The Durban Chamber of Commerce and Industry has prepared a paper on the Economic Implications of Minimum Wage Implementation.  It is not a definitive conclusion by any means; it is just the start of a rational, broadly-encompassing debate.

At present there is no coherent national minimum wage policy in South Africa. The general consensus in many quarters is that the apartheid wage structure has not been fundamentally altered, as many black South African workers in the private sector continue to live in poverty.

A 2013 study suggests that in 2011, nearly half of South Africa’s workers earned less than R 3033 per month, while the estimated minimum living level (MLL) is roughly R 4000. It is evident that many minimum wages currently prescribed by sectoral determinations and bargaining council agreements fall well below the MLL threshold. This begs an important question: Will the implementation of a national minimum wage policy reduce poverty and improve the standard of living for South Africans?

What is a ‘minimum wage’?

A ‘minimum wage’ may be defined as the smallest hourly wage rate that an employee may be paid as mandated by the law. A traditional minimum wage has three characteristics, namely:

• Must be adequate to satisfy the purchase of vital necessities (such as food, clothing, housing, education and recreation);
• Represents the lowest legal level of remuneration; and
• A failure to abide by the mandated rate is punishable by the force of the law.  In considering the determination of a minimum wage, several other important criteria are usually considered.  These include:
• The ability of the employer to pay the mandated wage rate (this is particularly important for SMMEs);
• Regional differences in the cost of living;
• The prevailing labour market situation, i.e. the interaction of the supply and demand of labour in a relatively competitive labour market;
• The productivity of the individual worker in relation to other workers conducting comparable work in other institutions or industries; and
• The relative ‘power’ afforded to labour unions (this is dependent on the negotiation skills of the party; the personality and societal culture of the negotiators; and the culture of collective bargaining).

Why mandate a minimum wage?

The general consensus is that the purpose of implementing a minimum wage is to afford wage-earners the requisite social protection in terms of the minimum permissible levels of wages. A fixing of the minimum wage provides workers a reasonable income to meet their basic needs, as well as prevents the exploitation of ill-informed workers.  The increased attention garnered by minimum wages in recent times is attributable to COSATU’s repeated calls to implement a national minimum wage. COSATU’s calls are supported by their research into the apparent successes of Brazil’s consolidation of a national minimum wage (an increase in the national minimum wage of 81% in real terms between 2003 and 2010, or roughly R3000 per month).

What is COSATU calling for?

1. A coherent national wages and incomes policy, which is to be combined with an appropriate macroeconomic and industrial policy, and not the policy outlined in the National Development Plan.  The wages and incomes policy must be complemented by a developmental state, as part of a comprehensive strategy.

2. A national minimum wage will be one cornerstone of this national policy and will aim to protect low-wage workers.

3. Legislated comprehensive sectoral bargaining will improve on the minimum wage threshold.

4. COSATU argues that if the minimum wage policy in Brazil was not coupled with an increase in domestic productive capacity, it would not have driven the creation of large scale formal employment opportunities.

What is the proposed minimum wage threshold?

According to a Mail and Guardian report in September 2012, the Labour Research Service proposed a living wage level of R 4 105, while UNISA suggested R 4 000 per month for a family of five. By contrast, the average minimum wage earned by those workers who fall under sectoral determinations is R 2 115 per month (based on 2011 figures).

How do we expect firms to adjust to a national minimum wage policy?

There are three basic ways in which firms will adjust their behaviour when faced with a minimum wage mandate.  The first and most common strategy is for the business to increase the price of their goods and services in order to reflect higher production costs.  However, it is likely that the level of competitiveness of the market and price sensitivity (i.e. elasticity of demand) of consumers may prevent this.

The second strategy may result in an increase in the firm’s overall efficiency as the threat of increased operational costs will encourage the firm to become more attentive to cost-saving measures. Therefore an improvement in worker productivity coupled with a redistribution of firm resources including water, energy and waste efficiency interventions may be seen.

The knee-jerk reaction of the private sector is to reduce the size of its labour force. However, it is unlikely that South Africa’s relatively rigid labour legislation will allow for this. Rather, it is more likely that South African firms will choose to adjust price, productivity or distribution of resources prior to the consideration of retrenchments.  Firm relocations are not a popular choice as the modest magnitude of minimum wage cost increases often discredits the feasibility of this option.

The international empirical literature highlighted that the outcomes of a national minimum wage policy on employment levels is highly dependent on the econometric methodology selected and the characteristics of the local labour market.

The South African literature was confined to the agricultural sector and provided an argument against a minimum wage as it has the tendency to increase unemployment, and in some cases decrease the number of hours worked per individual.  The Thai case was explored and it was evident that a national minimum wage policy poses a significant inflationary risk for the macro economy. This risk, coupled with decreased consumption demand from the private sector does not deliver a convincing case for a national minimum wage regime. The Chamber however acknowledges the propensity of appropriate sectoral determinations to yield positive employment outcomes, and provides recommendations to achieve this. 

For more information contact Shivani Singh Manager: Policy and Advocacy singhs@durbanchamber.co.za