Pay more, produce more
As debate on a national minimum wage continues in SA, Brazil’s current fiscal crisis offers material to consider. It has raised questions over labour federation Cosatu’s argument that rising wages can help lift millions out of poverty and propel economic growth.
The case of Brazil has been central to Cosatu’s argument that a national minimum wage (which it wants set at R4 500) will benefit SA. A first round of discussions on the matter at the National Economic Development & Labour Council is expected to end next month.
At present SA has no national minimum wage. Instead, sectoral determinations and bargaining council agreements set minimum wages for a large percentage of workers.
Cosatu’s punting of the Brazil model is based on the South American country having created 17m formal jobs from 2002 to 2011 while its minimum wage increased in real terms by 81% between 2003 and 2010. By 2009 the minimum wage represented 40% of the average wage, up from 23% in 1995.
The argument is that increased incomes helped fuel consumer-driven economic growth. This, all without a decrease in the formal workforce, according to the International Labour Organisation’s 2009 World of Work report. Between 2003 and 2010 unemployment instead fell, from 11,6% to 6,1%.
But the crisis has now made the model look vulnerable. Unemployment edged up to 8,1% in the first four months of this year, according to Brazilian household statistics. It touched almost 13% in Brazil’s biggest city, São Paulo, in May, according to the state of São Paulo’s statistics service. And things may worsen. Last month the IMF revised its expectation for Brazil’s economy, saying it would shrink by 1,5% this year, from its earlier estimate of a 1% contraction.
The Brazilian government acknowledges that the present crisis has come about because rising wages have not been accompanied by the requisite increases in productivity.
Productivity rose by just 0,2% (of total factor production) between 2010 to 2014, after having risen by just 1,6% between 2002 and 2010, according to a presentation in May by Brazil’s finance minister, Joaquim Levy. Last year wages outpaced the increase of 0,2% in GDP, rising by 2,7%, Levy noted.
Fernando Holanda Barbosa, a researcher at the Getulio Vargas Foundation, a think tank, last month pointed out that while recently one Brazilian worker produced the same income as 10 Chinese workers, now one Brazilian produces the same income as one Chinese.
A bigger problem is that the national minimum wage is tied to social benefits, meaning pension funds and unemployment benefits have also had to rise exponentially. This has rocketed public spending, with public debt now at nearly 60% of GDP.
Though SA is different because pension fund payments are not linked to minimum wages, the Brazilian case does raise questions about whether wages can keep increasing if productivity doesn’t rise at the same rate.
Free Market Foundation economist Loane Sharp says the end of the commodities boom has laid bare in Brazil “all these unemployment consequences”.
He adds that Brazil’s rising wage case is also an exception more than it is the rule, because the country’s economy has been consistently growing faster than SA’s economy.
Jeremy Seekings, director of the Centre