Myths and so-called ‘facts’ about the National Minimum Wage
- Neil Coleman
- 10 Nov 2014 04:49 (South Africa)
“It does not help the debate much when those opposing the minimum wage are likely to be mostly employers or earning salaries well above any proposed minimum wage... Whatever the merits of the arguments against the imposition of a meaningful minimum wage, they usually are made by those with an obvious self-serving agenda,” Dirk De Vos wrote in Daily Maverick last week.
The Labour Indaba’s decision to take forward implementation of the National Minimum Wage has generated a furious response from some commentators. This should come as no surprise. There are huge interests at stake. The decision threatens the cheap labour system, and the super-profits which elites rely on to feed their lifestyle.
We now see the hired guns of business scrambling to explain why the introduction of a National Minimum Wage is such a terrible idea. And why we must do everything in our power to oppose this lunacy! This is all for our own good, of course.
Business economist Peter Attard Montalto, of giant Japanese investment bank Nomura, ominously warned South Africans: “It is important to take a stance now already against the idea of a national minimum wage, because of its potentially incredibly destructive impact” (FIN 24 6/11/14).
Peter Bruce weighed in the next day, in his usual understated way, repeating virtually verbatim what Montalto said: “A national minimum wage would create large swathes of new unemployment. It doesn’t matter. Cosatu wants it at R5,000 a month. Hell, if that’ll create jobs and boost spending and thus growth, why not make it R10,000 a month?” (Business Day 7/11/14) And with that facile statement, presumably the debate is closed.
The high priest of voodoo economics and labour broker, Loan Sharpe, has publicly stated that a national minimum wage would never work in South Africa, no matter the level at which it was set. He was so carried away by the nobility of this crusade that he presented a set of his own so-called ‘facts’ on minimum wages to a parliamentary committee, ostensibly on the assumption that his audience would not be able to challenge him. This proved to be a basic error.
The vast majority struggling to make ends meet, however, won’t agree with these critics - they will welcome the decision to introduce a national minimum wage with open arms. A fascinating fact from the US mid-term elections on 4 November is that all five referenda were won by those in favour of increasing the minimum wage.
President Dilma Rousseff was recently re-elected, despite serious social and economic problems in Brazil, in significant measure because of the improvements which raising minimum wages have contributed to people’s standard of living.
There are two possible explanations for these contrasting views: Business economists opposing the National Minimum are right, but people are deluded. Alternatively, ordinary people know, through concrete experience, that it is in their own interest.
We have motivated the case for a National Minimum Wage over the last couple of years, based on extensive evidence from the international experience. But this is at best an irritant for those defending economic power and privilege, whose response is to either ignore the evidence, or to misrepresent our arguments. As PW Botha once famously said, “Don’t confuse me with facts!”
So what are the facts? And what are the myths and ‘made-up facts’? We mention a few key ones:
Myth I: Internationally, higher minimum wages have led to job losses
Despite widespread claims that minimum wages lead to reduction of employment, this simplistic notion has now been discredited:
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.
A special focus on minimum wages in the conservative Economist (Nov 24 2012) concluded that “evidence is mounting that moderate minimum wages can do more good than harm”.
Latin American experience refutes this alleged trade-off in practice. The creation of 17 million formal sector jobs in Brazil from 2002-2011 coincided with increases in real minimum wages of over 80%, and the reduction of unemployment from 12% to 6%. Uruguay increased its minimum wage from US$100 in 2003 to $500 in 2014- a 500% increase. Yet unemployment in Uruguay is now at historically low levels. (ILO 2014 CAS report)
In 2006, over 650 US economists, including five Nobel prizewinners, 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”. States in the US with the best recent employment record, have the highest minimum wage levels.
Myth II: In South Africa raising minimum wages led to major job losses
Dirk De Vos states categorically that “every study finds that real wage increases reduce the demand for labour”. But UCT’s DPRU found, in a study conducted for the Department of Labour in 2010 , that between 2001-2007, after the introduction of higher minimum wages through Sectoral Determinations, net employment in the affected sectors actually increased by over 650,000 workers, from 3,45 million to 4,1 million, despite lost farm worker jobs.
Conversely, low and declining wages don’t create employment: real wages of low-skilled workers have fallen since the 1990s, but jobs for the low-skilled have shrunk by nearly a million. Yet 2.5 million jobs have been created for higher paid, higher-skilled workers over the same period – despite large increases in real wages. Therefore facile mechanical connections between levels of wages and employment don’t work outside the pages of neoclassical economic textbooks.
