Business

Low-wage producers create jobs

Nicoli Nattrass, Jeremy Seekings

Successive government plans emphasise the need for job creation but industrial and labour market policies are biased against labour-intensive growth.

Low-wage employment that meets basic standards would provide work for low-skilled workers and benefit the unemployed, particularly in poorer rural areas. (Rogan Ward, M&G)

Nowhere is this more evident than in the clothing industry, where employment has collapsed in the face of rising wage costs and intensifying international competition. South Africa's most labour-intensive firms, which produce basic clothes for the mass market in direct competition with China and other low-wage countries, have survived by relocating to lower-wage regions or by paying below the legal minimum wage. Some firms have relocated production to Lesotho, where minimum wages are substantially lower.

The existence of the rump of labour-intensive manufacturing in South Africa is threatened by a "compliance drive" launched by the national bargaining council (NBC) for the clothing manufacturing industry in 2010. Firms that do not pay the minimum wage are pursued through the courts and eventually forced out of business. We estimate that about 16 700 jobs are directly under threat, with further job losses possible in other firms in the areas concerned. This has serious implications for labour-intensive growth because clothing is South Africa's most labour-intensive industrial sector, and the low-wage firms targeted by the bargaining council are its most labour intensive.

The council was created in 2002. Resisted from the outset by several employer bodies, especially in KwaZulu-Natal, the council has never been representative of firms in that province or in the country as a whole. Only about one quarter of the firms that are registered with the council (collectively employing less than half the workforce) are represented by employer associations and hence are "party" to agreements concluded with the South African Clothing and Textile Workers' Union (Sactwu). Nevertheless, successive ministers of labour have used the Labour Relations Act to extend wage agreements to all clothing firms, whether party to the NBC agreement or not.

In June 2011, five small clothing enterprises from Newcastle, a low-wage region in KwaZulu-Natal, initiated legal proceedings against the NBC and the minister of labour over the extension of minimum wages to them.

Since the first national minimum wage agreement in 2003, nominal and real minimum wages have risen significantly in the lowest-wage, non-metro areas of South Africa, including Newcastle. In 2000, when minimum wages were still set through the Employment Conditions Commission, minimum wages in Newcastle were half those in Cape Town. By 2011, after nine years of wage agreements in the NBC, they had reached two-thirds of the Cape Town level.

Fast fashion
Employers represented in the NBC, which are largely located in metro areas, have gone along with the reduction of inter-regional differentials as this is of little consequence to them. Although some of the firms that are party to the NBC agreements claim that they face competition from lower-wage producers, in fact they tend to produce for relatively protected niche markets (for example, bespoke orders and promotional goods) or the "fast fashion" end of the industry, where margins are higher and where longer-term relations can be forged with retailers.

These firms are not threatened by competition from low-wage, non-metro firms that produce different products for different markets, notably simple skirts, shirts and pyjamas aimed at middle- and low-income consumers for whom branding is less important.

Increased international competition, especially from China, caused in part by the appreciation of the rand between 2003 and 2011, has been the major factor behind the collapse of employment in South Africa's clothing industry. But this collapse would have been even worse if many of the low-wage producers in places such as Newcastle had shut down owing to an inability to comply with the minimum wages imposed by the minister of labour. But non-compliance has resulted in chronic conflict with the NBC.

The Newcastle Chinese feel betrayed by the transformed policy environment and by what they perceive to be racist slurs, such as calling them "fly-by-nights" when they regard Newcastle as their home. They also feel that there was a failure to understand how difficult it is to compete at the bottom of the clothing market. Profit margins are very low, and tight deadlines are stressful for both owners and workers. In this highly competitive environment, missed deadlines can turn a small profit into a major loss as penalties are imposed and orders cancelled.

Some owners live on their factory premises, mobilising their family to work long hours in the factory if a deadline is in danger of being missed. It is these pressures that have also sometimes resulted in labour practices that are clearly abusive, such as locking workers into the factory.

Productivity-linked pay
Some Newcastle firms still do not fully comply with the Basic Conditions of Employment Act or pay NBC-agreed minimum wages, but the situation defies simple characterisation. Some firms provide small payments to their workers during the off season that they might have to stop if they paid higher minimum wages. Others have experimented with worker co-operatives and various forms of productivity-linked pay. One model is to pay bonuses for production over and above a basic quota. Another is to offer low minimum wages plus piece-work payments. These practices can result in significant variation in earnings. According to wage records for 2011, take-home pay for workers employed by one of the applicants in the case ranged from 15% below the NBC minimum wage to almost double it.

Therefore, there is no simple correlation between minimum weekly wages and total earnings, and not all workers would necessarily benefit if minimum wages rose to the prescribed level at the cost of reduced productivity-linked pay. Indeed, when one of the applicants in the court case attempted to increase his minimum wages to 70% of the legal minimum, he could do so only by reducing his piece-work bonuses. His most productive (and best paid) workers resigned in protest at their reduced total earnings.

South Africa needs a more differentiated approach to wage setting that enforces basic standards of employment but tolerates low-wage employment. Allowing low-wage producers in places such as Newcastle to continue to exist will not harm jobs in the upper end of the industry. Instead, it will accommodate the needs of low-skilled workers, the unemployed and poorer consumers who buy basic clothing rather than the pricier, branded, fast-fashion products.

The extension of agreements, the NBC's compliance drive and resulting job losses puts paid to the argument that South Africa's bargaining councils do not affect employment. Indeed, the story illustrates how, under the hypocritical guise of promoting "decent work", labour-market institutions and industrial policies can create an unholy coalition of the state, a trade union and metro-based, relatively capital-intensive employers whose actions can inflict massive job-destroying structural adjustment on a labour-intensive industry.

This is the executive summary of a CDE Focus written by Professors Nicoli Nattrass and Jeremy Seekings of the University of Cape Town as part of a wider project on the labour market

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