Reflections on the Minimum Wage Bill

13 June 2018

INTRODUCTION

The National Minimum Wage Bill (“Bill”) was passed by the National Assembly on 29 May 2018. It will be passed through the National Council of Provinces before it can be signed into law by the President. The concomitant Labour Relations Amendment Bill and the Basic Conditions of Employment Amendment Bill were also adopted by the National Assembly on that day. The Bill squeaked through with just 202 votes in favour (one more than required) with the Democratic Alliance (DA) and the Economic Freedom Fighters walking out and opposing the legislation. Will its implementation address firstly, unemployment and secondly, income inequality or will the Bill exacerbate one or both of these problems?

The Bill is designed to increase the earnings of more than 6 million South Africans. The Bill was introduced in light of staggering inequality between earners in South Africa.

It must be strongly asserted, as a precursor, that while economic considerations are fundamental to the consideration of minimum wage, the reality of the situation is that the lives of millions of South Africans are affected. Beyond numbers on graphs and scales lie the lives of many vulnerable people. This brief does not provide an in-depth account of the moral attention that this matter deserves.

Two seemingly contradictory approaches are explored. Firstly, that the Bill could alleviate inequality and, coupled with social wage initiatives, reduce poverty. The other is that minimum wage will increase and prolong unemployment and that continued reliance on grants will serve redistributive measures only, instead of focusing on sustainable growth.

Before each position is considered, the rationale for the Bill and South Africa’s context of unemployment, inequality and poverty must be explored.

UNEMPLOYMENT

South Africa’s unemployment rate stands at around 26.7%. The 3 largest categories of unemployed South Africans include, the youth - those who have finished their schooling and have never worked, elderly persons with previous work experience but who have been seeking work for an extended period of 3 years and those aged 30 years to 65 years with past work experience but who have been seeking work for a shorter duration.

Two distinctions must be drawn: firstly unemployment and disemployment must be distinguished. While unemployment refers to a temporary state of not having a job, disemployment is not-so-temporary because it arises from the displacement and/or eradication of certain types of jobs or job functions that are likely never to return to our economy in any meaningful way.[1] 

Secondly – the difference between the strict definition of unemployment and expanded unemployment. The strict definition refers to those who are unemployed and are actively seeking work – the “searching unemployed,” while expanded unemployment refers to the categories of discouraged job-seekers: those that want to work but are not actively searching for a job as they have lost hope – the “non-searching unemployed”.

It is generally accepted that the national minimum wage should aim to have little or no disemployment effects and that it is not used as a measure to create jobs.[2]

INEQUALITY

With a Gini Coefficient of around 0,7[3] (out of 1) and 10% of the population earning around 55%–60%[4] of all income, compared to between 20-35% in advanced economies[5] South Africa is one of the most unequal societies in the world. The distinction between inequality pertaining to earning and wealth inequality must be made. While the first refers to the gap in earning power in the population, the later refers to assets such as real estate, pension funds and shares of listed companies. In terms of wealth inequality, it has been estimated that 10% of the South African population owns 90–95% of all assets.[6]

It has been suggested that wage differentials, not unemployment, is the main source of inequality in South Africa, responsible for about 56% of inequality.[7] It is hoped that labour market regulations such as the introduction of a minimum wage would help to improve income distribution.[8]Wage inequality affects wealth inequality and entrenches social divides. In the long-term, financial inequality can cause dire social, economic and political consequences.[9]

POVERTY

While various factors contribute to poverty, for the purposes of this brief, poverty will be considered as informed by unemployment and inequality. Beyond the poverty problems experienced by those low-income earners, wage inequality affects wealth inequality and entrenches social divides. If one is not earning enough to save or invest, one cannot grow wealth or pass it on between generations. The personal savings rate in South Africa is at approximately 0.2%.[10] South Africa’s national saving rate (gross saving as a percentage of GDP (Gross Domestic Product)) decreased from 16.0% in the third quarter of 2017 to 15.8% in the fourth quarter.[11] These alarmingly low rates indicate that without intervention and the creation of mechanisms that allow for the opportunity to create wealth and savings, economic growth could be massively curtailed.

