Why national minimum wage is good for SA economy

Johannesburg – Establishing a national minimum wage in South Africa, set at an appropriate level, can be instrumental in reducing the inequality gap and poverty, and can support economic growth.

This is according to a report by the National Minimum Wage Research Initiative (NMWRI) at the School of Economics and Business Sciences at the University of the Witwatersrand.

In an interview with Fin24, Dr Stephanie Luce explained that introducing a national minimum wage can be beneficial for the economy. Luce is a scholar at the City University of New York who has worked extensively on issues of minimum wages, living wages and the labour movement, both in the United States (US) and globally.

“When adjusting wages, the economy grows and there is higher productivity by workers,” said Luce. The National Minimum Wage for South Africa report shows that the level of economic output would be 2.1% higher with a national minimum wage, beginning at levels between R3 500 and R4 600.

Higher productivity is a result of employees staying in their jobs. High staff turnover are expensive for firms, explained Luce. “They can save money from not having to recruit and train people.” In firms where employees earn low wages, they often move on after three months.

Higher wages for low income households can add to growth through consumption demand. With raises, consumers tend to spend more and pour back funds into the companies they work for.

“Workers eventually become shoppers. A higher wage is also useful in increasing a customer base,” said Luce. Another motivation for higher wages is that it makes citizens less reliant on public subsidies.

A minimum wage can be implemented without significant employment effects, the report revealed. When asked whether similar trends could be seen in other countries, Luce said even though countries may seem different, employers and employment processes are similar. Looking at trends in both wealthy and non-wealthy countries, introducing minimum wage does not necessarily lead to job loss.

Reducing inequality and poverty

South Africa has the highest level of inequality in the world. In 2014, the average income of the top 10% of full-time employees was 82 times the average income of the bottom 10%, according to the report. Inequality in South Africa is largely driven by wage differences.

In South Africa, 54% of full-time employees (5.5 million workers) earn below the working-poor line of R4 125. This is often not enough for them to meet basic needs for themselves and their dependents. Higher wages for low-wage workers would benefit both the employed and the unemployed, the report stated.  

Minimum wages have directly reduced inequality in the formal and informal sectors across Latin America, and in Indonesia, Russia, China, India and Europe. Due to minimum wages and poverty levels being closely associated, raising wage levels has also reduced poverty.

For example, in the Philippines, a 1% increase in the minimum wage reduced poverty by 0.5%. In South Africa, the poverty headcount is projected to fall by around 2% with the decline being greatest for black South Africans.    

Percentage of full-time workers above and below working-poor line by race

Challenges to establishing a minimum wage

Small employers often have to pay higher wages, to keep workers. They often have to compete with multi-national companies which pay lower wages. These small employers might feel this is unfair, so introducing a minimum wage can help to “level the playing field,” said Luce.

It is expensive for firms to introduce higher wages, so it is often better to implement a higher wage incrementally. In New York, the minimum wage is being adjusted from $9 per hour to $15 per hour over the next five years, to ease the financial burden on companies. Firms then treat wages as any other operating expense for which they have to project and plan, explained Luce.

Minimum wage vs Living wage

A minimum wage is constructed to cover basic needs. The higher minimum wage in the US is actually below living wage, said Luce. But raising wages is a step towards achieving a living wage.

The report shows that the introduction of minimum wages has led to the successful raising of wages for low-wage earners in developed and developing countries. For example in Latin America, a 10% increase in minimum wages led to an increase in average wages of between 3% and 6%. In South Africa, minimum wages of between approximately R3 500 and R5 500 would raise average wages over 10 years, by between 15% and 28%.

The national minimum wage policy must be designed to cover the basic needs of workers and their families, while taking into account broader economic factors. Statistical modeling by the NMWRI indicated that a national minimum wage beginning between R3 500 and R4 600 and reaching up to between R3 900 and R5 100 after five years is feasible.   

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