National minimum wage can’t be blamed for joblessness
Reckless allegation is based on bending facts and the assumption that labour is a commodity like any other; it isn’t
Last week Statistics SA released the results of the latest quarterly labour force survey. The findings of the survey highlight many of SA’s biggest economic problems, especially around employment, and do not make good reading.
The narrow unemployment rate hit 27.6% in the first quarter of 2019, an increase from 27.1% in the previous quarter. We should all be concerned about these numbers. As a general trend employment tends to fall between the last quarter of one year and the first quarter of the next, partly because people employed over the busy year end period as temporary staff are not employed in the new year. Even so, there has been some very poor and often incorrect interpretation of the results.
One such example is that several commentators and economists have blamed the national minimum wage (NMW), which was introduced on January 1, for driving up unemployment. For the most part this criticism has revealed ignorance about what the minimum wage is, how minimum wages work in general, and the policy intention behind the NMW in SA.
Our first point is that specifics matter. The minimum wage is R20 per hour, not R3,500 per month, as it will vary based on the actual number of hours worked. This is a crucial distinction that has important implications for how the minimum wage will affect part-time employment, and for how we make comparisons between current earnings and the minimum wage. All of this is set out in detail in the report of the minimum wage advisory panel, which we both worked on.
Our second point is a simple one about causation. Most simply put it is reckless to infer from a single quarter of labour force survey data that the minimum wage is driving up unemployment in SA. Unemployment has been growing, as a general trend, since 2009 and has grown even faster since 2016. Understanding whether the most recent increase is due to the NMW requires careful statistical work and data for a sufficiently long period to allow for the policy to be properly implemented — neither of which is the case just yet. Any attribution of rising unemployment to the minimum wage at this stage is therefore mere speculation. Understanding what impact the NMW is having on employment will, at the very least, require several quarters of employment data and intricate analysis.
Since the president announced that agreement had been reached at Nedlac on the principle and level of the NMW, a number of commentators have painted a picture of an oncoming disaster. There are at least three reasons why readers should treat this sort of speculation with caution. First, SA has had minimum wage legislation for many, many years; the NMW builds on an existing architecture of sectoral minimum wages.
Second, the panel, in reaching its recommendation, thought carefully about how to implement the system in a way that would reduce the risks. For example, it recommended that in sectors such as domestic and farm work, where levels of wages are very low, a tier system that allows for a longer adjustment period should be part of the implementation.
Third, in all sectors of the economy businesses that may not be able to pay at the level of the NMW are able to apply for an exemption. None of the commentators who paint a doomsday scenario appear to have understood these basic elements of the design and implementation.
More broadly, the argument linking minimum wages to unemployment reveals some fundamental assumptions many hold about the labour market and which we would argue are incorrect. Those who contend that minimum wages must necessarily lead to higher unemployment believe the labour market is a commodity market like any other (think of the market for carrots or tomatoes), where higher prices must lead to lower demand. But in the market for tomatoes there are no power dynamics, no gender discrimination, no racism and no concerns about equality. Assuming that the labour market is the same as the market for tomatoes is a false equivalence.
Of course, it is quite obvious that the labour market is very different from most other commodity markets, not least because it is not people who are bought and sold in the labour market, but their labour time. There are many other important factors that differentiate labour markets: industrial structure, market power, concentration and monopsonies, and social and labour market institutions. This means the link between wages and employment is far less straightforward than many believe. The labour market is a social mechanism just as much as it is an economic one.
To make this point clearly, let us take the counterfactual. If one believes unemployment is high because wages are above the equilibrium price, it must follow that lowering the price of labour will lead to rising employment, until wages are so low that everyone who wants a job has one. But the post-apartheid period has seen extensive growth in very low pay and continually rising unemployment. The question then, for those who argue that wages must fall, is how far the level of wages must fall to clear the labour market, and what the consequences would be for poverty and inequality.
This raises the third important issue, one that is often lost in discussions of the SA labour market. It is that employment is one (very important) consideration but it is not the only one. We are also concerned with equity in the labour market, both between those who do the same job and between those in different jobs. We are also concerned with the effects of racism and patriarchy in the workforce and the fact that, for example, white men continue to be better paid than women and nonwhites, even when they do the same work. It is for this reason that we have an institution such as Nedlac, in which the minimum wage was debated for many years and where the multiple dimensions of the labour market and the minimum wage were considered.
Unemployment in SA is a major problem, and we should be very concerned about any increases in the level of unemployment. However, what is needed is a sensible debate based on considered and robust research. It is interesting that a number of commentators who have accused the panel of being reckless, without understanding the nuance of design and implementation in its recommendations, are the same people who on one quarter of employment data reach the conclusion that an NMW is bad policy. Who, one might ask, is being reckless?
• Prof Valodia is dean of commerce, law and management at Wits University and leads the university’s Southern Centre for Inequality Studies, where Francis is deputy director. Valodia chaired the advisory panel on the NMW and Francis was lead researcher.