This article will provide a comprehensive overview of what a national minimum wage involves, how it might affect employment statistics and whether it will aid inequality and the Gini coefficient. Brazil’s minimum wage policy will be examined at length and conclusions will be drawn on whether the Brazilian example could work in the context of South Africa.
Figure 1 below illustrates the relationship between minimum wage and employment.
In Figure 1 the minimum wage requires workers be paid a higher wage than the equilibrium would dictate in a perfectly competitive market; it is important to note that this is not always the case. In many developed countries workers are paid above minimum wage to satisfy demand and supply effects. The graph, however, would be an accurate depiction of the South African example where equilibrium wages are low due to high unemployment and, thus, an overwhelming supply of labour to the market.
Reference will also be made to social wages; this is an all-encompassing term that describes the social welfare benefits associated with subsidised education, health care and housing (National Treasury, 2013). Social wages are often described as the non-income portion of monthly wealth gains. That is to say that although a person may receive an income of x amount, they may also benefit from free housing, food stamps and education subsidies which are also a source of gain and result in final monthly inflows that exceed just the x amount of income.
Minimum wage in South Africa today
South Africa’s current minimum wage set up is complex and incomplete; the wages are applied only to certain sectors and, in some cases, differ according to skill-level and experience (Department of Policy Research Unit [DRPU], 2008). This makes the current minimum wage legislation difficult to understand, and - more importantly - it leaves the majority of labour sectors unregulated.
The proposed national minimum wage would work quite differently; it would (according to COSATU’s manifesto) form part of a larger policy to combat income inequality and would ensure a single, overarching wage floor. Essentially, all current sector-related minimum wages would be replaced by one minimum wage (COSATU, 2014). This wage is envisioned to be a “living wage” wherein anyone who received it would be able to survive on the wage alone. COSATU argues that the national minimum wage would then form the basis of all collective bargaining efforts; it would be a wage level from which to improve upon.
Media reports suggest that organisations are calling for a national minimum wage of between R4 000 and R8 000 but COSATU have yet to come out with a final figure (Fin24, 2015). These amounts will become relevant when unemployment and job security are discussed, given the radical increase these figures are from the current sector-based minimum wages. As Craig Dodds (2014) explains; what is more important than the whether a national wage should set is at what level it should be set. The assumption will be made throughout this paper that the introduction of a national minimum wage will increase all minimum-wage earners incomes.
The implications
The Development Policy Research Unit at the University of Cape Town published a paper in 2008 that dealt explicitly and comprehensively with minimum wage arguments. The implications of which will be discussed briefly below.
The possible negative implications are, broadly speaking, unemployment and higher living costs. The introduction of a national minimum wage will change the finance structure of every firm that employs low-cost workers who are currently paid a wage below the proposed national minimum. The cost of labour will increase. Firms will be faced with decisions regarding how to offset the higher labour costs and many will likely choose to cut back on the number of workers employed. Others may choose to cut costs in other areas but it is highly unlikely that firms will accept an overall decrease in profits as a result; what is more likely is a price increase in the product or service offered by the firm. These price increases could occur across South Afrca and result in a higher cost of living for all South Africans, offsetting the gains made by an increase in income.
Positive implications of a national minimum wage are, possibly, increased aggregate demand and poverty alleviation. Workers who are able to retain their employment will enjoy an increase in income and will, as a result, stimulate overall consumption. When one considers the number of workers who earn minimum wage, this figure is likely to be impressive. Furthermore, the nature of a minimum wage is to protect those who earn the least and increasing their income will have a direct impact on inequality. The issue with the above argument, however, is that South Africans who face the most severe poverty are unemployed and a national minimum wage would not directly benefit them. What could be argued, however, is that the increase in aggregate demand and spending would allow Government to spend more on social wages – thus also providing value to the unemployed population.
The Brazilian Example
Brazil is commonly referenced when discussing minimum wage success stories. It is used as proof that sharp increases in minimum wages need not result in large decreases in employment.
Former Brazilian president Ignacio Lula da Silva, who is credited for the success, was the leader of the Brazilian Workers’ Party. His pro-poor income policy was able to improve inequality in Brazil by increasing incomes across the board, but ensuring that the lowest incomes increased by a higher percentage than the incomes of the wealthy (Paton, 2014). This was done directly through and increase in the minimum wage while simultaneously broadening Brazil’s public works efforts. President Lula explained that his bottom up approach had allowed previously impoverished groups to increase their purchasing power which stimulated consumption in the economy (COSATU, 2014).
