THE DEPUTY PRESIDENT AND THE MINIMUM WAGE

Charles Simkins | Nov 10, 2014
The minimum wage issue has been rumbling for some time. The Parliamentary Labour Committee has started hearings on the topic. Business Day reported on 5 November that the Deputy President will chair a committee on the issue which will include six Cabinet Ministers, among them the ministers of labour, economic development and finance. NEDLAC has been given the task of producing a report on the technical aspects of its introduction by July next year.
 
What is at stake here?
 
In an unregulated market, a ruling (equilibrium) wage will be established by market forces. At this price, every worker who wants to work will find it and every employer who wants to employ workers will find as many as they want. Should the price deviate from the equilibrium, action by employers or workers will bring it back. Since a minimum wage affects low skilled workers, attention can be confined to the low skill section of the labour market.
 
A minimum wage changes the situation. It essentially forbids contracts below the minimum wage, even though there are both employers and workers who may want to enter into such contracts. There is a point in having a minimum wage only if it is above the unregulated minimum. Since the demand for labour is like other forms of demand, where the higher the price (in this case the wage), the lower is the quantity demanded. Involuntary unemployment appears, with some workers willing to work for the minimum wage or below unable to find work. The workers who remain in employment, however, are better off, because the minimum wage is higher than the wage would be if the market were unregulated. So from the point of view of low skilled workers themselves, there is a trade-off.
 
What determines the terms of the trade off? The best circumstances in which the wage floor can be pushed up is in a growing economy with nearly full employment, and with social policies which mitigate the effects of unemployment.Such an economy could cope with the increased unemployment, by reducing its impact on workers and with the hope that growth will lead to re-absorption within a short time. These are not the circumstances of the South African economy at present. Growth is expected to be weak for the next few years. The Quarterly Labour Force Survey shows there are huge numbers of unemployed and discouraged workers.[1] While the International Monetary Fund points out that South Africa's social security system is more extensive than in many other middle income countries, there is relatively little support for the able-bodied unemployed. There is the Unemployment Insurance Fund, but that covers only workers who have been employed and only for a limited time, whereas the majority of the unemployed have either not worked before or have been unemployed for more than a year. The Expanded Public Works Programme has been providing some relief to unemployed workers for a time, but it cannot offer work to all applicants, even given the low wages it offers. The youth wage subsidy, passed after years of wrangling, has been introduced to make it easier for young people to gain experience and thus to make themselves more employable. There are training programmes for the unemployed, but they cannot guarantee post-training employment.
 
The other key consideration is the responsiveness of the quantity of the demand for labour to changes in the wage rate, known as elasticity to economists. An elasticity of one means that a one per cent increase in wages leads to a one per cent decrease in the quantity of labour demanded. It therefore means that aggregate wages remain constant. But their distribution of wages among workers will deteriorate. Some experience an increase in wages, while others are thrown out of work. An elasticity of less than one means that a one per cent rise in wages leads to less than one per cent drop in employment, while an elasticity of greater than one means that the same wage rise will lead to more than a one per cent drop in employment. The less elastic the demand for labour, the smaller will be the adverse unemployment effects of a given wage rise.
 
So what is the elasticity of demand for low skilled labour in South Africa? Even in countries with much better data than we have, and many more skilled analysts than we have, there are controversies about measurement. Reviewing the South African evidence, Professor Johannes Fedderke points that an estimate of 0.7 is most widely quoted, but that this is an average for all skill levels, and that an elasticity of over two has been found for unskilled labour. There is also a considerable variation across sectors of the economy[2]. These findings create two difficulties. There is a distinct possibility that pushing up the wage floor will have sharp effect on unemployment and actually decrease aggregate wages paid to low skilled workers. Also, there will be difficulties in a having a one size fits all national minimum wage.
 
And finally: as South Africans well know, what is politically rational is not necessarily economically rational. The COSATU of to-day is not the self-confident COSATU of twenty years ago, supported by legislation by the then Minister of Labour. Now it is fractious and unhappy, and new non-affiliated unions are appearing on the scene.
Moreover, weak economic growth imposes strains on trade unions everywhere. This cannot be good news for the ANC, bound in alliance with COSATU and the Communist Party, and there has already been intervention by the ANC in COSATU's fights, in the person of the Deputy President himself. Might we end up with an outcome which strengthens COSATU by giving it something, while at the same time worsening poverty and making the South African unemployment problem even more intractable than it is at the moment?
 

Footnotes

[1] A discouraged worker is one who wants a job, but has given up all hope of finding one.  The Quarterly Labour Force Survey for the third quarter of 2014 found 5.2 million unemployed and a further 2.5 million discouraged workers.
[2] Johannes Fedderke, The cost of rigidity: the case of the South African labour market, Comparative Economic Studies, 2012, 54: 809-842
 
Charles Simkins 
Senior Researcher 
charles@hsf.org.za