Will a national minimum wage really help the poor in SA?  Brian Kantor disagrees with the expert panel’s assessment.

‘The aggregate employment losses were estimated as between 100,000 and 900,000 jobs lost in exchange for the recommended national minimum wage. . . . .’

‘It would have been helpful had the panel used the report to explain more fully why employment offers are negatively related to the wages, or rather employment benefits provided by employers in exchange for hours worked.  The relationship is much less self-evident than the panel may have presumed it to be — especially to members and leaders of trade unions, who are inclined to attribute wage differences much more to political forces and bargaining power and even to race, than to the differences in skills and therefore of the contributions to output made by the well and poorly paid’.

Brian Kantor, chief economist and strategist at Investec Wealth & Investment : A reality check on the national minimum wage: Opinion in BusinessLive today published by Business Day.  The views expressed in this article are those of Brian Kantor and may not necessarily represent those of Investec Wealth & Investment.

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Further excerpts

It is always salutary to be reminded just how dire are the economic circumstances of the average South African and how slowly their economic conditions have been improving.  Over 51%, some 29,733,210 of our people, live on less than R1,036.07 a month.  These and many other shocking statistics are reported by the panel of experts appointed to recommend the level of a national minimum wage and on a process for its effective implementation, in their report to Deputy President Cyril Ramaphosa.

The panel has no doubts about the helpfulness of a national minimum wage in principle — only reservations about practice.  To quote selectively from its substantial 128-pages report:

“On its own it will not solve all of the challenges we face, but it is an implementable policy which is designed to have a measurable and concrete benefit on the poor.  The minimum wage is therefore seen as one of the tools to close the wage gap, including between the genders, and thereby to overcome poverty.

“Furthermore, under the correct conditions and at the correct wage level, it is possible for minimum wage policies to contribute to improving economic growth.… Given that the national minimum wage is essentially a policy to help the poor, it is generally accepted that exemptions and exclusions should be kept to an absolute minimum”.

Striking a balance

The panel was required by the social partners in the National Economic Development and Labour Council (Nedlac), who agreed to a national minimum wage, to recommend an appropriate level for it.  Since it recognised a relationship between wages and employment, the national minimum wage had to strike a balance between the effects of increasing wages to a higher prescribed minimum level and its consequences for unemployment — of which SA already has a great abundance.  Some 26% of the labour force, those in work or looking for work, are unemployed, while many more potential workers have been discouraged from looking for work and have fallen out of the labour force.  Adding them to the work force would imply a more broadly defined national unemployment rate well into the 30%-plus range.

The panel recommended a national minimum wage of R3,500 a month, or R20 an hour, to be phased in by 2020, with 90% of the national minimum wage to be applied in agriculture and 70% in domestic service provided to private homes.

It also recommended annual reviews of the national minimum wage and a gradual move to uniformity across all sectors of the economy.

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Minimum wages and employment

It would have been helpful had the panel used the report to explain more fully why employment offers are negatively related to the wages, or rather employment benefits provided by employers in exchange for hours worked.  The relationship is much less self-evident than the panel may have presumed it to be — especially to members and leaders of trade unions, who are inclined to attribute wage differences much more to political forces and bargaining power and even to race, than to the differences in skills and therefore of the contributions to output made by the well and poorly paid.

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The implications of a minimum wage far above average wages

Is there any precedent for a national minimum wage or a sectoral minimum wage determination to be set so far above average earnings?  If so, what have been the consequences for employment?

Put another way, is there reason, given the facts of the labour market, to think the employment elasticities in SA are a lot more negative than the range of assumptions considered by the models?

Time will tell much more about the consequences of the recommended national minimum wage, as the panel complacently assumes, and adjustments can then be made to the model and the recommendations.  But who will care for the unemployed and their dependents in the meanwhile?

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The poor of SA deserve better opportunities to work, and the opportunity for their children to acquire the education and skills that would help them qualify for and find well-paid work.  They do not need further interference in their search for work.

Employers’ response will confuse the evidence

To complicate the numerical outcomes to be observed in due course, employers will make structural adjustments in response to higher minimum wages, such as relying more on mechanisation and automation — requiring more carefully selected and skilled employees.  The forces that substitute capital for labour, especially less skilled labour, are already well at work in the economy.

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Opportunity costs

A further observation of the inconvenient and uncomfortable truths of the South African labour market is that the supply and demand for labour are very well matched for the well paid and very poorly matched for the low paid.

A very high unemployment rate is surely evidence of wage levels that are too high, rather than too low, and undermines the important purpose of providing work for those who would wish to work at prevailing wages.

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Regulatory barriers to employment

There are in fact 124 separate such sectoral minimum wage determinations.  They cover approximately 5-million workers and 33% of those employed — leaving only 35% of workers uncovered including presumably many of the better paid who also lack union representation.

The lowest such monthly determinations in 2015 ranged from R1,813 for domestic workers to R2,844 for contract cleaners in the lowest grades.

The highest sectoral minimum determinations, for more skilled work, were R6,155 a month for workers in private security and R6,506 a month in retail and wholesale businesses.

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The influence of welfare on employment

Nor did the influence of SA’s extensive welfare system on poverty and employment receive much more than perfunctory and rather condescending attention from the panel, which says in its report:

“While wages are low relative to living levels, there are arguably some offsetting effects from the social wage spending by government.  About 35% of SA’s budget is spent on programmes targeted at the poor, including free basic education, healthcare, water and electricity, and income support grants for children and the elderly.”

One can only wonder how panel members could have argued that social wage spending could not have some offsetting effects on consumption and, more arguably perhaps, on employment via the willingness to supply labour services at low hourly rates on offer.

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Growth and jobs: ignoring the evidence

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The recommended national minimum wage represents more of the same lack of faith in market forces that encourages further regulation of the labour market in SA, rather than a very different recommendation to introduce less interference in the market place to generate faster growth and employment.

It represents another example of economists, as are the governments they usually serve, being part of the economic problem rather than the solution.