A minimum wage is the least we can do
THE long-awaited recommendations on a national minimum wage in South Africa were revealed this week, just days before Stats SA data showed unemployment had jumped to 27.1% in the third quarter and shortly before ratings agencies deliver their assessment of progress on the structural reforms they have been calling for.
The report proposes a national minimum wage of R3 500 a month, or R20 an hour. It indicates that a staggering 47.3% of the working-age population earn below this threshold. Moreover, 90.7% of private-household workers and 84.5% of agricultural employees fall into this category — nearly 1.7 million people.
Due to the potential adverse effects of instituting the R3 500 monthly minimum in these sectors, farm and forestry workers, as well as domestic workers, will have a minimum wage of 90% and 70% of the proposed level, respectively.
The recommendations were informed by more than 60 research reports, augmented by consultations and a review of evidence. The panel found that a national minimum wage of R3 500 would contribute to alleviating poverty without adverse effects on employment. It is envisaged that this will become legislation at the beginning of next year and have a phase-in period of two years.
Nevertheless, debate on whether a higher minimum wage will negatively affect employment continues. One school of thought believes that, by lifting minimum wages, job losses will be unavoidable. In fact, the National Treasury has stated that the proposed minimum will result in 715 000 jobs being shed, and shave more than 2% off economic growth. This could be exacerbated by increased mechanisation.
Another argument against the higher minimum wage is that profits have come under severe pressure recently due to weak economic growth and rising input costs, including resilient employee compensation growth. The caveat is that most of the gains seem to have accrued to higher-income groups.
Nevertheless, the argument is that the gap between profit and wage growth must close to ensure the sustainability of private enterprise.
Rising labour costs may also reduce international competitiveness and have an adverse impact on export growth. The attempt to diversify our export base through industrialisation and reduce the vulnerability of the domestic business cycle to external shocks would also be inhibited.
By contrast, supporters of a higher minimum wage emphasise correctly that a sustainable society needs a living wage that can cover basic necessities. While a national monthly minimum wage of R3 500 is proposed, the working poverty line is estimated to be R4 317 a month. Further, inequality in South Africa is rising. Therefore, such a policy intervention can protect those most vulnerable to adverse economic conditions, particularly in the current environment. It could also potentially catalyse growth by nudging more money to low-income households, which have a higher propensity to spend. This would bolster domestic demand.
A great deal of international evidence on the topic reveals that a sensible minimum wage can reduce income inequality and alleviate poverty without compromising economic growth.
Recent literature in Brazil has found that a minimum wage has a negligible impact on overall employment. In China, minimum wages improved productivity without incurring adverse effects on employment. However, different sectors were affected differently. For example, a minimum wage in China’s manufacturing industry produced adverse effects on employment but was positive in the construction sector.
For South Africa, which is characterised by extreme and growing inequality, a well-designed national minimum-wage programme that mitigates against job losses by taking into account the nuances of different industries would likely have a net positive outcome.
Nxedlana is FNB chief economist