The African National Congress (ANC) believes that the primary instrument against poverty and inequality is the creation of decent work. On the basis of this and other beliefs, it elected leaders at its 52nd conference who could advance its perspective on economic transformation. Yet some leaders have begun to cave in to pressure from those who counterpose decent work with employment creation, thereby opening yet another space for the economy to create “immiserising jobs”.
The idea of decent work has a number of dimensions. What I want to focus on is the dimension of a living wage. What is the effect of a living wage on the economy?
The starting point is that the purchasing power of society plays an important role in sustaining the growth rate of an economy. This purchasing power is, in the final analysis and to a large extent, given by the average wage multiplied by the level of employment.
It follows from this that if the average wage were zero purchasing power would be zero, no matter how many people worked for free, and firms would have no one to sell to — economic growth would not be sustained. On the other hand, if the average wage were way too high it would squeeze profits and discourage investment and employment prospects would therefore be zero.
The idea of a living wage arises from the observation that although an economy can create employment on the basis of low wages the volume of employment may not be sufficient to counterbalance the effect of low wages on demand. Therefore a living wage would increase purchasing power more than it would reduce the quantity of labour demanded by firms.
In fact, because social purchasing power would have increased, firms would face increased demand for their goods, which would feed back into increased demand for labour at a living wage. Therefore, the aspect of decent work that deals with a living wage has an analytical underpinning. It also forms the basis for employment as a primary tool against poverty and inequality. It posits a virtuous cycle that links the goods and labour markets. As I have noted above, however, beyond a certain point rising wages relative to productivity will squeeze profits and make investment unviable. Proponents of decent work, therefore concede that, in a capitalist economy, there is an upper limit to wages.
Opponents of decent work argue that an increase in the average wage to the living-wage level will lead to a more than proportionate decline in the amount of labour demanded by firms. Because this would reduce purchasing power overall, a vicious cycle would ensue in which the decline in demand would be accompanied by rising unemployment and increasing wage levels as firms struggled to sell their goods.
The solution to unemployment is to suppress real wages as a basis upon which to expand employment and thereby increase overall purchasing power. Logically, proponents of this employment strategy need to concede that there should be a minimum wage below which employment is not a viable economic activity. Yet they refuse to do so and instead argue that working in itself is better than not working at all. This argument cannot be logically sustained.
In the case of South Africa the Labour Force Survey September series records that 1,95-million jobs were created between 2001 and 2007. Yet income inequality has worsened over the period: the Gini coefficient rose to 0,68 in 2008. The minister of finance mentioned that half of South Africans live on 8% of national income. The 2010 United Nations Development Report says 44% of South African workers earn less than $1,25 a day. Cosatu mentions that 71% of African female heads of households earn less than R800 a month. Over a period of 10 years up to 2009, individual poverty fell from 52,5% to 48% — not because of the 1,95-million jobs created, but because of the extension of social grants.
When one looks at the class structure of demand, what is striking is the dominance of the upper classes. Indeed, the deepened income inequality and increased low-wage employment has shifted the purchasing power to these classes, whose tastes incline towards luxuries and imported items. The government’s new growth path informs us that the richest 10% of households captured around 66% of credit from the financial system. If I assume that 70% of household demand is credit-financed, this means that 10% of households account for 46% of household demand.
What all this tells us is that the idea of a living wage, as a component of decent work, has some traction in South African reality. First, despite the large increase in employment, accompanied by an increase in low-wage employment, purchasing power has not expanded on a mass scale. Second, the concentration of consumption in the upper classes shows that the employment strategy proposed by proponents of “immiserising jobs” will fail to resolve the crisis of poverty and inequality. The strategy may reduce the number of the poor but it will expand the pool of the working poor.
In his address to the 2010 national general council of the ANC President Jacob Zuma said that the new growth path must address the problem of why economic growth in the past 16 years has failed to resolve the problems of poverty, inequality and unemployment.
The agreement is that we need to change the quality of economic growth. Logically, we need to acknowledge that jobs have been created in the past 10 years, yet the problems of inequality and poverty remain. Therefore, we all have to agree that we need to change the quality of employment.
Nothing can be more degrading than a worker’s life being depleted in employment at a wage that cannot sustain the worker and his or her family for a month.
Professor Christopher Malikane is director of the Macro-Financial Analysis Group at the School of Economic and Business Sciences, University of the Witwatersrand.