Minimum wage will cost small businesses the most

Published Feb 16, 2016


Discussions on the mooted national minimum wage (NMW), at a recent symposium at the University of the Witwatersrand, suggest that its introduction will lead to increased consumption.

The consumption, it was argued, would lead to increased production and thus grow the economy.

Whatever the merits and demerits of this argument and its assumptions, it misses the dictum that “a small business is not a small big business”. There is abundant research that businesses react differently to phenomena because of their size.

Unsurprisingly, presentations on the implementation of NMWs in Malaysia, India and Germany showed that the impact was more on small businesses than on bigger ones. This was based on the levels of non-compliance. This is not surprising as small businesses do not have the fat to absorb the resultant impact on the wage bill or cannot move funds from one line of item to the wages one. Most are perpetually on life support.

Thus, proponents of “the NMW will increase consumption and production” blissfully ignored the impact it could have on small business. This generalisation, in any case, exemplifies South Africa’s psyche of seeing the economy in terms of big businesses. In fact, this appears to be an African disease as a 1989 World Bank report decried the fact that small business is “Africa’s missing middle”. It pointed out that Africa’s economies consisted of a huge informal sector, big multinationals and state-owned entities. African governments had paid scant attention to small business, yet it was the engine for growth.

Reasonable threshold

Fortunately, this is now changing, as Africa focuses on entrepreneurship and small business. And since the creation of the small business ministry in South Africa many, but not enough, now swear by small business.

The discussions on the NMW for our country should, therefore, focus on its impact on our vulnerable small business sector and a reasonable threshold set. Notwithstanding the impact on small business, the NMW is necessary as it will lift millions out of dire poverty. According to Statistics SA, 28 million people live on less than R800 a month.

As if this is not enough, the mean per capita income for the poorest 10 percent is R910 and for the richest 10 percent it is R19 1194. This is disgraceful. The NMW is thus desirable, particularly as some business persons have affluent lifestyles at the expense of their employees. Still, and needless to state, the NMW will result in job losses as scenarios by the respected Development Policy Research Unit show.

This is a no brainer as the doubling of labour wages in the agricultural sector resulted in severe job losses. It did not result in a wealthier agricultural sector, as the super leftists at the symposium would have us believe. More importantly, a further dichotomy is that we must achieve a balance between economic transformation, which is the longer route to lift people out of poverty, and the NMW, which is the shorter route.

Transform racial structure

If we want to transform the racial structure of our economy, in which the richest continue to be white and the poorest are the black majority, we need more vibrant small businesses. Getting 10 percent of this major company or the other does not change the racial composition of the economy as the 3 percent black presence on the JSE after 20 years of black empowerment shows. For the record, lest people deliberately misunderstand me, there is nothing wrong with individuals getting their 6 percent or 5 percent of this or that. It is a part of transformation.

However, this 5 percent does not change the nature of economic participation, as most came in as silent investors. Real transformation is when more black people are creators of wealth in their own right. To add to this, we need more black-owned businesses as we need to expand the tax base. Note: we have close to 15 million South Africans getting a social benefit of one form or the other. We must just expand the tax base as the number of social benefits is unsustainable but necessary. Hence, the relevance of the Black Industrialist and the National Gazelles programmes simply cannot be overestimated.

It is emergent businesses that may be hard hit by the NMW. Yet, they are the businesses that could integrate us, in our identity, and into the world economy. Just as they did for some of Asia’s economies two decades ago. Thus, while the introduction of a NMW is a major necessity, the threshold is critical. When a small business closes doors, it is numerous families and not only the business owner that lose livelihoods.

The claim that consumption is boosted when wages are increased must be considered alongside the fact that there is a negative and wholly destructive impact on small businesses as a result of an increased wage bill. The threshold is thus critical.

* Dr Thami Mazwai is a special adviser to the Minister of Small Business, but writes in his personal capacity.

** The views expressed here do not necessarily reflect those of Independent Media.


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