Minimum wage helps SA skirt development traps
A national minimum wage can play an important role in reducing inequality and contributing to sustained development in SA, writes Hansjörg Herr
SA’s lacklustre rates of economic growth and high unemployment may indicate that it is caught in a "development trap".
These traps can occur because of a lack of productivity growth that fails to catch up to levels in developed counties; bad macroeconomic management, for example high inflation or financial crises; or high levels of inequality.
SA may suffer from all three development traps that need to be overcome in order to secure economic development. Inequality appears to be the most serious of the three, with SA belonging to the group of countries with the highest inequality in the world.
A national minimum wage can play an important role in reducing inequality and contributing to sustained development in SA.
Researchers from the International Monetary Fund and elsewhere have concluded, on the basis of large empirical studies, that inequality is a major factor that holds back development. Long-term and sustainable growth periods are especially unlikely for countries with high inequality.
Two complementary explanations are offered.
Firstly, high-income households save a larger share of their income than low-income households. High inequality, therefore, leads to a lack of sustainable mass consumption and also indirectly damps investment demand.
Secondly, high inequality prevents poorer households from spending sufficiently on education or health. High inequality reduces social mobility and is combined with other economic and social ills like high levels of criminality.
How can statutory minimum wages help trigger sustainable development?
Capitalist economies do not automatically tend to full employment. In some countries, for example SA, unemployment is persistently high. Without an institutionally given and enforced lower limit, wages fall to levels that do not even guarantee workers’ physical subsistence. If all workers were covered by collective bargaining and trade unions present and sufficiently strong in all sectors, then bargaining could determining such a lower limit. However, as soon as this is not the case, sectoral wage inequality will explode and workers without collective bargaining coverage are confronted with low wages.
Sufficiently high statutory minimum wages can reduce wage dispersion within and between sectors. In the ideal case, a statutory minimum wage sets a wage floor and collective bargaining, as an independent force, negotiates wages above the minimum level. Minimum wages set on a sector-by-sector basis — as is the practice in SA — can play a crucial role in preventing unacceptable wage dispersion within a sector.
But the whole purpose of a minimum wage is to fix a minimum independent of the sector. It is deeply unfair if the minimum wage, for example for a security guard or a domestic worker, is lower than that of unskilled workers in the car or mining industries.
Fragmented sectorally set minimum wages are typically justified on the basis of different sectoral productivity levels, or occur because of certain privileges or sources of power within different sectors. These factors do not justify different sectoral minimum wages. In the latter cases, this is obvious, but different productivity levels in different industries are also not a good guideline for sectoral minimum wages.
In some industries, it is possible to achieve high productivity increases, in others not. Sectoral minimum wages based on sectoral productivity levels, therefore, lead to higher and higher wage dispersion.
In a country that shows solidarity and strives for social cohesion, moving from a system of sectoral minimum wages to a national one must take place.
Such an adjustment also helps to reduce the general difference of wages between sectors. Ideally, workers with the same qualification and practical experience should earn the same wage irrespective of the sector. The same minimum wage in all sectors will have structural effects on the economy.
On the one hand, the structure of prices in the economy will change. In many sectors, productivity increases can totally or partially compensate for wage increases. A new price structure leads to new technology choices by firms, leading to a ripple effect across the economy.
Increasing minimum wages can increase productivity. This can result from improvement in the quality of labour, for instance through increased investment in health and education, by increasing the motivation of employees and reducing the likelihood of frequent job changes and by spurring higher consumption demand, leading to higher investment (Verdoorn’s Law).
On the other hand, the structure of consumption and production also changes. One reason is the change in prices: some things may be consumed more and other things less.
If minimum wages are substantially increased and/or adjusted between sectors, some sectors expand and others may shrink. This all depends mainly on how consumers react to changes in the structure of prices. However, consumption and production across the economy — which determine investment — are not only (or predominantly) shaped by prices — wages and wage inequality also play a crucial role in the equation.
For example, countries with low wage dispersion have a different consumption and production pattern when compared with countries with high wage dispersion.
In Scandinavian countries, only the super-rich employ domestic workers. However, in the typical developing countries, for example Brazil, the middle class sees it as a status symbol to have a maid for the whole week.
Changing the distribution of income by increasing minimum wages can have positive effects for patterns of consumption and production. A more equal society improves the quality of life of workers together with greater investment in education, health, and so on (positive "supply-side effects").
A more equal society also stimulates higher consumption demand, higher production and greater investment (positive "demand effects").
From a macroeconomic perspective, minimum wages do not destroy jobs; the opposite is the case.
Sometimes people view the matter only from the perspective of a single company and argue that higher wage costs create difficulties for firms. It is true that higher wage costs in one company are problematic for them. However, if wage costs for all companies in a sector rise, then the macroeconomic ripple effects already described occur and firms are likely to be better off.
In the ideal case, minimum wage policy is combined with other policies to reduce inequality (tax policy, provision of public goods, fighting against monopoly profits and so on); policies to increase productivity (mainly via active industrial policy); and policies of macroeconomic demand management and stability (strictly controlled financial system, wage policy to prevent wage inflation, active fiscal policy and so on).
Minimum wages alone are not the magic bullet to create sustainable development.
However, they can be part of a policy package to overcome a development trap via increased employment, higher demand and higher productivity; these are key elements in increasing living standards in less-developed countries.
• Herr is a professor of economics at the Berlin School of Economics and Law and Global Labour University