ARGUMENTS AGAINST THE BILL

Job loss

Low economic growth (less than 1% per annum) is resulting in increased unemployment. Accordingly, both poverty (individuals are unable to earn) and inequality (the capacity for earning is confined to those with jobs resulting in the rich getting richer and the poor poorer) are like-wise increasing. This threshold of a minimum wage may further limit entry to the job market and discourage employers from hiring new workers. In terms of industrial competitiveness, the Bill will likely result in the trimming of jobs. In order for businesses to make provision for the wage increase (to bring it in-line with the stipulated minimum) jobs may be lost. Everything here depends on the extent of job loss in response to wage increases. Should job loss exceed 1% for every 1% of wage increase among affected employees, total wages paid out will drop. The Commission[12] will need to consider the evidence on this issue carefully. With fewer jobs available, will the Bill lessen the wage gap but result in increasing the gap between the employed and the unemployed?

Philip Booth argues that minimum wage equals maximum risk. As mentioned, increasing the minimum wage can also increase the risk of unemployment. Unemployment can result in devastating consequences for the individual concerned and those who suffer will be the most vulnerable members of our society – those with low productivity, those with fewest skills, those with disabilities, the long-term unemployed and so on. Consequently, if the minimum wage was to increase unemployment, the effect would also be that unemployment terms are lengthened. This is on account of such individual’s productivity and the wage they can command tending to fall, making it even harder to find employment.[13]

By having restrictive labour practices, policies such as the minimum wage may have the unintended consequence of reducing investor confidence and accordingly economic growth, which will again, result in increased unemployment.

Prioritisation of welfare

“Growth is the key not only for the realisation of higher aggregate – and hence per capita – levels of output, but also for the amelioration of both poverty and income inequality”.[14] This statement by Johannes Fedderke situates growth as a pre-condition for any development, a greater total GDP per person. But how can real growth be achieved if South Africa prioritises the attainment of greater equity and redistribution ahead of faster economic growth? The current budget allocated a R528 billion spend on social grants, over the medium term.[15] The prioritisation of social welfare expansion means that other forms of expenditure have to be limited. In terms of a minimum wage, this argument precipitates that grant initiatives and minimum wage stunt the natural developmental growth of our country. It is argued that instead of these support mechanisms, investments in quality human capital such as education, health, policy and housing must be implemented.

Too Low?

In cases where there is only one earner in a household, the minimum wage is insufficient. The cost to feed a family of 4 for a month is around R2,562.38. The Pietermaritzburg Agency for Community Social Action (Pacsa) argues that the R3,500 proposed National Minimum wage, when dispersed through a family of 4 people is R875 per person – below the current official upper bound poverty line of R1,077 per month.

Unions have marched against the proposed minimum wage of R20 per hour as it does not seem to be a “living wage” - the minimum income necessary for a worker to meet their basic needs. There has been no adjustment in the proposed minimum wage since the VAT increase from 14%-15% was announced in the 2018 Budget. During the parliamentary debate at which the Bill was passed, acting labour committee chairwoman Sharome van Schalkwyk emphasised that the national minimum wage was not a living wage and would merely provide a basic floor.

The Bill does not explicitly require the minimum wage to increase annually in-line with Consumer Protection Index (CPI). Sections 6 and 7 of the Bill require an annual review by the Commission of the minimum wage and a recommendation for its adjustment. In this required annual review, CPI increase is only one of the considerations.

ALTERNATE VIEWS COULD HOLD SOLUTIONS OR RESOLUTIONS TO THE ABOVE CONCERNS

Job security and creation

Mitigating job loss may lie in comprehensive social protection. Brazil’s strategy of consolidating its national minimum wage and formalisation of labour markets along with social protection resulted in the creation of 17 million jobs and the reduction of inequality. The result was that domestic demand for products and industry increased as spending power amongst the lower- earning population emerged.[16]

The Bill will increase the wages of 6 million South Africans, by increasing the income per head and reducing the Gini coefficient. This is a sustainable way of reducing inequality. The increase in spending power will assist economic growth and create increased demand for goods and services. Accordingly, more jobs could become available.

The DA announced that the party’s first priority would be to get South Africans into jobs and allow workers to “opt out” of the minimum wage. Opt out means that, in order to get a job and enter the work force, workers may earn less than the prescribed amount at the risk of exploited by their employees and having their dignity infringed.

