Minimum wage policy 'regressive', says Peter Attard Montalto

Johannesburg – The proposed national minimum wage (NMW) of R3 500 was lower than expected but the policy is still “regressive”, according to Nomura economist Peter Attard Montalto.

The proposed minimum wage, which was set by a panel of experts, was announced by Deputy President Cyril Ramaphosa on Sunday. It has sparked debate and raised concerns about the impact on job losses.

The impact of a NMW may not be felt on an economy immediately. However businesses may have to cut profit margins to accommodate labour costs, said Montalto.

“Businesses simply don’t operate like this,” he stated.

A NMW will get passed on to investors through lower dividends. South African pension funds will also feel the impact, he said. Government could further feel the pinch through lower tax collections, or through higher prices to consumers, explained Montalto.

READ: How experts arrived at SA's R3 500 minimum wage figure

Montalto highlighted that South Africa does not have a “flexible labour market” or the “productivity growth” to support a NMW.

“We worry that an economy with such weak private investment growth on such weak sentiment will not be able to support a NMW without adverse effects.”

He added that the NMW was a step backwards and not a reform.

The policy proposed has only really worked in higher-income countries or ones who have benefitted from a commodity boom.

“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. South Africa fails on all of these,” said Montalto.

Introducing a NMW in a low productivity growth economy will make future employment growth harder.

“South Africa needs labour-intensive growth in order to develop, a NMW makes that harder,” he stated.

ALSO READ: Ramaphosa challenged to live on R3 500

A NMW may result in households being worse off, working fewer hours with poorer terms of employment.

Evidence shows that with the introduction of sectorial minimum wages in the past, employers often cut back on non-wage benefits. This is likely to happen for a NMW too.

Figure 1 below shows that existing sectorial wages are likely to be around or over the suggested NMW level, by the time of enforcement in 2019. 

As for the impact on unemployment levels, research by Treasury in 2014 estimates that a wage of R3 189 would lead to a loss of 715 000 jobs, and a 2.1% drop in GDP.

Nomura is of the view that employment numbers may not change, but future hiring numbers may fall.

“Total hours per employee may fall, as well as non-wage benefits, all feeding back into the macro-economy.”

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