Eventually, during President Lula’s second term, the policy saw an increase in employment (rather than the decrease opponents often fear), a reduction in poverty, an improved GDP, less inequality and an overall strengthening of their economy and growth prospects (COSATU, 2014; Paton, 2014).
Interestingly, these results were unpredicted. In 2004 economists Maloney and Mendez published a paper that predicted negative impacts on employment, concluding that the national minimum wage increases would be met with far-reaching unemployment.
Could South Africa be next?
COSATU’s argument in support of a national minimum wage relies solely on the Brazilian case study. They believe that because Brazil and South Africa share similar statistics in terms of labour demographics, inequality and development there is a good chance that policies used in Brazil will succeed in South Africa.
What COSATU fails to comprehend is the glaring differences in each scenario. For one, the financial landscape today is different to the one Brazil was facing in 2002; in 2002 fewer multinationals existed and outsourcing labour was less common, the 2008 crisis had not occurred and growth projections were optimistic (Lund, 2012). Presently, South Africa is facing sluggish growth and threats by multinationals to move their labour plants elsewhere in the face of rising costs (Nene, 2015)
When Brazil undertook to increase national minimum wages they did so as part of a larger development plan. This meant that when the private sector could not afford newly increased labour costs, the public sector was increasing employment to offset against those losses while paying the higher minimum wage (Paton, 2014). COSATU (2014) has admitted that there is a need for the South African government to make the national minimum wage part of a larger pro-poor income policy – essentially stating that one does not exist at present.
Politically, South Africa and Brazil are incomparable. The existence of (and subsequent ruling by) a Workers’ Party in Brazil while is symbolic of the differences; South Africa is decades away from the political reform needed to separate the current tri-partite alliance between the ANC, COSATU and the SACP (Paton, 2014; Lund, 2012). South Africa would need strong, revolutionary political support from a workers movement (like the Workers’ Party evident in Brazil) to convince the ANC to move away from its current economic agenda.
It is entirely impossible to gauge exactly what the outcomes of a minimum wage in South Africa might be at this point. COSATU are currently campaigning and drawing recommendations to present to the Planning Commission and it is clear they plenty of clarifying and expanding to do on the proposal they currently have. What is most important when considering the suitability of a national minimum wage is the nominal figure at which the wage will be pegged. All discussion up till that point is rendered nothing more than conjecture, and even then, as proved by the Mahoney and Mendez (2004) paper, only time will tell.
Political consideration
The important role that politics plays in this discussion cannot be understated. South Africa’s economy, as with every economy worldwide, does not function in a vacuum and is heavily linked to the political agenda of each stakeholder. Currently, COSATU is the political organisation most invested in the introduction of a national minimum wage. If a national minimum wage is to be set, it will have to pass in parliament for which it needs ANC support. Thus the final outcome relies on COSATU’s ability to convince their leaders of the need to reform the current status quo on income inequality.
Concluding remarks
Brazil was able to prove critics wrong and show that an increasing minimum wage need not be met with a decreasing employment rate and can in fact combat poverty. They were able to do so through stringent reform and strong government support. COSATU has argued that the Brazilian example can be readily applied to the South African context. The organisation will, however, need to garner support from the ANC and clarify their plans for the policy if they want to see the national minimum wage become a reality. A national minimum wage could, as evidenced in Brazil, improve South Africa’s Gini coefficient without harming employment but this is largely dependent on what level the minimum wage is set.
------
Reference will also be made to social wages; this is an all-encompassing term that describes the social welfare benefits associated with subsidised education, health care and housing (National Treasury, 2013). Social wages are often described as the non-income portion of monthly wealth gains. That is to say that although a person may receive an income of x amount, they may also benefit from free housing, food stamps and education subsidies which are also a source of gain and result in final monthly inflows that exceed just the x amount of income.
Minimum wage in South Africa today
South Africa’s current minimum wage set up is complex and incomplete; the wages are applied only to certain sectors and, in some cases, differ according to skill-level and experience (Department of Policy Research Unit [DRPU], 2008). This makes the current minimum wage legislation difficult to understand, and - more importantly - it leaves the majority of labour sectors unregulated.
