Wage war: Maximum effort, minimum??reward

2014-11-25 11:30

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We can’t grow SA with poverty wages, write Gilad Isaacs and Ben Fine

In 1993, Princeton researchers David Card and Alan Krueger turned conventional wisdom on its head. Their now famous study showed that increasing the minimum wage in New Jersey, US, did not have negative employment effects on that state’s fast food industry.

The debate over the future of South Africa’s new national minimum wage legislation, which is heating up, would be strengthened by a consideration of the research conducted over the past two decades. Much of this runs, surprisingly, in the opposite direction to “common sense”.

The main “common sense” argument is that by imposing minimum wages, one artificially raises the price of labour away from its “market-clearing” level and higher unemployment results.

The most comprehensive review of the impact of minimum wages in South Africa – which since 1999 have been implemented in 11 different sectors of the economy – was conducted by researchers from the University of Cape Town and Cornell University in New York on five sectors: retail and wholesale, domestic workers, forestry, taxi workers and private security. The study found no negative impact on employment resulting from the minimum wage.

In three out of the five sectors, workers emerged materially better off. In other studies on the agricultural sector, it was found that institution of a minimum wage did negatively impact employment.

Case studies similar to those of Card and Krueger – particularly those studies contrasting labour markets experiencing a minimum wage increase with a carefully chosen comparison – tend to find that minimum wage increases have little or no effect on employment levels.

The same holds for a number of meta-analyses – studies that draw conclusions out of a survey of the literature by combining results from a range of studies. The respected 2009 meta-analysis by Hristos Doucouliagos and TD Stanley incorporating 64 minimum wage studies that covered 1?474 individual estimates showed no support for adverse effects.

Notwithstanding the variable impact on employment, minimum wages have overwhelmingly been found to decrease poverty and inequality.

How can the evidence on labour markets contradict the supposedly “common sense” theoretical premise that, like the market for fish, an increase in price will mean lower demand?

Neoclassical economic theory thinks of labour markets as akin to other markets, governed by the iron laws of supply and demand, in which, if left undistorted, a price will be reached at which everything in the market will be sold. In the same vein, so the theory goes, no involuntary unemployment other than that caused by excessively high wages should exist.

But labour markets are not like other markets and these laws do not determine the wage level, and the wage level is neither the only, nor the key, factor regulating employment levels.

Unemployment is present even when wages are low. In South Africa, large-scale unemployment began in the 1970s and, by 1994, was already at 30%.

Regarding wage-setting, employers may not simply accept the hypothetical “market price” of labour, but are sometimes – because of structural power imbalances – able to force wages below this. In this instance, wages may actually be below what it costs the worker to live and the state must pick up the bill or the worker ends up hungry, sick or homeless.

On the other hand, because wages must, to some extent, support the worker (at standards set by social norms) there’s a floor beneath which wages will not fall despite high unemployment indicating “excess” labour supply.

Wages are themselves an outcome of the type of investment and jobs created, and shaped by class, conflict, power and other social factors. Wage levels may be one consideration in levels of investment, but the evidence indicates there is no unidirectional causation between wage, investment and employment.

The traditional low-wage growth path in South Africa is exhausted as both an economic and political strategy. In the context of mediocre growth and rising inequality over the past two decades, workers are demonstrating that they are ever less willing to tolerate poverty wages.

Wages must be set to target productivity and efficiency – evidence suggests that due to insecurity, labour discontent and the inability to live a healthy lifestyle, low wages do not necessarily achieve this.

There are good reasons wage increases could expand, not reduce, both employment and growth. For instance, boosting household income can increase demand in the economy, spurring growth and employment in other industries.

These positive effects are not guaranteed. Rather, they point to the necessity of taking a broader view of how the economy – and labour markets within it – functions as a whole.

The national minimum wage is a step towards an alternative growth path. But it must be accompanied by other initiatives, such as industrial policy that sees South Africa create jobs in sectors that can sustain moderately higher wages, and grow sectors that can benefit from, and contribute to, increased domestic demand.

We should view with scepticism any claims that there is a simplistic mechanical link between wages and levels of employment. The stakes are too high for such distortions to fly in the face of logic, evidence and need.

