Business

Minimum wage is no magical fix

Thalia Holmes

Correcting the trends entrenching South Africa’s inequality will take more than polarised rhetoric.

The National Union of Metalworkers of South Africa wants R6 000 as a minimum wage. (Gallo)

Research has shown that setting a national minimum wage is unlikely to make a meaningful reduction to the gap between rich and poor in South Africa unless an “unaffordable” amount of resources is devoted to the task.

In his recent state of the nation address, President Jacob Zuma said that a national minimum wage would be investigated as “one of the key mechanisms to reduce income inequality”.

But a report compiled by Nomura emerging markets economist Peter Attard Montalto says that South Africa would need to set aside about R20-billion a month or 6.2% of its gross domestic product (GDP) to correct the underlying factors that such a wage would seek to address.

According to the report, the ANC posits that setting a minimum wage would help to tackle the growing differences between the country’s average wage and its median wage.

Over the past few years, South Africa’s average wage has consistently increased above inflation, but the median wage (which articulates what the person right in the middle of the highest and lowest earners is taking home) has increased at a rate below inflation. In 2012, the median wage increased by a little over 3%, whereas inflation hovered around 5.5%, and the average wage increased by over 8%.

The difference points towards greater salary increases for those who are earning above the median wage line. It’s “cementing South Africa’s inequality problem”, says Montalto. But reducing that gap would require the government to oversee a huge correction.

In effect, it would call for the median wage to grow at the same rate as the average wage. So instead of growing at the roughly 3% it did in 2012, the median wage would need to grow at roughly double the rate of inflation, or at least 12%; something Montalto says “looks like a serious challenge”.

Such a move would require significant increases in state spending and massive redistribution of resources, he says. In short, it would be “wholly unaffordable”.

Reducing the chasm
If a national minimum wage is merely set without the government aligning the growth of the average and median wages, the report, which interrogates a number of possible minimum wages for the country using various models, finds that very little would be done to reduce the chasm between rich and poor.

According to Nomura’s calculations, South Africa currently has an effective nationwide minimum wage of about R1 878 for urban dwellers and R1 618 for rural folk.

A hypothetical national minimum wage of R2 000 a month, structured to include those who earn social wages, would only reduce South Africa’s currently steep Gini coefficient from 0.63 to 0.58. If this was increased to R4 000 a month, the Gini coefficient – a measure of income inequality – would decrease to 0.47. Even at this rate (a little lower than the R4 500 called for by the Economic Freedom Fighters), South Africa’s wealth gap would still be more pronounced than countries such as Indonesia, India and Sierra Leone.

These hypothetical figures raise questions about what the appropriate national minimum wage in the country should be. Currently, minimum wages are legally determined by the Basic Conditions of Employment Act in several sectors, with the lowest earners being domestic workers at R1 618 for rural-based workers. Bargaining councils ensure other “effective” minimums.

But according to Trenton Elsley, executive director at the Labour Research Service, certain sectors such as services do not enjoy minimum wage protection, and there is also a “great deal of minimum wage violation” taking place across the economy.

In Elsley’s opinion, the debate about a national minimum wage that addresses inequality needs to shift. “We know a great deal about the distribution of wealth in South Africa,” said Elsley. “It is very, very skew. We know a fair amount about poverty too. There are millions of people living in it. A better question is perhaps to ask: How much do you need to live a decent life?

“This might allow us to get past a polarised rhetoric where wages are either simply too high or too low.”


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