Dispelling the myths of national minimum wages

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The ANC’s 2014 election manifesto endorses the principle of introducing a legislated national minimum wage. This concrete intervention is hugely important for millions of South Africans who, despite working long hours, still live in poverty.

Unfortunately, some responses to this announcement suggest a startling level of ignorance and misinformation.

Based on Statistics SA figures, we can estimate that over half of workers in the country earn less than R3 500 a month, way below what is required to support a family. This harsh reality of mass working poverty is the living legacy of a system deliberately designed to entrench the superexploitation of the African majority while entrenching minority economic privilege.

It is an indictment of our democracy that 20 years on we have failed to make real progress in reversing this unacceptable legacy of apartheid.

While workers remain trapped in poverty, they watch a growing gap between themselves and the wealthy and powerful. South Africa has a toxic mix of increased economic inequality combined with extreme poverty and unemployment.

This is no longer simply a social issue, if it ever was. It is the major political question of our time. Addressing this challenge will – rightly – be the dominant theme of the upcoming elections.

While a national minimum wage is not a panacea, it will be an important step forward in responding to these challenges. It will be key to a package of labour market, social protection and economic measures, aimed at giving concrete meaning to the slogan of “a better life for all”.

Labour market measures must be designed to eliminate working poverty, radically reduce inequality of incomes, and institutionalise mechanisms to ensure that all workers, through their unions, are able to collectively negotiate better conditions of employment, irrespective of sector.

The national minimum wage is key to this agenda, because it establishes a minimum income floor. This counters the race to the bottom seen in the most vulnerable sectors. It can also provide a lever to reconfigure the apartheid wage structure, with other measures aimed at creating greater income equity. These labour market interventions will promote decent work, and unleash the economy’s productive potential.

Millions of South Africans face poverty and destitution through no fault of their own. Social protection measures should aim to ensure that all citizens are entitled to a basic floor of income, and provide access to a package enabling them to meet their basic needs, regardless of their circumstances. A national minimum wage is connected to this package, because it guarantees a minimum income to all families (and often extended families) who rely on a breadwinner.

Contrary to the DA’s propaganda, unemployed people don’t want the employed to have lower wages, or less job security. As Jonny Steinberg points out, “tell an unemployed woman in Pondoland that her brother on the platinum mine, who remits money home every month, should not be paid more, and she will tell you that you are mad”. (“Opinion makers have blind spot on wages”, Business Day, January 24).

Following the global financial crisis, recognition has grown that stimulating real economic activity, as opposed to financial speculation, is the key to generating jobs and investment. An important element of this stimulus is raising the incomes of working people. Their propensity to spend on basic necessities, if linked to an appropriate industrial strategy, can lead to a massive economic impetus to kick-start economic activity.

Former president Luiz Inácio Lula da Silva of Brazil, addressing the Cosatu executive in 2012, explained this point powerfully: “Once we put money in the hands of the poor, they started buying goods, more of which needed to be produced. When workers and the poor started spending, the giant wheels of the Brazilian economy started turning.”

Brazil’s deliberate policy of progressively raising the real value of the minimum wage was key to increasing incomes of the poor. Two-thirds of Brazil’s reduction in inequality was due to the increased national minimum wage, according to the International Labour Organisation’s Group of 20 policy brief. The massive increase in employment that followed this policy, dispels the myth that higher minimum wages automatically lead to job losses.

The Brazilian experience shows an important relationship between increased domestic demand and potential for economic diversification and industrialisation. Conversely, poverty in South Africa, and the southern African region, means a major repression of demand. Raising the incomes of working people is key to unleashing trapped economic potential.

Scaremongering tactics by conservative economists creates the impression that introducing a national minimum wage will derail the economy. Recently, one economist asserted crudely that regardless of the national minimum wage level, it would be catastrophic for employment, and would never work in South Africa “under any circumstances!” He, and his fellow ideological soulmates, haven’t bothered to look at contrary evidence from the international experience. A growing body of international economic opinion now agrees that governments can effectively use national minimum wages to combat poverty and inequality.

In 2006, more than 650 US economists, including five Nobel prize winners, stated that increasing the national minimum wage would significantly improve the lives of low-income workers and their families “without the adverse effects that critics have claimed”.

The UK Low Pay Commission, responsible for setting national minimum wages, stated that their research could find no evidence that minimum wages caused damage to the economy or jobs. Literature on the recent Latin American experience concludes that rapidly rising minimum wages have coincided with job creation, formalisation of work and, significantly, contributed to reducing inequality and working poverty. A special focus on minimum wages in the conservative Economist (November 24, 2012) concluded that “evidence is mounting that moderate minimum wages can do more good than harm”.

In 2010 economists at UCT examined whether the introduction of minimum wages through South African sectoral determinations had an impact on employment. To their surprise they found that minimum wages between 2001 and 2007 coincided with a net increase of 650 000 jobs over this period, accounted for by five sectors, despite farming experiencing a significant job loss. So the neoclassical economic myth that increasing minimum wages automatically leads to job loss has been refuted.

It is not being argued that introducing a national minimum wage in itself would necessarily have the impact of increasing the number and quality of jobs. Rather, the national minimum wage needs to be used in combination with other policy instruments to achieve these desired goals.

Various economic factors, such as sectoral conditions, industrial strategy, trade dynamics and broader economic conditions (including domestic demand), together determine sectoral employment performance. Therefore, wage policy has to be combined with appropriate economic policies to have the desired employment impact.

International experience, in countries as diverse as in Latin America and Scandinavia, shows that a national wage policy which reconfigures the wage structure can significantly raise the income of low paid workers, and reduce inequality, without causing a major economic shock.

Countries experiencing extreme income inequality find that introducing a national minimum wage not only brings the lowest paid out of working poverty, but helps compress the entire wage structure, by reducing wage differentials.

In many countries, including Brazil, the policy of significant real increases in the national minimum wage, has coincided with real increases reflected in collective bargaining in the bottom half of the wage structure, and greater moderation at the top.

The Economist reported that in the UK, increases in the national minimum wage had “boosted earnings further up the income scale – and thus reduced wage inequality. (As a result) wage gaps in the bottom half of Britain's pay scale have shrunk sharply since the late 1990s”. (November 24, 2012)

Finally, it is important to clarify the relationship of a national minimum wage to the broader system of collective bargaining. Currently, South Africa doesn’t have a national minimum, but various fragmented minimum wages set through statutory sectoral determinations (covering only 3.5 million of more than 10 million formal sector workers).

Minimum wages negotiated at bargaining councils cover a further 2.3 million workers. Minimum wages in the country are characterised by: very low levels of many minimum wages, way below any accepted minimum living level; proliferation of multiple minimum wages; huge variation within and between sectors; and low levels of enforcement.

The introduction of a legislated national minimum wage in South Africa would create an economy-wide wage floor, below which no one could fall.

The national minimum wage would be simple, high-profile, and all workers and employers would be aware of the legal obligation to pay this minimum. It wouldn’t replace collective bargaining or the role of unions, and employer organisations.

Indeed, a national minimum wage lays the basis for strengthening sectoral and workplace collective bargaining through which employers and unions negotiate wages and conditions throughout the wage structure.

As happens internationally, collective bargaining would negotiate sectoral minima above this national floor, according to conditions in those sectors. This is the model strongly supported by the International Labour Organisation.

This is the first of a two-part article. The second will look at how to address some practical challenges faced in implementing a national minimum wage.

* Neil Coleman is the strategies co-ordinator in the Cosatu secretariat. This article is based on a detailed paper published by the International Labour Organisation (ILO), downloadable at the ILO’s website.


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