The proposed national minimum wage would work quite differently; it would (according to COSATU’s manifesto) form part of a larger policy to combat income inequality and would ensure a single, overarching wage floor. Essentially, all current sector-related minimum wages would be replaced by one minimum wage (COSATU, 2014). This wage is envisioned to be a “living wage” wherein anyone who received it would be able to survive on the wage alone. COSATU argues that the national minimum wage would then form the basis of all collective bargaining efforts; it would be a wage level from which to improve upon.
Media reports suggest that organisations are calling for a national minimum wage of between R4 000 and R8 000 but COSATU have yet to come out with a final figure (Fin24, 2015). These amounts will become relevant when unemployment and job security are discussed, given the radical increase these figures are from the current sector-based minimum wages. As Craig Dodds (2014) explains; what is more important than the whether a national wage should set is at what level it should be set. The assumption will be made throughout this paper that the introduction of a national minimum wage will increase all minimum-wage earners incomes.
The implications
The Development Policy Research Unit at the University of Cape Town published a paper in 2008 that dealt explicitly and comprehensively with minimum wage arguments. The implications of which will be discussed briefly below.
The possible negative implications are, broadly speaking, unemployment and higher living costs. The introduction of a national minimum wage will change the finance structure of every firm that employs low-cost workers who are currently paid a wage below the proposed national minimum. The cost of labour will increase. Firms will be faced with decisions regarding how to offset the higher labour costs and many will likely choose to cut back on the number of workers employed. Others may choose to cut costs in other areas but it is highly unlikely that firms will accept an overall decrease in profits as a result; what is more likely is a price increase in the product or service offered by the firm. These price increases could occur across South Afrca and result in a higher cost of living for all South Africans, offsetting the gains made by an increase in income.
Positive implications of a national minimum wage are, possibly, increased aggregate demand and poverty alleviation. Workers who are able to retain their employment will enjoy an increase in income and will, as a result, stimulate overall consumption. When one considers the number of workers who earn minimum wage, this figure is likely to be impressive. Furthermore, the nature of a minimum wage is to protect those who earn the least and increasing their income will have a direct impact on inequality. The issue with the above argument, however, is that South Africans who face the most severe poverty are unemployed and a national minimum wage would not directly benefit them. What could be argued, however, is that the increase in aggregate demand and spending would allow Government to spend more on social wages – thus also providing value to the unemployed population.
The Brazilian Example
Brazil is commonly referenced when discussing minimum wage success stories. It is used as proof that sharp increases in minimum wages need not result in large decreases in employment.
Former Brazilian president Ignacio Lula da Silva, who is credited for the success, was the leader of the Brazilian Workers’ Party. His pro-poor income policy was able to improve inequality in Brazil by increasing incomes across the board, but ensuring that the lowest incomes increased by a higher percentage than the incomes of the wealthy (Paton, 2014). This was done directly through and increase in the minimum wage while simultaneously broadening Brazil’s public works efforts. President Lula explained that his bottom up approach had allowed previously impoverished groups to increase their purchasing power which stimulated consumption in the economy (COSATU, 2014).
Eventually, during President Lula’s second term, the policy saw an increase in employment (rather than the decrease opponents often fear), a reduction in poverty, an improved GDP, less inequality and an overall strengthening of their economy and growth prospects (COSATU, 2014; Paton, 2014).
Interestingly, these results were unpredicted. In 2004 economists Maloney and Mendez published a paper that predicted negative impacts on employment, concluding that the national minimum wage increases would be met with far-reaching unemployment.
Could South Africa be next?
COSATU’s argument in support of a national minimum wage relies solely on the Brazilian case study. They believe that because Brazil and South Africa share similar statistics in terms of labour demographics, inequality and development there is a good chance that policies used in Brazil will succeed in South Africa.
What COSATU fails to comprehend is the glaring differences in each scenario. For one, the financial landscape today is different to the one Brazil was facing in 2002; in 2002 fewer multinationals existed and outsourcing labour was less common, the 2008 crisis had not occurred and growth projections were optimistic (Lund, 2012). Presently, South Africa is facing sluggish growth and threats by multinationals to move their labour plants elsewhere in the face of rising costs (Nene, 2015)
When Brazil undertook to increase national minimum wages they did so as part of a larger development plan. This meant that when the private sector could not afford newly increased labour costs, the public sector was increasing employment to offset against those losses while paying the higher minimum wage (Paton, 2014). COSATU (2014) has admitted that there is a need for the South African government to make the national minimum wage part of a larger pro-poor income policy – essentially stating that one does not exist at present.
