Brian Kantor: Minimum Wages – yet another ‘own goal’ | Fin24
 
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Brian Kantor: Minimum Wages – yet another ‘own goal’

Dec 06 2015 10:18

Investec’s Brian Kantor is at it again, this time picking apart government’s National Minimum Wage. He says it’s being used by the ruling party as a carrot for political survival but it won’t cure poverty.

Instead it will retard economic growth, which in his words is the only way for the country to dig itself out of the hole it currently finds itself. And in order to get higher levels of growth, labour needs flexibility, which is a foreign concept in ANC political circles. Yet another ‘own goal’. – Stuart Lowman

By Brian Kantor*

The SA government seems determined to press ahead with a national minimum wage (NMW). This is apparently with the agreement of organised business and labour, though the minimum levels themselves are still in dispute.

It however appears likely that the NMW will be set close to the incomes that define “the working poor”, those who earned less than about R4 000 per month in 2015 for a 35-hour working week.

Not much poverty relief at R4 000 per month, you may think. Yet the problem is that most of those with jobs in SA earn much less than this while a large number of potential workers are unemployed and earn no wage income at all.

According to a comprehensive recent study of the Labour Market in SA1, even after adding 40% to wage incomes to compensate for “underreporting” in the Labour Force Surveys undertaken by Stas SA, 48% of all wage incomes representing 5m workers fall below R4 000 per month and 40% earn less than R3 000 per month, about 2.7m workers out of a total employed of about 13m.

The proportion of those employed who fall below R4 000 is much higher in the rural areas, higher in agriculture (nearly 90%) and domestic services (95%). At the other end of the spectrum is mining, where 22% of the work force earn less than R4 000 per month.

Even in the comparatively well paid and well skilled manufacturing sector, about 48% of the work force are estimated to earn less than R4 000 per month.

Read also: Warren Buffett on income inequality – minimum wages no answer

Unless the laws of supply and demand for labour can be repealed, it seems obvious that were the NMW to be made effective, the consequences for currently low paid workers would be very serious.

Many will lose their jobs, while many more young workers hoping to enter the labour market will find it even more difficult to gain entry to formal employment.

Some excluded from formal employment may find work in the unregulated informal sector and many others will be required to work fewer hours, as employers seek to make their work force more efficient, to compensate for an artificially higher hourly rate.

This trend is already well under way, according to the study. Other employment benefits provided by employers, such as pensions, health, housing and food, may be reduced to compensate for higher take home pay.

Why then would the government wish to push ahead with such a predictably disastrous initiative, imposed without regard to labour market fundamentals? Can the government and its advisors truly believe that wages have little to do with employment or that some miracle of economic growth or currently unrealised productivity gains will come to raise the demand for labour?

Surely not, though the support of trade unions and large businesses for an NMW, expecting less competition for jobs from low paid workers or firms able to hire them, is entirely rational self-interest at work.

Unions attempt to maximise the wage bill they can draw member dues from and business seeks to maximise profit, not employment. Robots can replace workers very easily, especially at higher wages or rather improved employment benefits.

Read also: Global Data: ANC desire for minimum wage a very bad economic idea

The case for an NMW must be a political one. It cannot be an economic one. If an NMW, proclaimed at levels well above market determined wages could cure poverty, the economic problem of poverty in SA and everywhere else would have been solved by decree a long time ago.

The government must believe that fewer but better paid, so-called decent jobs, will mean more support for it at the ballot box. Nobody would thank a government for employment at wages that do not provide an escape from poverty, even if the alternative more poverty for now and more dependence on government hand-outs of cash and housing.

Our labour market regulations and interventions have long been pushing employment and employment benefits strongly in this direction.

Fewer well-paid private sector formal jobs have been provided – relative to GDP – and many people have joined the ranks of the unemployed or the informally employed, the latter not fully captured in GDP estimates.

NMW may be a recipe for political survival but is not a cure for poverty in SA. It will retard the rate of economic growth in SA that is the only long-term cure for poverty.

Economic growth, sustained at a rate well above population growth, would gradually lift all incomes in SA, including those of the worst paid, as well as skilled workers. Achieving higher growth rates demands a more flexible labour market. Unfortunately SA continues to move in the other direction.

References:

1Arden Finn, A National Minimum Wage in the Context of the South African Labour Market
August 2015
National Minimum Wage Research Initiative Working Paper Series No. 1
University of the Witwatersrand; www.nationalminimumwage.co.za

* Brian Kantor is chief economist and strategist at Investec Wealth & Investment

* For more in-depth business news, visit biznews.com or simply sign up for the daily newsletter.

biznews  |  brian kantor  |  sa economy  |  minimum wage
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