This “jobseekers’ exemption certificate” is aimed at overcoming the added barrier to entering the job market that the minimum wage imposes.[17] The exemption is targeted at first time employees trying to gain access to the job market, as well as those who have not had a job for more than 5 years – a phenomenon in the 50-65 age group. The exemption certificate would only be applicable to those who have been unemployed for an extended period of time, of 12 months or more. Arguably, the worker’s dignity is promoted as the worker is empowered to accept a wage, albeit it being lower than the prescribed minimum, that allows employment and earning capacity.

Prioritisation of human capital

Instead of the State funding social grants, funds should be directed towards schemes that invest in people, such as health-care and educational systems. The benefit of grants playing a part in the transition to sustainability of the individual through empowerment and job creation must not be overlooked. By cutting grants, the immediate danger of increasing already dire poverty levels looms.

Accordingly, it is suggested that the minimum wage should be combined with initiatives that improve the “social wage”, which includes free or subsidised social benefits to individuals such as water and sanitation, safe housing and free education.

Projects such as nutrition programmes, medical treatment and prevention campaigns and housing policies need to be delivered and rolled out effectively. Should this be the case, it counters the concern that the amount of R20 per hour is too low. With those whom the Bill aims to protect being very vulnerable members of society, it is imperative that social wage initiatives compliment the Bill to act as an efficient mechanism against poverty and income erosion of the poor.

A good starting point

The national minimum wage will affect no fewer than 47% of workers. Increasing the amount of R20, at this stage, would likely result in high levels of non-compliance and greater job loss. The Bill does not prevent people earning more, it is merely stipulating a minimum and preventing people from learning less. It is a floor, not a ceiling amount. The amount strikes an adequate balance between a bold and progressive policy but also makes compliance implementation possible. We see that the proposed minimum wage can be a good point of departure in creating work-force potential.

The effect of minimum wage will not only affect the lowest earners but may also positively influence workers earning in the higher percentiles. On account of the lowest wage being increased, the higher wages will also possibly increase as employers may adjust overall pay scales. Higher percentile jobs, will increase at a lower rate than the lowest percentile as the increase will be a “spill over effect.” This Increase of the lower percentile first, will then have an effect on reducing inequality.[18] In addition, a study in 10 developing countries has found that the average wages in informal sectors and those who are self-employed rose on account of institutional increase of the national minimum wage.[19] In both these cases, bargaining powers for the worker increase.[20] Thus Thomas Picketty argues that national minimum wage can be “an important tool to reduce extreme wage inequality.”[21]

CONCLUSION

The above demonstrates the controversy of the national minimum wage. The Bill must not be judged void of the current context of South Africa’s economic conditions. The Bill has been introduced at a time of extremely low economic growth, high unemployment[22] and rampant poverty. Even in a time of strong economic growth introducing such a far-reaching policy is difficult. Arguably, the effect of the Bill on big business will be less that the effect on small business. Similarly, the effect on workers involved in each sector will be different.

While the Bill raises more questions than it answers, in times like these, the Bill cannot be expected to generate sustainable growth without further measures including investment in human capital as well infrastructure support for small businesses. Considering opposing viewpoints, the likely approach to be favoured is that the Bill alone is not sufficient to tackle the mammoth task of its intention - to advance economic development and social justice. Complementary initiatives will be needed. By the time of the first annual review, required by section 6 of the Bill, it is hopeful that a clearer picture of the dangers and benefits of the Bill will have emerged.

Jade Tess Weiner is a Researcher at the Helen Suzman Foundation. 

This article first appeared as an HSF Brief. 

[1] Danny Cota “Unemployment V Disemployment” available at https://www.redshiftconsultinginc.com/index.php/2015/12/11/unemployment-vs-disemployment/ accessed on 23/05/18.

[2]Imraan Valodia Minimum wage is part of the moral economy available at https://mg.co.za/article/2017-01-17-00-the-minimum-wage-is-a-step-to-the-moral-economy accessed on 20/05/18.

[3]0 is perfect equality and 1 is perfect inequality.

