A Minimum Wage in South Africa

Various countries have implemented minimum wage legislation with a sufficient degree of success to justify it becoming established policy. But South Africa with its very high unemployment rate (especially when judged on the broader definition, which includes those who have abandoned looking for work) and lack of skills is not an obvious candidate. The concern must be that the overall poverty situation could worsen.

It must be said at the outset that the agreed R20/hour or say R3,500 per month (roughly $270 or £220) is a long way from a living wage for even a single person let alone those who possibly have to support an extended family. But the hard economic fact is that 47% of workers are said to be earning less than that (including the vast majority of domestic and agricultural workers) and many of the unemployed are only too happy to take up work below that figure. How then can a balance be struck between being obliged to pay what is an frighteningly low minimum wage and those who will nevertheless be denied work because of that requirement.

The oversupply of unskilled labour has prompted government  to subsidise  employment of some categories of workers to encourage employers to take them on and provide them with some experience, without which it is exceedingly difficult to find employment. Yet this new requirement will work directly against this. Ann Bernstein of the Centre for Development and Enterprise argues that no country with a similar unemployment rate and skills profile has tried to set a minimum wage, so reports of only minor job loss effects are not relevant.

Some of the more likely possible effects are as follows:

  1. Higher prices where the employer is sufficiently insulated against competition (local or foreign) which can particularly be the case in service industries, but even so demand for the product or service will decline to some extent which in turn reduces the labour requirement. At the same time this will be hard on those consumers who are unemployed or who earn more than R3,500/mo but are still living on the poverty line.
  2. Cost reduction measures, especially by those who have no ability to raise prices, including those subject to world prices for commodities. These measures are typically centred on reducing wage costs.
  3. Productivity improvement. This has been pushed by some supporters of a minimum wage but is unlikely in many instances and an employment reduction tends to be the result.
  4. Mechanisation as a means of achieving 2 and 3 above and in response to one expense factor becoming more expensive, but again lowering the demand for labour.
  5. The greater spending power of those who benefit from a higher wage. This is not expected to generate sufficient employment to offset more than a small part of the above effects.
  6. Tax increases in order to fund social grants for the increased number of unemployed.

Market supply and demand forces lead currently to wages in many instances being lower than the proposed minimum. Artificially overriding market forces typically leads to market distortion and a less than optimal result. A joint finding by the Treasury and UCT’s Development Policy Research Unit is that the proposed minimum will lead to job losses of anywhere between 200,000 and one million. Given the already very high unemployment rate this seems likely to exacerbate the already socially troubling divide between those with jobs and those without and would likely increase the existing tensions between locals and foreigners (who typically are small shopkeepers or in informal employment). Large numbers of people with not much to lose can be a time bomb waiting for a populist leader.

What is almost as troubling in all of this is why, when workers have been available at such low wages, has it not been possible to harness their labour profitably in unskilled occupations and how much worse will the situation be if their wages are unilaterally increased. That is a topic for another time but must include SA’s inability to provide modern economies’ requirements for well educated workers together with government policies which are not conducive to growth and which tend to favour those with jobs while neglecting those without (notwithstanding social grants, which while they may be necessary, do not increase employability).

Finally if some action of this sort is necessary is a minimum wage the best solution. Other solutions put forward take the expense away from the employer, thus eliminating many of the adverse consequences listed above, and place the burden on the state. One idea being mooted is the basic grant for all citizens (and permanent residents?), as recently turned down in a Swiss referendum but nevertheless under serious consideration in a number of countries. Yale Greenberg World Fellow Joshin Raghubar has pointed out that the South African Taylor committee of inquiry in 2000 suggested such a scheme but the amount which the country can afford is such that in 2017 after adjustment for inflation its recommendation would only amount to R233 per month, though for a large extended family with only one breadwinner that could amount to a substantial part of the difference between the proposed minimum wage and a market related wage the breadwinner may earn. And of course it is important not to have a basic grant which is a disincentive to seek employment. A possibly more likely solution would be a negative income tax which would bridge part or all of the gap between what the employer is prepared to pay and what the state believes to be a minimum acceptable wage. Both these solutions are likely to have a smaller impact on employment than a minimum wage but at the expense of increased taxation in a country where a heavy burden of taxation already falls on the shoulders of a relatively small proportion of the population. This can though be mitigated by a reduction in, or abolition of, unemployment pay and various social grants.

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