Minimum wages have reduced inequality across Latin America, Asia and Europe, says Gilad Isaacs. The same can happen here.
Johannesburg - A national minimum wage, set at an appropriate level, can achieve the central objectives of reducing working poverty and inequality. It can also lead to increased economic growth without significant negative economic consequences.
South Africa has the highest level of inequality in the world. Based on our own calculations using Statistics SA data, in 2014 the average income of the top 10 percent of full-time employees was 82 times the average income of the bottom 10 percent.
There’s a growing international consensus that inequality retards economic growth. Inequality also undermines social cohesion. And working poverty is dire in South Africa. About 54 percent of full-time employees - 5.5 million workers - earn below the working-poor line of R4 125.
They cannot meet their most basic needs and those of their dependants. High dependency ratios mean wages stretch to cover many dependants.
The International Labour Organisation says the purpose of minimum wages is to ensure wages are able to cover the basic needs of workers and their families. A national minimum wage sets a single economy-wide wage floor.
In South Africa, we explored a national minimum wage as a tool to reduce inequality and transform the inherited apartheid wage structure. Minimum wages have been successful at raising wages for low-wage earners in developed and developing countries.
In Latin America, a 10 percent increase in minimum wages led to an increase in average wages of between 1 percent and 6 percent.
Minimum wages have meanwhile reduced inequality in the formal and informal sectors across Latin America, and also in Indonesia, Russia, China, India and Europe.
In South Africa, the institution of a national minimum wage has been under negotiation between the "social partners" at the National Economic Development and Labour Council (Nedlac). Deputy President Cyril Ramaphosa in August appointed a panel to consider the available research and advise on the nature and level of a national minimum wage.
The national wage floor is an advance over the current sectorally set minima as it covers all workers. It’s easier to enforce and doesn’t set lower minima for sectors with high proportions of vulnerable workers.
Collective bargaining, covering about 32 percent of lower-wage workers, has maintained wage levels but is unable on its own to combat working poverty.
Without a national minimum wage, average wages over our forecast period (2016 to 2025) are projected to be R7 814 (in 2010 rand). National minimum wages levels beginning at approximately R3 500 would, however, raise average wages over the 10 years, in real terms, by between 21 percent and 38 percent, reaching R9 462 and R10 781 respectively.
The result would be a rise in household income, particularly for low-wage workers. This would spur greater consumer spending, increase output and raise levels of growth, together with a rise in productivity. Most pertinently, this statistical modelling projects a fall in the Gini coefficient in South Africa.
Raising the coverage or level of minimum wages can also cause a shift in income from capital towards labour. This is also shown to be beneficial to our overall economy.
Firms and economies adjust to higher minimum wages in a number of ways. The most important channels of adjustment are productivity increases due to organisational efficiency and increased effort by workers, reductions in wages of higher earners and small price increases.
In middle-income countries - such as ours - minimum wages are on average set at 48 percent of the average wage. This translates into R4 161 (in April 2015 rand).
In April last year, a family of four required R5 276 to meet their most basic needs and not live in poverty. The working-poverty line was R4 125.
The national minimum wage policy must be carefully designed and set at a level that is able to meaningfully improve workers’ livelihoods with sustainable ramifications for the wider economy.
* Gilad Isaacs is a PhD candidate at SOAS (formerly known as the Schoolof Oriental and African Studies) and researcher at the Corporate Strategy and Industrial Development programme at the School of Economic and Business Science at Wits. This article is based on a report written by the National Minimum Wage Research Initiative at Wits
** The views expressed here are not necesarily those of Independent Media.
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