While political parties argue about the merits of the national minimum wage, the election year may (ironically) not have been the right moment in history to fulfil this long-awaited ideal, writes Dieter von Fintel.
On 1 January 2019 the much-anticipated national minimum wage came into effect in South Africa, bringing to fulfilment one of the long-held objectives of the 1955 Freedom Charter. However, the jury is still out on whether the legislation will have the desired positive impacts on society. Official data is yet to be released to assess whether wages have grown significantly since implementation or whether job losses have dominated.
With impending elections, facts are easily shrouded in political sentiment and speculation. The ANC's election manifesto describes the move as "unprecedented" and "improving the wages of at least 6 million workers who are currently being paid below… R20 per hour [R3500 per month]". Of course, the purported benefits presume that all currently low-paid jobs will be preserved, that firms resist mechanisation and – more pertinently – that their doors stay open.
The EFF joined other critics to highlight that the R20 threshold is not a "living wage" and will not help lift many households out of poverty. Their election manifesto calls for at least R4 500 per month for all workers, and R12 500 as a separate minimum for mineworkers. Poverty reduction from these higher thresholds could benefit some, while being offset by many of the 6 million joining the proverbial queues of job searchers. As the recent experience of Seattle demonstrates, ambitious increments aggressively cut away at jobs, while gradual increases in minimum wages are less incisive.
On the other side of the political spectrum, the DA promises a Jobs Act, with exemptions from the minimum wage to incentivise job creation. Newcomers, the Capitalist Party, advocate for subsidised low-paid jobs in a similar vein to the existing youth Employment Tax Incentive. Instead of pursuing living wages, both parties presume that allowing firms to pay low salaries will solve South Africa's unemployment woes – of course the problem runs much deeper and requires widespread upskilling in the face of rapid technological change.
Looking through the ideological mist is difficult without real evidence. Who is right about minimum wages? Currently the only available lens that lends clarity is South Africa's past experimentation with minimum wages in selected sectors of the economy.
Context clearly matters. The early 2000s heralded a period of robust economic growth, signalling a departure from the volatility of the 1980s and early 1990s. This was also a time when specific minimum wages were introduced into the retail, domestic worker, construction, taxi and agricultural sectors. Contrary to standard economic theories, many sectors increased wages without sacrificing jobs. The economic upswing of the time is one of the most likely enabling factors that helped to cushion against negative expectations.
When firms enjoy new business, they have economic leverage to improve wages without having to retrench workers. It makes sense to implement wage policies that could threaten jobs when firms have spare cash to do so, and when start-ups are ready to enter the market to create new vacancies. Indeed, if the recent example of Germany is anything to go by, the strategy works impeccably. Their 2015 national minimum wage had little impact on jobs, but rode on the back of a sustained long-run increase in employment. Examples like these explain why economists are progressively becoming less dogmatic about the theoretical link between raising minimum wages and connected employment losses.
However, South Africa no longer enjoys the upbeat economic position it did at the turn of the century, nor does it have Germany's benefit of a sustained labour market upswing. Sluggish growth and lacklustre employment creation since the global financial crisis leave the labour market in a precarious position. High unemployment rates have not abated in the last decade, and growth projections do not bode well for a turn in the near future. Firms – especially those with small turnover – have little room to manoeuvre budgets towards preserving and creating jobs while simultaneously raising their wage bills.
Agriculture the only realistic precedent
The most realistic precedent for South Africa's new minimum wage is, therefore, the experience of the agricultural sector. Unlike the rest of the economy, the sector's GDP fluctuated between moderate growth and contraction in the early 2000s. Agricultural employment has declined along a sustained trajectory for decades, and many smaller players have sold off to larger farmers who were more adept at mechanisation.
When the minimum wage was introduced in 2003, the response was swift and reinforced the existing trend: small farm employment plummeted, while larger farmers were shielded. A key missing ingredient was robust sectoral growth that could preserve jobs. The 50% increase in agricultural minimum wages that followed widespread strikes in the Western Cape in 2012 had further negative impacts on jobs.
A closer look at the evidence reveals another common thread that transcends agriculture, but is easily overlooked in economy-wide studies: small and rural firms represent vulnerable parts of the economy, which do not easily accommodate minimum wages without cutting jobs. With the agricultural sector remaining brittle, and the rural economy still facing the highest unemployment rates, it is likely that the national minimum wage can hurt rural jobs, particularly those in small firms. It could potentially accelerate migration from rural to urban areas, intensifying existing urban-rural economic rifts and reinforcing spatial inequality.
The prognosis for the national minimum wage is therefore perhaps not what the 1955 Freedom Charter originally envisioned. It comes at an inopportune time. Economic uncertainty means that it is not an assurance of a more secure future; instead, it could threaten the jobs that the economy so sorely needs to alleviate poverty and inequality – and especially in rural areas, where the most impoverished live. And if job creation is stunted, the capacity of the economy to generate work diminishes over long-time horizons.
While political parties argue about the merits of such a move, the election year may (ironically) not have been the right moment in history to fulfil this long-awaited ideal. However, time will tell, and data will weigh in to provide a richer perspective on the arguments for and against. Employment numbers for the first quarter of 2019 are expected for release only "sometime in May" – just too late (but conveniently for some) to moderate the opinions of electioneering politicians.
- Dieter von Fintel is associate professor in the Department of Economics at Stellenbosch University.
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