Myth III: COSATU says raising minimum wages (regardless of how high) will have no negative impact on employment
Critics caricature COSATU’s argument to suggest that a national minimum wage, regardless of its level, will have no effect on existing jobs, and will inevitably create new jobs. Linear thinking of economists apparently only allows for causality one way or another. But we have argued that the picture is more complex:
“…there is no mechanical relationship between (the level of) employment and (the level of) wages. Employment performance is explained by various economic factors. Sectoral conditions, industrial strategy, trade dynamics etc., [all] play a key role in determining how any sector performs. Therefore wage policy must be combined with appropriate macro and sectoral policies to have the desired employment impact”. (Business Day 22/8/14)
We have also said that rising effective demand, resulting from growing consumption by workers, creates an opportunity, if the correct policies are in place, to drive economic activity and employment growth. As President Lula da Silva said: “Once we put money in the hands of the poor, they started buying goods.. and the giant wheels of the Brazilian economy started turning.”
This fuelled domestic demand, and with the massive extension of affordable credit, promoted formal employment.
Myth IV: COSATU regards the national minimum wage as a panacea or a silver bullet
COSATU has repeatedly stated that transformation of the labour market and the economy requires a package of measures. The National Minimum Wage is only one part of this package, albeit an important part, which must be complemented by a system of comprehensive social protection, a reconfigured collective bargaining system, and appropriate industrial and economic policies.
But while the National Minimum Wage may not be a silver bullet, it could be an important catalyst in sparking broader change.
Myth V: SA workers are already relatively well paid and their wages are rising rapidly
Recent statistics demonstrate the shocking level of poverty amongst low-paid workers. Stats SA’s Labour Market Dynamics 2013 states that last year half of South African workers earned below R3,033 per month (the median wage). The vast majority therefore earn way below the estimated minimum living level of around R4,500 p/m.
And the situation is not improving. Median wages have stagnated, actually decreasing between 2012-13; while average wages (around R15,000 in 2014), are distorted by the earnings of high income earners and continue to shoot up, faster than inflation. Inequality between wages at the top and bottom is spiralling out of control. A minimum wage, which significantly raises the income of those at the bottom of the wage distribution, will therefore play a key role in combating working poverty, and inequality.
We argue that reconfiguration of our highly unequal wage structure, will allow for flexibility in raising the wages of the bottom half. The PPC experiment showed the dramatic difference such a strategy could make: CEO Khetso Gordhan took a large pay cut (as did 60 top executives) to reduce the 1:120 ratio between his salary and those of the lowest-paid. And 1,000 PPC workers at the lowest pay-grades got an increase of about R10,000 per year, reducing the ratio to 1:40. Imagine if we generalised this approach to the economy as a whole - private and public sector - what a powerful impact this could make in transforming our society.
Myth VI: By proposing R4,500 to R6,000, we want a national minimum wage way above the ‘clearing rate’
Business economist Peter Montalto has confidently declared that a minimum wage could only be established without a serious impact or distortion on the economy “if it were around R2,500 per month, unlike the COSATU proposed level of R4,500 to R6,000 per month”. Setting a minimum wage “so far above the clearing rate would lock out far more unskilled workers from the workforce”. (Fin 24 6/1/14)
Apart from this rather arrogant assertion, there is one problem: COSATU has not actually proposed a figure yet. We have only indicated a desirable target range for a national minimum wage, using internationally accepted yardsticks, but opponents are trying to create hysteria about the ‘dire consequences’, without examining our position. Our position over many months has acknowledged the need for a carefully managed process, including the idea of phasing in the desired level of the minimum wage:
“There may need to be discussion of a process of phasing in an agreed target, to manage the process, and avoid an excessive shock to the economy. At the same time, this doesn’t remove the need to act with the necessary decisiveness and boldness, to address the crisis of working poverty and inequality.” (Business Day 29/8/14)
Myth VII: The ‘real cause’ of inequality is unemployment
Bizarrely, some commentators have tried to suggest that a national minimum wage will not contribute to reducing poverty and inequality, because the ‘real problem’ is unemployment. But 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 even in the UK, increases in the national minimum wage have “boosted earnings further up the income scale - and thus reduced wage inequality. (As a result) wage gaps in the bottom half of Britains pay scale have shrunk sharply since the late 1990s”. (Economist 24/11/2012)
Thomas Piketty, in his blockbuster Capital au XXIe siècle, traces how public policy has played a critical role, in France and the US, in reducing income inequality. A key instrument of public policy in this regard, had been improving the level of the national minimum wage.
Myth VIII: Social Grants are better at addressing poverty and inequality than minimum wages
A number of opponents of the National Minimum Wage are now the biggest fans of social grants, despite historically opposing their extension.
Dirk De Vos goes as far as to say that social grants in Brazil “reduce inequality more effectively than a meaningful minimum wage might do”. But this is another made-up ‘fact’. Research (ILO/ OECD G20 Policy Brief, 2011) has shown that two-thirds of the reduction of inequality in Brazil was a result of the rising value of the Minimum Wage, and wages in general, with one third attributed to social grants.
But why must the two be counterposed? Clearly there is the need for an effective combination of a good social protection system and rising National Minimum Wages. This is precisely the lesson of the Brazilian experience.
The lesson here is clear: the National Minimum Wage is a viable proposal, and those standing in its way – by virtue of not needing it – are not really in a position to do so. DM