South Africa

Op-Ed: South Africa’s minimum wage is here to stay

By Saliem Fakir 28 August 2015

The post-1994 era has been accompanied by a shift in overall national income share on a per capita basis for the better. Statistics show the national income share has grown, so how do you explain the high inequality even though we have relied on both state and market mechanisms for redistribution? By SALIEM FAKIR.

Generally, for most of the working population wages are at the discretion of employers and employees in areas that fall outside of the annual collective bargaining processes. Where there are organised unions, wages are determined through collective bargaining and sectoral negotiations. As a result there are at least 36 or so different minimum wages in the country. And, even where minimum wages are set through bargaining councils or on a sectoral basis they are reliant on good compliance and enforcement.

Not everybody gets paid a minimum wage even in those sectors where they have been negotiated and set.

Inequality naturally increases demands for fairness which is the political essence of the national minimum wage debate at present. Inequality increases when unemployment is high and persistent unemployment serves to place a drag on the progress of low earners and those of lower or middle income status.

According to the World Economic Forum Global Risk report, South Africa has the third largest unemployment rate for people between the ages of 15-24 years old.

Metric bullies tend to treat numbers as end objectives in their own right and dwell on competitiveness. Which tends to be coded language for profit loss or gain against improving income share for workers. Behind the numbers are real people for whom some empathy needs to be shown over their living circumstances. There are other things degrading the incomes of low earners not just low wages. As Joseph Stiglitz and Ravi Kanbur have recently argued, wages must relate to life outcomes but not simply a metric of labour wage competitiveness. Wages need to be linked to quality of life progress and the purchasing power of earned income. Without a sociological appreciation the minimum wage debate becomes meaningless.

So, why is minimum wage here to stay?

Firstly, unequal societies also create unmet expectations and desires for certain standards or forms of lifestyle that may be out of step with where people are and where they want to be. This is the problem of the mimetic impulse. Perceptions of rapid material progress and even opulence for some, against what the unions call poverty wages, conveys to the bottom strata of our society that the economy produces and continuously reproduces two different types of life and existential experience.

Distortion of wage earnings between the top pyramid and the bottom pyramid is bound to cause feelings of resentment due to the unfairness of how the market system works. And, as the UK’s own High Pay Commissions shows, these disparities in income have nothing to do with market forces or some meritocratic process but are influenced by the relative power of managers and shareholders to ‘rig’ the income share in their favour.

Secondly, failures in public services eat at the wages of low earners as they are reliant on social services, which are often free or have minimum charges, to complement wage income. If these services are poor or unavailable, out-of-pocket expenses for health, education and other basic needs have to be paid for from an already constrained household budget. In turn, South Africa’s city design and planning do not favour poor workers or even work seekers because of the cost and distances they have to travel to places of work.

The lack of reliable public transport further degrades income if you consider the fact that food and transport can easily constitute between 30% or more of a poor household’s income. This is why access to social grants will continue to play an important role in widening the social net and providing safety when the wider economy is under stress. Financial distress also leads people to seek out loan sharks and get onto a treadmill of debt that ends up being more detrimental than beneficial.

Thirdly, single earners or those with irregular earnings have to spread their income to a wider grouping of people than is the case with those who tend to be top earners. In South Africa, dependence follows a predictable racial pattern with whites having, in general, higher earnings and a low level of dependents compared to blacks. The reality of persistent unemployment is that it also acts as a drag on the progress and prosperity of those earners who have to support these dependents. These earners in turn have to resort to political pressure during wage negotiations using collective power to demand more of the income share.

But as economists will tell you, over time this leads to diminishing returns and under poor economic conditions wage earners can be pushed out of the system as capital opts out or downsizes.

Fourthly, increases in wages can set in motion a vicious cycle – increased capital intensity in segments of the economy, where automation is feasible, will go that route and will no doubt lead to more job losses. The threats of widespread mechanisation may not hold true for all sectors. Nonetheless, the shift to automation is a global phenomena that we need to study more closely. The effects of automation will most likely place downward pressure on wages globally for unskilled and semi-skilled workers. As Lawrence Summers noted recently, speaking on the challenge of future jobs: “The economic challenge of the future will not be producing enough. It will be providing enough good jobs.”

On the issue of mechanisation and automation, especially in certain types of mining, services and manufacturing, there seems to be either complete obliviousness to this issue or a lack of willingness to discuss this headwind with some degree of maturity and openness. The nature of work and the idea of full-time employment is more than likely to change in character in the future and we need to have some sense of this shift if we are to introduce sound economic policies and measures.

Stabilising increased wage demands requires us to solve the broader unemployment challenge. The formal economy is unlikely to capture all of those of working and productive age for the long-term future and is a challenge that will require creative solutions.

The future of peace in the workplace will remain unsettled business so long as unemployment persists. Both business and the government have a responsibility to work together but the solution should not be left to only the formal economy.

The expansion and normalisation of the informal sector, as an important part of our economy, needs proper policy attention. The era of universal formal work may well be a thing of the past. We need to be far more open about whether the future is really formal jobs and begin to think of informality and partial working hours as new ways of organising a greater swathe of people who want work and want to be active and productive in the economy. South Africa should also be open to a managed immigration policy that encourages skilled entrepreneurs and professionals to complement the existing formal workforce. They are bound to create more jobs than not.

In the end, formal economic mechanisms where the market operates have to be complemented with efficient and effective social measures taken on by the state to ensure a liveable minimum wage leads to quality of life, the accumulation of assets and to future intergenerational opportunity. The minimum wage debate must also be seen as a broader dysfunction and disconnect between state and private delivery mechanisms because fixing one end of the welfare spectrum, the living wage, can be eroded by the other – social service dysfunction and poor delivery. It is a doubtful that a single metric, the national minimum wage, can solve the bigger picture when this is an issue of coordination between state and market mechanisms that are not aligned.

The minimum wage may lead us somewhere but whether it will solve the intractable problems that have dogged the last 20 years, and been the major source of our inequality, is not clearly visible in all the policy noise that goes on when these debates get all fired up. DM

Saliem Fakir is head of WWF-SA’s Policy and Futures Unit.

Photo: A miner rides a bicycle as he returns from his shift in Nkaneng township outside the Lonmin mine in Rustenburg, northwest of Johannesburg, June 26, 2015. REUTERS/Siphiwe Sibeko.

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