A Minimum Wage. Why bother?
by Iswamo Kapalu
There is a business in the Western Cape called Robertson Farm Assured Meat, it used to go by the name Robertson Abattoir. In 2010, the abattoir dismissed 42 of its workers for refusing to work 18 hour shifts. At the time the abattoir dismissed them, the workers earned R104 for the 14 hours a day that they were contracted to work.
Soon after they were dismissed, new workers were employed to take their places. This is the mostly silent plight of a lot of South African workers. Exploitatively low wages for long, gruelling hours of work. Hanging over every laborious broom sweep and every picked grape is the spectre of unemployment. A silent acknowledgement in every pained “yes sir” and “nee mevrou” that there is an army of poor, desperate people just like you –ready to replace you should the ache in your back cause you to groan too loudly. The only options open to you are exploitation or starvation.
In light of this, former reserve bank governor Tito Mboweni argued earlier this month for the introduction of sectoral minimum wage. Characteristic of the debate surrounding minimum wage, there was a multiplicity of disparate voices on the short and long term effects of the minimum wage on employment.
Economics being an imprecise science, the literature surrounding the subject is inconclusive but on the two sides of the debate the argument often goes like this:
One side, those for the minimum wage, argue that a living wage is essential to the dignity and survival of affected workers. They argue that the minimum wage compensates for the lack of bargaining power among the affected workers. Related to this is the potential of the living wage to compensate for the lack of mobility faced by workers. Workers are rarely able to uproot their lives in search of better paying jobs. They argue that an increase in the minimum wage will result in a greater proportion of disposable income, leading to more spending, resulting in more demand, ultimately resulting in an increase in job numbers.
On the other side, it is usually argued that an increase in the minimum wage will lead to job losses. Those against raising the minimum wage argue that an increase in the minimum wage will slow down employment growth. The central logic in this argument is that income distribution in South African businesses is perfectly efficient. The assumption is that employers are already paying as much as they reasonably can for their businesses to remain profitable while getting a reasonable cut themselves. They argue that, due to its mobility, capital can easily be moved. Therefore, an increase in the minimum wage will only scare away investors.
A 2013 study done by American economic theorists, Jonathan Meer and Jeremy West, found that raising the minimum wage doesn’t actually lead to significant job losses (Meer & West, 2013). This finding holds true for both developed countries like the United States and United Kingdom (Draca, Machin & Van Reenen, 2011) but is also true in developing countries like China and Brazil (Mayneris, Poncet & Zhang 2014). In developing countries, it is difficult to ascribe with any confidence, positive economic outcomes to an increase in the minimum wage, simply because it is difficult to isolate one policy – in what is usually a large, complex, and polycentric policy framework – as the driving force behind a positive outcome.
What the Meer and West study found was that raising the minimum wage slowed down employment growth in expanding sectors, especially among the youth and low-skilled and resultantly low-income workers.
Relying on this study and the many that have concurred with its findings in the three years since, we may be able to test the desirability of a higher minimum wage. Here, the desirability of a higher minimum wage is a question that must be grounded in our own economic reality. That reality is of a country with some of the worst income inequality in the world, a staggering unemployment rate- especially among the youth, a low absorption rate for low-skilled workers, and an average monthly income of R3400.
Logically, the effect of a higher minimum wage would be confined to only those who earn below the proposed figure; that is low-income and low-skilled workers. However, that translates into a rather large part of the South African workforce, with an estimated 28.2% of South African workers being defined as “low-skilled” (StatsSA, 2014). If the Meer and West finding holds, this would mean various extents of improved spending power for more than a quarter of the population. The converse would be a deceleration of an already sluggish job growth for low income-workers and youth.
But that is just one study and one possible effect.
What’s illustrated by this and every such study is that the living wage involves a policy balancing act that will put existing jobs and workers on one end of the scale and potential jobs and workers on the other. This policy balancing act weighs the dignity of workers and the prospects for unemployed youth against each other.
Although the implementation of the minimum wage offers us the chance to reduce our embarrassingly unequal income distribution, it does so at the risk of slower job growth, the flight of capital and unattractiveness to investors. But if implemented, the living wage will need to be accompanied by innovative, dynamic and comprehensive policy. This policy will need to counter the effects on job growth in the affected sectors, to ensure enforcement, and provide firms with incentive to comply rather than leave. It will also require buy-in from the private sector and employers will need to ask themselves whether an additional house in Clifton is worth the dignity of their employees.
In a larger sense, the debate around the living wage asks us important questions about ourselves and how we want to proceed with “nation-building”. It asks us whether we want a booming economy built on exploitation or a modest one in which every person’s dignity is a non-negotiable. It asks us whether we want to continue living in a country where exploitation is something we’re even willing to countenance in search of “growth”. It asks us whether human dignity needs to be accompanied by economic benefit to be valuable and worthy of pursuit, and whether we want to be an “attractive” investor destination for our exploitative labour conditions.
How we answer these questions will tell us who we are and what we value.
Jonathan Meer & Jeremy West. “Effects of the Minimum Wage on Employment Dynamics,” Journal of Human Resources, University of Wisconsin Press, vol. 51(2), (2016) pp 500-522.
Mirko Draca, Stephen Machin and John Van Reenen “Minimum Wages and Firm Profitability” American Economic Journal: Applied Economics vol. 3, No. 1 (January 2011), pp. 129-151.
Sandra Poncet & Florian Mayneris & Tao Zhang. “The Cleansing Effect of Minimum Wage: Minimum Wage Rules, Firm Dynamics and Aggregate Productivity in China,” Working Papers 2014-16, CEPII Research Centre (2014).
Sara Lemos, “Minimum Wage Policy and Employment Effects: Evidence from Brazil” Economía vol. 5, No. 1, (Fall 2004) pp. 219-266.
Statistics South Africa “Employment, unemployment, skills and economic growth: An exploration of household survey evidence on skills development and unemployment between 1994 and 2014,” (2014)