Narrow wealth gap by improving skills
GLOBAL inequality has widened since the financial crisis. That’s because, in an attempt to jump-start growth, industrialised countries adopted loose monetary policies which increased liquidity and pushed up the values of hard assets such as real estate and art.
This led to the inequality we are now grappling with, and the emergence of discussions around minimum wages. Much of the debate over this policy centres on whether raising minimum wages causes job losses, and the potential magnitude of those losses.
South Africa’s minimumwage legislation covers workers through sectoral determination. The government has introduced a minimum wage in sectors where workers are particularly vulnerable.
According to some researchers, sectoral determination excludes about a million workers who are not represented by collective bargaining.
It has been argued that a national minimum wage would simplify the complexities of the current system, which has 124 wage schedules, and would promote equal pay for work of equal value among workers.
But how effective is a national minimum wage in reducing inequality and unemployment?
The standard model of competitive labour markets predicts that a higher minimum wage will lead to job losses among low-skilled workers.
There was evidence of this when 200 000 jobs were lost over one year following the first sectoral determination.
A binding minimum wage that is set higher than the competitive equilibrium wage reduces employment for two reasons. First, employers will replace low-skilled labour with other inputs, such as equipment. Second, the higher wage and new input mix implies higher prices, in turn reducing product and labour demand.
Unemployment remains high, and the inequality gap is expanding. According to a recent report by the Institute for Justice and Reconciliation, the growth of black middle classes and elites, as well as increased earnings for most in formal employment, has reduced inequality between race groups but led to greater inequality within the black population.
The growing affluence of the rich, both black and white, combined with persistent unemployment and low wages for less-skilled workers, has resulted in an increase in overall inequality. The “wage gap” between high and low earners has widened.
Discussion of how to tackle the inequality problem in South Africa has been varied. Some say the focus should be on unemployment and poverty, while others say it should be on the wage gap.
One of the most compelling rationales for a national minimum wage floor is to raise the incomes of poor or near-poor families.
We need to address the technological change
But I don’t believe that a higher minimum wage will necessarily reduce both poverty and unemployment.
Targeting unemployment by addressing our education and skills development would have greater impact. Workers are not acquiring the experience and skills that would help their productivity in future. We need to address the technological change which has marginalised many workers, especially in mining and agriculture.
We need to increase economic participation in the rural areas and identify export markets that will require increased productivity.
Entrepreneurship is one of the most important tools to solve the unemployment problem.
Leoka is an economist at Argon Asset Management