Isaacs is a PhD student in economics at the University of London. Fine is professor of economics at the University of London

Implementing a minimum wage is more complex than it seems, writes Ian Ollis

In the debate over a proposed minimum wage in South Africa, we will, as a country, need to examine the factors involved and choose a path best suited to our economy, which has one of the highest gaps between rich and poor in the world.

This is no doubt partly caused by the unemployment rate, particularly among the youth, which is at more than 35%.

As such, it would help greatly to benefit from what is often termed “catch up” – where developing countries avoid the mistakes of developed countries by navigating better solutions without the long painful journey of trying out failed economic experiments, and in doing so catch up to the First World. South Africa should be considering what has been learnt elsewhere.

Conventional economic wisdom on minimum wages has it that anything that artificially raises the price of labour will curb demand for it, and the first to lose their jobs will be the least skilled, the very group of people who we are trying to help.

However, Gilad Isaacs and Ben Fine from the University of London point to certain alternative studies, which they claim turn “conventional wisdom on its head”.

It is frequently, however, the habit of those with a left-leaning agenda to quote selectively from a couple of unusual studies to demonstrate an issue that is difficult to prove.

For example, a study in Jamaica has shown that the introduction of the minimum wage has actually reduced average wages because employers began asking why they should pay workers more than the minimum wage.

This phenomenon is not the norm, and to use such extreme examples is not helpful for an emerging economy such as ours. We need to steer our economy and labour policy on a steady and previously tried path to success.

The study by David Card and Alan Krueger fits into this category. In 1993, these Princeton researchers turned conventional wisdom on its head.

Their now-famous study showed that increasing the minimum wage in New Jersey did not have negative employment effects on that state’s fast food industry, but in fact employment may have even gone up after an increase in minimum wages. Unfortunately, this study has not stood up to closer scrutiny.

Moreover, a number of studies by David Neumark at the University of California and William Wascher, an economist on the board of governors of the Federal Reserve, among others, have consistently shown that the opposite was true.

Their studies of the New Jersey fast food industry showed that the increase in the minimum wage caused actual job losses.

However, this is not the end of the story. The American Economic Review has published revised papers by both of these sets of economists, and both sets have refined and revised their view.

As stated in The Economist on February 1 2001: “Messrs Card and Krueger no longer insist that the higher minimum wage pushed employment up; they have settled for saying that [contrary to the standard model] it ‘probably had no effect’.

Messrs Neumark and Washer have lightened the emphasis on falling employment, emphasising instead their conviction that [contrary to what Messrs Card and Krueger had first claimed] employment did not go up.”

This example shows quite clearly the danger of using untested studies of economic data. Inevitably, there is a trend to show that there is no increase in employment as a result of an increase or imposition of a minimum wage.

Long-term analysis shows that in many cases, particularly in highly industrialised nations, there is a negligible effect after the implementation of the minimum wage, but that there is a measurable loss in jobs in a few cases, particularly in countries with highly inflexible labour markets, and in sectors where the increase in wages cannot be passed on to the consumer.

This view follows the South African experience. At present, we have 11 sectoral determinations. According to Stats SA reports, a marked reduction of approximately 73?000 jobs occurred in the agriculture sector after the sudden increase of the minimum wage by the minister.

In the other sectors, limited or no job losses occurred because the minimum wage increases have been gradual. Small business, youth and unskilled workers are always the groups in danger of job losses when minimum wages are implemented or suddenly increased.

Isaacs and Fine’s own comments support this view. The University of Cape Town studies by Ben Stanwix and Professor Haroon Bhorat, to which they refer, have shown that studies on the agricultural sector found that the implementation of a minimum wage did negatively impact employment.

There is nothing “faulty” about stating that studies show job losses in agriculture in South Africa after the increase of a minimum wage. That is simply a fact.

There is simply no evidence that “the national minimum wage is a step towards an alternative growth path”.

The real situation we can expect is that in South Africa, very careful imposition of minimum wages – of whatever form is finally decided on after realistic economic modelling – may be able to limit impacts on the job market to very limited extent, as we have already become used to sectoral determinations and bargaining council agreements in most sectors.

Politicians messing in setting minimum wages could be catastrophic.

Ollis is the DA shadow minister of labour.

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