If ever we are to have rational economic policy supporting a broad-based improvement in living standards in South Africa, we must have greater clarity in our positive and normative[1] thinking about the economy than we do. The intention of this brief is to identify obstacles to clear thinking about the national minimum wage. It does not, indeed it cannot, describe what this clear thinking is. The relevant work has not been done. Rather, the purpose here is to try and understand what holds us up in getting the purchase we need on the issues.
Now, if both price and income increase at the same time, the effects offset each other: the increase in price reduces demand, while the increase in income increases it. But what happens if price increases and income decreases? There is then a doubly negative effect on demand: the price increase leads to a decrease in demand, and the income drop also leads to a decrease in demand. The price of labour is the wage, so that if wages increase while output drops, there is a doubly negative effect on employment. This is why policy makers have to be so careful under such circumstances. The size of the impacts will depend on the values of the elasticities, which is important to know. Estimating them is not easy. Characteristically there will be a lot of things changing at the same time so it is difficult to identify the specific effects one is looking for. But it is not impossible, and attempting it can yield important insights into the functioning of the labour market.
What we have in the report on this is two illogicalities and an absence of information. We read:
While the overall employment decreased, the study[4] indicates that the decline in employment was more pronounced amongst workers earning less than the national minimum wage (17%), compared to workers earning more than the national minimum wage (11%). The marginal disproportionate employment impact on low-wage workers cannot be attributed to the national minimum wage increase…[5]
But why are obliged to reach this conclusion? One may make exactly the opposite argument. After all, paying less than the minimum wage is now illegal, so that its existence puts pressure on employers who have been paying less than the minimum to move towards it, a pressure which does not exist for employers who have been paying more than the minimum wage. This would account for the quantitative finding cited. It is a consequence of the existence of the minimum wage and could be expected to stronger the higher the minimum wage becomes.
We also read:
A qualitative study conducted by the internal research unit of the Department of Employment and Labour in 2021[6] indicates no evidence of an effect on employment due to the national minimum wage in the domestic sector and construction sector. Any reported changes are attributed to the COVID-19 lockdown restrictions and the economic decline... The study also indicates that the impact of the national minimum wage on hours, employment and non-wage benefits cannot be distinguished from the impact of COVID-19 on businesses and other economic factors[7].
Qualitative research has the consequence that the sample in one or both of the studies is not a probability sample. Standard statistical techniques cannot be used, so we are left with an unrepresentative set of off-the-cuff opinions which cannot capture the full effects of the national minimum wage. Even worse: the passage cited is that the third sentence states that the impact of the national minimum wage cannot be identified, whereas the first sentence implies that it can. Which is it?
The aim of this brief is to amplify the argument made in our submission to the Department of Labour. In doing so, it has been necessary to confront some very poor argument. As advice to the Minister, the Report simply won’t do.
To read the Report of the National Minimum Wage Commission on the Review and Adjustment of the National Minimum Wage for 2022, click here.
To read the Helen Suzman Foundation’s Submission, click here.
Charles Simkins
Head of Research
charles@hsf.org.za
[1] Positive analysis is about what is the case. Normative analysis is about what the case ought to be.
[2] This form of unemployment is known as frictional unemployment.
[3] ‘Segregation has fallen on evil days’ said Smuts in an address to the SA Institute of Race Relations in 1942 and the documents cited dealt with the implications of an integrated future. They were, of course, repudiated by the National Party after 1948.
[4] The study referred to is by the Development Policy Research Unit at the University of Cape Town. The full reference is Haroon Bhorat, Adaiah Lilenstein and Ben Stanwix, The impact of the national minimum wage in South Africa: Early quantitative evidence, Development Policy Research Unit, DPRU Working Paper 202104, April 2021 available at http://www.dpru.uct.ac.za/sites/default/files/image_tool/images/36/Publications/Working_Papers/DPRU%20WP%20202104.pdf
[5] Government Gazette 45649, p 32
[6] No authors, no title, and above all no access. Accordingly, no basis for assessing the adequacy of the study.
[7] Is this the same study referred to in Annexure A of the Report? If it is, there is still no proper referencing and access, and there is a further problem, since Annexure A says the study was based on an earlier study by the Centre for Social Development at the University of Johannesburg, for which there is no title and no facilitation of access