Why the National Minimum Wage might not be good news

A National Minimum Wage (NMW) of R3, 500 has been proposed. Yet there are many people who are in disagreement with this on both sides of the fence. Some are arguing that R3, 500 is not enough to support households that often require one salary to support four people, while others are saying that R3,500 is too much and will result in job losses and retrenchments.

In the report released by National Treasury, it noted that a NMW could result in job losses and a drop in GDP. “Based on a minimum wage of R3189 in 2014 numbers, the National Treasury concludes that approximately 715,000 jobs will be lost. Moreover, the National Treasury model predicts that GDP will fall by 2.1%,” said Treasury.

The most recent unemployment figures released on Wednesday by Statistics South Africa (Stats SA) indicate that unemployment has risen, and is currently at its highest since 2003 at 27.1%.

Ian Ollis, Shadow Minister of Labour for the Democratic Alliance (DA), noted that the proposal to introduce a NMW may add to the current jobs crisis.

Concerns regarding the NMW

Dr Azar Jammine, director and chief economist at Econometrix, told Justmoney that while a NMW might be good in theory, in practice it may be harder to achieve. “In practice I don’t know that it necessarily is the right way to go about things, as opposed to having minimum wages that are industry dependent. It is obviously aimed at avoiding exploitation. But the other thing that has been found is the higher the minimum wage the greater the transgressions in terms of paying it, and you don’t want to have a situation where you spend fortunes trying to police the implementation of the minimum wage.”

“The higher the minimum wage, the greater the impact in encouraging job losses and vice versa. Secondly, the impact would vary depending on which industry you are looking at. Some sectors, for example the mining sector, already have wages well in excess of the minimum wage, and therefore would not be affected. But other sectors, such as agriculture and domestic work and some of the services sectors, are paying significantly below the minimum wage proposed, and the risk would be that they would be negatively affected,” said Jammine.

Peter Attard Montalto, research analyst at Nomura, stated that while the NMW report is balanced and well thought through, it does betray some fears of the negative impact of a NMW. “The report suggests a R20 per hour national minimum wage with lower levels for domestic workers and farm workers (75% and 90% respectively) and a phase-in period of two years up to 2019 for all sectors except domestic workers and SMEs which get three years. This comes to about R3440 per month, which sounds low, but the report highlights that some 47.3% of workers in the economy earn below this level.”

Below are some of the flaws and concerns regarding the NMW report, according to Montalto:

• The report deliberately doesn’t set a medium-run aspirational level for the NMW as argued for by various society groups. However, it does hint that the level would be such that households of NMW earners would cross the poverty line (which is reportedly R1, 077).
• The amount of R3, 500 may not be the NMW if and when it is eventually introduced. Montalto explained: “It's a NMW for the time of implementation which is 2019 for full enforcement. We therefore see some risk that the actual number could be raised to future prices, i.e. shift from R3, 440 to around R3, 850.”
• There are already certain sectors that already enjoy a minimum wage, such as domestic workers and farm workers. By the time the NMW comes into effect, Montalto pointed out that these sectoral minimum wages may be the same or higher than the NMW. “This can be viewed as a positive (i.e. the NMW will be less binding) or a negative as it could put upside risks to NMW revisions.”
• One concern is that the country cannot afford or sustain a NMW. Montalto highlighted that a NMW can only work where there is decent national productivity growth, flexible labour markets, a low share of non-wage compensation by employers and low unemployment. Unfortunately, South Africa falls short of achieving these.
• Evidence suggests that employers have already cut-back on non-wage benefits due to previous sectoral minimum wage increases. Montalto emphasised that employers may cut further non-wage benefits should a NMW be implemented.
• There is also a concern about the implementation of a NMW in rural areas. According to Montalto, a NMW poses a greater impact risk in rural areas where sectoral wages are already lower than in urban/metropolitan areas. “The report recognises this risk but sees the impact of a dual minimum wage for different areas as too distorting and adding to the regulatory burden,” said Montalto.
• Unrealistically, government and labour have implied that profit margins should reduce to accommodate a NMW. However, as Montalto highlighted, businesses simply don’t operate like this.
• Due to the phase-in period for the NMW, it is difficult to predict and judge the overall impact on the economy, which may take some time to be felt.
• The question of whether employment or wage is more important, also needs to be addressed. Montalto said: “We would argue there are greater upside benefits from increased employment (skills, security, non-wage benefits) as opposed to simply the level of income. This is even before more ideological considerations of freedom of individuals to sell their labour below a NMW if they value employment over unemployment.”

In concluding, Montalto stated that a country with such weak private investment growth on such weak sentiment may not be able to support a NMW without adverse effects. “We see this as a step backwards not a step forwards – it is not a reform. It is a policy choice to form a social wage with business paying more to some people but government having to provide the ultimate backstop for everyone through social grants and tax redistribution.

“As we have often published before, all policy should be measured against the key aim of “does this policy help South Africa achieve the largest number of people employed at the best possible income in the most sustainable manner between 2020 and 2025?” We think the answer to this on NMW is no.”

In contrast, reports coming out of the National Minimum Wage Research Institute (NMWRI) at the University of the Witwatersrand (Wits), state that an NMW may boost growth in South Africa, as well as reduce poverty.

Despite claims that the introduction of a NMW will stimulate growth, Jammine believes that it will have mixed outcomes. “Many point to the situation in Brazil, what they don’t bear in mind is that Brazil simultaneously embarked upon a massive education and skill development drive. And ultimately we also see where Brazil has landed more recently, notwithstanding the introduction of minimum wages, unemployment and inequality are starting to rise sharply again.”

He added that a focus on education and skills development is important to help with employment growth, but the focus should also be on “rendering education and skills development more useful for business to want to employ people, because there is a frequent complaint, what’s the point of educating people when they can’t find jobs afterwards.”

Lastly, Jammine noted that the introduction of a NMW may impact on government’s target of creating five million jobs by 2020.

It appears that much still needs to be discussed and decided with regards to the NMW before a final judgement as to its impact can be determined.

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