Politically, South Africa and Brazil are incomparable. The existence of (and subsequent ruling by) a Workers’ Party in Brazil while is symbolic of the differences; South Africa is decades away from the political reform needed to separate the current tri-partite alliance between the ANC, COSATU and the SACP (Paton, 2014; Lund, 2012). South Africa would need strong, revolutionary political support from a workers movement (like the Workers’ Party evident in Brazil) to convince the ANC to move away from its current economic agenda.
It is entirely impossible to gauge exactly what the outcomes of a minimum wage in South Africa might be at this point. COSATU are currently campaigning and drawing recommendations to present to the Planning Commission and it is clear they plenty of clarifying and expanding to do on the proposal they currently have. What is most important when considering the suitability of a national minimum wage is the nominal figure at which the wage will be pegged. All discussion up till that point is rendered nothing more than conjecture, and even then, as proved by the Mahoney and Mendez (2004) paper, only time will tell.
Political consideration
The important role that politics plays in this discussion cannot be understated. South Africa’s economy, as with every economy worldwide, does not function in a vacuum and is heavily linked to the political agenda of each stakeholder. Currently, COSATU is the political organisation most invested in the introduction of a national minimum wage. If a national minimum wage is to be set, it will have to pass in parliament for which it needs ANC support. Thus the final outcome relies on COSATU’s ability to convince their leaders of the need to reform the current status quo on income inequality.
Concluding remarks
Brazil was able to prove critics wrong and show that an increasing minimum wage need not be met with a decreasing employment rate and can in fact combat poverty. They were able to do so through stringent reform and strong government support. COSATU has argued that the Brazilian example can be readily applied to the South African context. The organisation will, however, need to garner support from the ANC and clarify their plans for the policy if they want to see the national minimum wage become a reality. A national minimum wage could, as evidenced in Brazil, improve South Africa’s Gini coefficient without harming employment but this is largely dependent on what level the minimum wage is set.
------
Reference List
Burns, J., Edwards, L., & Pauw, K., 2010. Wage subsidies to combat unemployment and poverty: Assessing South Africa's options. Available online: http://www.opensaldru.uct.ac.za/handle/11090/73
Cooper, R & John, A. A,, 2013. The effects of a minimum wage. Microeconomics: Theory Through Applications. Available online: http://catalog.flatworldknowledge.com/bookhub/reader/2992?e=coopermicro-ch10_s02
COSATU, 2014. A national minimum wage for South Africa. Available online: http://www.cosatu.org.za/docs/misc/2014/neilcoleman_llcnmw.pdf
Development Policy Research Unit, 2008. Minimum wages, employment and household poverty: investigating the impact of sectoral determinations.
Dodds, C., 2014. Minimum wage versus job losses conundrum. Available online: http://www.iol.co.za/business/news/minimum-wage-versus-job-losses-conundrum-1.1740010#.VREg_o6UcSg
Fin24, 2015. Calls mount for guaranteed minimum wage. Available online: http://www.fin24.com/Budget/Increasing-calls-for-guaranteed-minimum-wage-20150224
Freeman, R. B., 1996. The minimum wage as a redistributive tool. The Economic Journal, 639-649.
Lund, T., 2012. Minimum wages. Available online: http://www.financialmail.co.za/politics/2012/10/08/minimum-wages
Maloney, W., & Mendez, J., 2004. Measuring the impact of minimum wages. Evidence from Latin America. Law and Employment: Lessons from Latin America and the Caribbean . 109-130. University of Chicago Press.
National Treasury, 2013. Social security and the social wage. Budget review 2013. Available online: http://www.treasury.gov.za/documents/national%20budget/2013/review/chapter%206.pdf
Nene, N., 2015. Budget Speech. Available online: http://www.parliament.gov.za/content/speech~11.pdf
Paton, C., 2014. Is South Africa ready for a labour-led “Lula” movement? Available online: http://www.bdlive.co.za/national/labour/2014/02/21/is-sa-ready-for-a-labour-led-lula-moment
South African Government, 2014a. State of the Nation Address. Available online: http://www.gov.za/state-nation-address-his-excellency-jacob-g-zuma-president-republic-south-africa-occasion-june-2014
No comments:
Post a Comment