Unfortunately for Bernstein, the free-market tomato world does not exist in the reality of the labour market.
It is a popular heuristic device for teaching first-year economics at university, but the real world is much more complex.
All sensible economists and policy makers in SA agree the reasons behind unemployment problems are complex and multifaceted. Technological change, developments in the international economy, the prices of commodities, low levels of productivity, an education system that is generating poor-quality outcomes, inadequate skill levels, low levels of investment and extreme wage inequality are just some issues driving unemployment. It is a complex issue and to peg all of this onto higher wages for the bottom earners, as Bernstein does, is not at all helpful.
One of the key messages that have emerged from the panel’s report is the shocking statistic that up to 47% of workers earn less than R3,500 per month.
If high wages were really the only issue, Bernstein should ask herself why, at these very low levels of earnings (below what can be considered enough to live on), unemployment levels are still so high. How much lower would she like to drive these wages?
Bernstein accuses the panel of being irresponsible and taking a “wager”, which she argues will lead to higher levels of unemployment and greater poverty. She is wrong, and for a number of reasons.
EXCEPTIONAL CIRCUMSTANCES
She sails forth as though we live in a country that has no minimum wages. In fact, the Basic Conditions of Employment Act provides for sectoral determinations that set minimums on a sectoral basis for farm workers, contract cleaning, domestic work and the like.
The problem is that the system, designed in the early 1990s, is based on the notion that well-organised trade unions and employer organisations will set minimum wages and standards through collective bargaining and that the sectoral determinations need only to deal with exceptional circumstances.
The labour market has changed a lot since the 1990s. There has been great growth in low-paid, unregulated jobs in which workers have no protection. The NMW is plugging a gap in the regulatory system.
The panel looked at much evidence. Bernstein selectively only mentions two bits of research – by the Treasury and the University of Cape Town’s development policy research unit (DPRU) — which she misrepresents, and either unjustifiably dismisses that which does not suit her case, or ignores it.
The research, based on economic modelling exercises, which the panel reviewed on the possible effects of the NMW, all suffer from two deficiencies. By the very nature of the exercise, the models attempt to predict the future. Predicting the future is not an exact science. Economic models are furthermore abstractions from the real world attempting, parsimoniously, to focus on one or a few of a number of possible theoretical arguments.
The Treasury and DPRU models are based on theory that sees the labour market as behaving something like a tomato market — the only possible way in which the economy can adjust to an increase in wages is through a fall in employment.
Labour markets are not tomato markets. All sorts of other adjustments are possible — productivity could increase, profit rates could fall and domestic demand could rise. The Treasury and DPRU researchers understand this and understand the limits of their models.
The panel debated it with them in the engagements it had with the researchers. The researchers understand these models are extremely useful devices to guide their thinking and to alert them to issues they should consider. They understand that the models are not reality.
Furthermore, Bernstein only mentions the Treasury and DPRU models because these suit her argument. The panel also had to consider other research that suggests the disemployment effects would not be large.
The Applied Development Research Solutions model suggests that the employment effects would be neutral and that there would be important growth effects of an NMW. The panel looked at all the models, understood the limitations and strengths of the research and took a balanced view about the risks.
Bernstein conveniently dismisses the international evidence that suggests NMWs do not do nearly as much harm as she suggests on the grounds that SA’s extremely high levels of unemployment make the international evidence irrelevant — another example of her conveniently ignoring what does not assist her narrow arguments. Many countries that have much in common with SA have an NMW — Brazil, Mexico, Indonesia, Costa Rica, to name a few — and all this research evidence needs to be considered.
MANAGED INTRODUCTION
No one can predict with certainty what the future will bring, so there are always risks, but South Africans can be assured that, unlike Bernstein’s approach, the panel carefully considered all the issues and all the research before recommending an NMW of R20/hour.
The panel did not underplay the potential disemployment effects.
It considered these and highlighted the importance of carefully managing how the economy adjusts to the NMW. A careful reading of its report will show the panel keenly understood the importance of a managed introduction of the NMW in a manner that reduces the risks.
Everyone agrees, as does Bernstein, that SA’s current pattern of economic growth does not generate sufficient employment opportunities. To say this is trite. The question is what should be done about the problem.
Bernstein seems to suggest the solution is to generate even more insecure employment opportunities that pay wages well below what is required to live just above the bread line. SA has been doing that since the early 1990s and it is not working — as about 6.6-million people in low-paid jobs and the millions more who cannot even find low-paid work, can attest to.
The NMW is one small and cautious step in taking SA along an inclusive economic path that gets its economy onto a growth path that begins to tackle employment and inequality.
The panel’s proposals are balanced, carefully considered, and deal with the reality of the labour market in SA. The same cannot be said for Bernstein’s critique.