[4]Anna OrthoferFigures suggest SA has the highest concentration of wealth in the hands of a few available at https://mg.co.za/article/2016-08-04-00-figures-suggest-sa-has-the-highest-concentration-of-wealth-in-the-hands-of-a-few accessed on 15/04/18.

[5]South Africa needs to fix its dangerously wide wealth gap available at http://theconversation.com/south-africa-needs-to-fix-its-dangerously-wide-wealth-gap-66355 accessed on 05/04/18.

[6]Anna Orthofer Wealth Inequality in South Africa: Evidence from and survey and tax data available at http://www.redi3x3.org/sites/default/files/Orthofer%202016%20REDI3x3%20Working%20Paper%2015%20-%20Wealth%20inequality.pdf accessed on 06/04/18.

[7]Murray Leibbrandt , Arden Finn & Ingrid Woolard Describing and decomposing post-apartheid income inequality in South Africa Development Southern Africa Volume 29, 2012 - Issue 1 available at https://www.tandfonline.com/doi/abs/10.1080/0376835X.2012.645639 accessed om 03/04/18.

[8]Consider countries such as Indonesia, the UK and Brazil.

[9] Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka, Evridiki Tsounta Causes and Consequences of Income Inequality: A Global Perspective available at https://www.imf.org/external/pubs/ft/sdn/2015/sdn1513.pdf accessed on 10/04/18.

[10]Gerald Mwandiambira “What are the savings statistics in South Africa?” available at https://mg.co.za/article/2018-02-23-00-what-are-the-savings-statistics-in-south-africa accessed on 05/06/18.

[11] Reserve Bank “Quarterly Bulletin March 2018” available at https://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/8334/01Full%20Quarterly%20Bulletin%20%E2%80%93%20March%202018.pdfaccessed on 06/06/16.

[12] Chapter 3 of the Bill refers to the establishment of a Commission, its composition, appointment and termination of members, its functions, conduct of meetings, secretariat and funding. The commission will review the national minimum wage, currently at R20 per hour, annually.

[13] Philip Booth “The Risks of Lifting the Minimum Wage” available at https://iea.org.uk/blog/the-risks-of-lifting-the-minimum-wage accessed on 23/05/18.

[14] Johannes Fedderke Social Welfare: Social stasis available at https://hsf.org.za/publications/focus/focus-55-november-2009-images-of-justice/social-welfare-social-stasis accessed on 15/04/18.

[15] Malusi Gigaba 2018 Budget Speech available at https://www.moneyweb.co.za/in-depth/budget/read-the-complete-2018-budget-speech/accessed on 06/006/18.

[16] COSATU, 2013, ACTRAV Symposium on Income Inequality, Labour Market Institutions and Workers Power in Geneva available at http://www.ilo.org/wcmsp5/groups/public/- - ed_dialogue/actrav/documents/meetingdocument/wcms232227.pdf accessed on 15/04/18.

[17]Gwen Ngwenya In defence of a jobseekers’ exemption Available at /opinion/in-defence-of-a-jobseekers-exemptionaccessed on 18/05/18.

[18] David A. Green What is a Minimum Wage For? Empirical Results and Theories of Justice available athttps://economics.ubc.ca/files/2014/09/pdf_paper_david-green-minimum-wage.pdf accessed on 23/04/18 at 21.

[19] David A. Green What is a Minimum Wage For? Empirical Results and Theories of Justice available athttps://economics.ubc.ca/files/2014/09/pdf_paper_david-green-minimum-wage.pdf accessed on 23/04/18 at 25.

[20] David A. Green What is a Minimum Wage For? Empirical Results and Theories of Justice available athttps://economics.ubc.ca/files/2014/09/pdf_paper_david-green-minimum-wage.pdf accessed on 23/04/18 at 9.

[21] Rene Vollgraaff Piketty Says South Africa's Lack of Land Reform Fuels Inequality available at https://www.bloomberg.com/news/articles/2015-10-01/piketty-says-south-africa-s-lack-of-land-reform-fuels-inequality accessed on 23/04/18.

[22]South Africa’s current unemployment rate stood at 26.7% in the first quarter of 2018, unchanged from the previous period available at https://tradingeconomics.com/south-africa/unemployment-rate accessed on 30/05/18.