SA unpicks Piketty’s Brazil knot

Superstar economist Thomas Piketty waded into the prickly minimum wage debate while on tour in South Africa last week.

The author of the bestseller Capital in the 21st Century is better known for advocating a global wealth tax to address growing inequality, but he also advocated a national minimum wage in South Africa when he spoke in Soweto on Saturday.

Echoing sentiments long voiced by trade union federation Cosatu, Piketty upheld Brazil as a role model for South Africa. “There are countries in the world, not only in the rich world, but also emerging countries like Brazil, who have a national minimum wage, who were able to find the right level for the national minimum wage,” he said.

Piketty added that South Africa, although substantially smaller, should also be able to find the right level to avoid the extreme exploitation of low-skilled workers.

The decision to ratchet up the national minimum wage in the Latin-American country was made consciously more than a decade ago and the move is widely credited for playing a significant role in halving the unemployment rate, dramatically lowering the poverty rate and reducing inequality.

Although the “right level” for Brazil is a federal national minimum wage of 788 Brazilian real (about R2 730), the level at which a local minimum wage should be set remains, as Cosatu has put it, the elephant in the room. The federation has suggested a minimum of between about R4 500 and R5 500 a month.

Brazil’s federal minimum, if converted into rands, is on a par with many sectoral minimum determinations in South Africa.

For example, R2 606 is the monthly minimum for forestry and farmworkers, and R2 850 for taxi drivers and administrative workers. But it is higher than the monthly minimum of R2 065 for a domestic working in a metropolitan area, or the R1 625 floor determined by the minister for expanded public works programme workers.

In a forthcoming working paper co-authored by Jeremy Seekings and Nicoli Nattrass at the University of Cape Town’s Centre for Social Science Research, they argue that “South Africa’s existing sectoral minimums are not low in comparison with the Brazilian national minimum. Indeed, they are remarkably in line with it.”

The paper, “National” Minimum Wage-Setting in South Africa, also finds that current sectoral determinations in South Africa have about the same purchasing power that the minimum wage in Brazil has.

Neil Coleman, the strategies co-ordinator in the Cosatu secretariat, said it was important to take note of the depreciation of the Brazilian currency, one of the worst-performing currencies in the world in the past year. At the beginning of 2015, 788 real would have been equal to about R3 800.

Coleman said South Africa was often compared to Brazil for obvious reasons, such as high levels of poverty and inequality in both countries. But the amount of the minimum wage was just one of many factors in the debate, he said.

Another factor was that Brazil had a policy in place that sought to increase the income of people at the very bottom of the pyramid. It also had an extensive network of social protections, cash transfers and other generous benefits, which meant Brazilians had a higher household income.

Brazil put more money than South Africa into social welfare, helped by a tax to gross domestic product ratio of 35%, Coleman said. South Africa’s ratio, according to the South African Revenue Service, was 26%.

According to the OECD, in South Africa, social services accounted for 8.77% of GDP; in Brazil it accounted for roughly 15% of GDP.

The national minimum wage supported far fewer Brazilians when compared to South Africa, where the wage for one person was expected to provide for bigger extended families, given the higher unemployment rate. Expenses such as those relating to transport were also much higher in South Africa, where workers travelled longer distances to work; Brazil had a much higher degree of densification.

Coleman said one could look at several examples in Latin America where there had been a political decision to support a long-term, consistent increase in the minimum wage.

South Africa’s sectoral minimum wage for farmworkers is now almost on a par with Brazil’s national minimum wage. (Paul Botes, M&G)

Gilad Isaacs, the co-ordinator of the University of the Witwatersrand’s national minimum wage research initiative, said Brazil’s experience was used to show how a country could withstand an increase in the minimum wage. In lieu of an African example, its economy had similar features to South Africa’s, which invited a comparison.

“One tries, imperfectly I guess, to draw lessons from countries that might present parallel experiences.”

But he agreed that the general trend among half a dozen countries in Latin America, including Uruguay, Peru and Ecuador, showed that an increase in the minimum wage translated to a decline in poverty.

And, although an accompanying comprehensive social reform package, as instituted in Brazil, was advantageous, these other examples showed it was not strictly necessary in order for a national minimum wage to be effective.

“Even South Africa has seen reductions in poverty over the last 10 years, but the fact is, if you look at per capita income, stretched over the dependents, [it is] not going to lift them over the household poverty line,” Isaacs said.

Estimates of how much Brazil’s national minimum wage contributed to the reduction in  inequality were anywhere between 35% and 55%.

Seekings and Nattrass said: “We acknowledge that the Brazilian case showed that, in specific circumstances, raised minimum wages can contribute to poverty reduction and economic growth. But the Brazilian case shows also the limits to this argument: in Brazil itself, macroeconomic conditions are no longer amenable to increases in minimum wages.

“We argue that economic conditions in South Africa are also not conducive to the kind of wage-led growth advocated by Cosatu and Coleman in support of a high national minimum wage.”

Lyal White, the director of the Centre for Dynamic Markets at the Gordon Institute of Business Science, said that, although the Brazilian government succeeded in addressing poverty and inequality, “the prerequisite for everything is growth. And they had it.”

“We are not the same as Brazil. We don’t have the depth of the economy. You can’t divide the wealth. We haven’t grown the pie enough here.”

Following years of remarkable growth coinciding with the commodities supercycle, Brazil has since found itself in recession and its credit rating downgraded to junk, or subinvestment, status.

“Currently Brazil is shedding jobs at 100 000 a month,” White said. “Those are the sort of real indicators of where Brazil is going.”

Cosatu argues that individual monthly wages do not come close to meeting the upper poverty line for households and some are even insufficient to meet households’ monthly food needs.

Statistics South Africa figures, quoted by Cosatu, show that a worker supporting four dependents in 2014 needed to earn R946 per family member, or at least R4 730 a month, to save his or her family from sinking into poverty.

What the minimum wage pundits say

Internationally, the minimum wage is 40% to 50% of the national average wage, unions told the parliamentary portfolio committee on labour in June. But South Africa’s is less than 25%, according to a 2010 Organisation for Economic Co-operation and Development report.

Average earnings as reported in February 2014 were R14 731; 40% of which is R5 892.40.

Researchers Jeremy Seekings and Nicoli Nattrass used International Labour Organisation data to put South Africa’s minimum wages at 34% of the average wage in 2012.

“National minimum wages are obviously linked to the level of development of a country, so one would expect South African minimum wages to be lower than minimum wages in Brazil,” they wrote, arguing: “The minimum wage is 45% of gross domestic product per capita in Germany, and 32% in Brazil. In South Africa, the minimum wage of a domestic worker is marginally lower, at 31% of GDP per capita, but the average minimum set through sectoral determinations (R2 362 in 2014) was 40% of GDP per capita in 2014 … If South Africa’s minimum wage was set (in 2014) at the same proportion of GDP per capita as Brazil, it would be R1 875; if it was set at the same proportion of GDP per capita as it is in Germany, it would be R2 636.”

Neil Coleman, of the labour federation Cosatu, said, “For us, it’s not the question of level. It’s the question of the principle … We accept there has to be a medium-term strategy”, but it needed to be bolder than current sectoral determinations.

Coleman and Cosatu say South Africa has the most minimum wage schedules (124) compared to other African countries and this presented compliance and enforcement complications.

Seekings and Nattrass suggest that policymakers should look to the example of Mauritius in the 1970s: it prioritised low-wage job creation to address unemployment. “It was only once the labour market had tightened that statutory minimum wages were raised because policymakers wanted to ensure there would be no job destruction,” they said.

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