Opinionista David Kaplan 28 November 2016

The National Minimum Wage Panel report: No numbers, No direction

The major concern is the disemployment impact of a National Minimum Wage. The higher it is, the more it meets the needs of the working poor, but simultaneously the greater will be the reduction in employment. In short, there is a trade-off.

The National Minimum Wage panel of experts has recommended a minimum wage (NMW) of R3, 500 per month or R20 per hour. The panel calculated that almost half (47%) of wage earners currently earn below this level. The National Minimum Wage will take effect July 1, 2017. But there will be a phasing-in period. Fines for non-compliance will only be implemented after July 1, 2019.

There is universal agreement that wages are far too low for very large numbers of wage earners and that a National Minimum Wage has the potential to alleviate this situation. The major concern is the disemployment impact of a National Minimum Wage. The higher it is, the more it meets the needs of the working poor, but simultaneously the greater will be the reduction in employment. In short, there is a trade-off.

The main reason to convene a panel of experts is to make this trade-off explicit – to give it some real numbers. A National Minimum Wage of X will result in so much welfare improvement, particularly for poor households on the one hand, but will reduce employment by so much on the other. The debate can then be an informed one. Is the trade-off worth making? Should we be looking for another? Ideally, the expert panel should have provided a range of scenarios of possible National Minimum Wages and their accompanying trade-offs.

This the expert panel failed to do.

Confronted with models that produced very different projections of possible disemployment that would result from any meaningful National Minimum Wage, the panel declined to interrogate further – “it was not the business of the panel to judge the accuracy of these models”.

Instead, the panel came to its conclusion as to the appropriate level of the National Minimum Wage through internal discussion.

In reaching the recommendation that the first national minimum wage for South Africa be set at a level of R20 per hour (R3,500 per month), the panel carefully considered all of the evidence, debated the issues at length and reached what we believe to be a carefully considered level.” (My emphases.)

The double-double-speak of carefully considered itself speaks volumes. Carefully considered and debated at length is the panel’s stand-in for the numbers. Instead of making their own assessment of the trade-off, the panel produced a fudge.

In respect of the disemployment effect of a National Minimum Wage of R3,500 per month, the panel concluded: “The proposed number is intended to be just below the threshold where the effects on employment change from benign to negative.”

This begs a number of questions.

What does benign entail – in numbers? What some might consider benign others might consider significant. Benign, like beauty, is in the eye of the beholder.

South Africa faces low growth and rising unemployment at least for several years. What impact does this have on the determination of what unemployment numbers might be considered benign?

What assumptions has the panel made in drawing the conclusion that the effects on employment will be benign?

How much confidence does the panel have in their proposed National Minimum Wage, particularly since they have fine-tuned it so precisely at “just below the threshold?”

The report does not pose, let alone provide answers, to any of these questions.

A number of sectors where a large proportion of workers are very low-paid will find it difficult to bear the costs of the National Minimum Wage. Employment in agriculture and domestic service are particularly sensitive to the level of the National Minimum Wage. The panel recommended that, in the first year of implementation, the minimum wage in agriculture should be 90% and for domestic workers 75% of the National Minimum Wage.

Any future adjustments to this level should be evidence based, but the panel expressed the view that over time these tiers should be done away with so that the National Minimum Wage would apply to all workers. A cautionary approach to these sectors is certainly required. Whether the allowances are sufficient though is unclear. Once again, there are no numbers to support the panel’s recommendation.

A special dispensation is particularly critical for small firms (SMEs), which are heterogeneous. Medical practices for example contrast with small construction firms.

The former have considerable capacity to pay more and will hardly be impacted upon because wages are already well above the National Minimum Wage.

The latter have far less capacity to pay and will be strongly impacted upon because the wages that they pay are likely to be below the National Minimum Wage.

Recognising the heterogeneity of SMEs and the limited capacity of the vast majority of small firms to pay higher wages, the panel recommended a further one year’s grace period for the phasing in of the National Minimum Wage. The concession is derisory. A stay of execution, but still execution. After just a year’s grace, all small firms will be subject to the same National Minimum Wage as any large firm.

The panel gave no consideration to new firms. Initially firms are under-capitalised and labour intensive – wages are by far the largest component of their variable costs. The panel failed to recognise the critical importance of start-ups to growth and to an economy seeking to diversify and to dilute economic concentration. The panel should have exempted all new firms from the provision of the National Minimum Wage for some years from date of establishment.

The expert group failed also to consider the impact of their recommendation for the National Minimum Wage on the price of labour relative to that of capital. At present, South Africa’s industrial policies provide substantial incentives to capital investment. The National Minimum Wage will have the impact of raising wages in a context where government policy is designed to cheapen the costs of capital. Since many activities performed by unskilled low-paid workers can be mechanised, investors are given a further impetus to choose capital-intensive, labour-saving methods of production.

Expect the following outcomes:

  • The debate will continue. In the absence of the numbers, the debate will continue to be a shouting match.
  • The minimum wage will ultimately be a settlement negotiated by those best able to meet the costs, the “insiders” – established firms, their workers and leaders.
  • There will be no meaningful concessions to those least able to meet the costs, the “outsiders” – particularly small firms, start-ups and potential new hires.
  • Heightened constraints on the entry and growth of small firms combined with further incentives to substitute capital for labour will reinforce South Africa’s current capital-intensive slow growth trajectory. DM