HAROON BHORAT: Minimum-wage gamble
It’s a measure that is often touted as a panacea for inequality. But setting a minimum wage is a double-edged sword, as agriculture has shown
Minimum wages are generally viewed as an important instrument in worker protection and wage support. In an ideal world, a minimum wage helps to reduce poverty as well as inequality.
Indeed, for the majority of countries, adopting some form of minimum-wage legislation has now become a standard tool of labour-market policy. More recently, in developed economies where debates about rising inequality are receiving increased attention, the minimum wage has gained attention as a mechanism for offsetting widening income disparities, alongside other measures such as raising taxes on higher earners.
SA, no stranger to minimum-wage policy, is following suit with the adoption of a national minimum wage (NMW), which has been effective since January 2019, in the hope that it will raise wages for millions of workers.
Prior to the NMW, there was a system of minimum-wage rules in some sectors.
The government has used this regime to boost earnings for low-paid workers in vulnerable sectors for almost two decades. But unlike the new NMW, these sectoral determinations set different minimum wages in specific sectors characterised by low wages and limited union coverage. This left more organised industries to set their own wages, through bargaining councils.
The figure shows the rates at which the sectoral determinations have increased since they were first introduced, as well as the average hourly minimum wages in 2017 (the proposed NMW of R20 an hour is shown by the horizontal red line).
Taken together, minimum wages have increased in real terms by 46%, with almost no negative employment effects, though notably in some sectors, employers have cut the number of hours an individual works.
The one exception to this relatively positive story is in agriculture, where a one-off increase in the minimum wage of 50% in 2013 led to huge job losses.
The experience in agriculture serves as a cautionary tale against raising minimum wages by too much, particularly in those sectors where large numbers of part-time workers can easily be laid off, or where capital substitution possibilities exist.
So, as much as minimum wages can raise the floor for low-wage workers, they also carry the threat of job losses. It is the art of effective, and responsible, policy-making to manage this trade-off.
Too often, SA has sacrificed jobs to be able to pay higher wages.
For the NMW, an evidence-based and transparent wage-setting procedure will be critical. At least the process followed in establishing the policy so far is encouraging in this respect.
As the president prepares to sign a new minimum wage regime, the downside could be huge
Yet the worry is that, despite the substantial real increases in minimum wages in eight sectors covering about 4.5-million workers, there has been little change in the levels of overall poverty and wage inequality.
This is in large part due to the fact that given the dynamics of SA today, the minimum wage remains an inadequate, and arguably an incorrect, tool for these challenges.
Take a simple example: We have burdened the minimum wage with trying to resolve all the welfare challenges faced by workers in agriculture.
But by doing so, we’ve created large job losses which may have undermined the growth of the sector itself.
The minimum wage cannot be seen as the panacea for all welfare challenges faced by workers. It is a delicate instrument, with significant downside risks — and should be used with extreme care.
• Bhorat is professor of economics and director at the development policy research unit at the University of Cape Town