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December : The minimum wage: global context and possible impact

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2 December, 2016

The minimum wage: global context and possible impact


We now have a minimum wage proposal of R3 500, criticised from all sides of the political and social partner spectrum.

One needs to look at minimum wages from many sides; a little international context helps.

The minimum wage of R 3 500 is high in relative terms. Recent data from the Organisation for Economic Co-operation and Development on selected emerging markets, shows that South Africa's minimum wage ratio compared with the typical wage is the third highest out of 41 countries on which I have data.

The proposed minimum wage works out at 92.5% of the full-time median wage. This level beats all the developed countries that on average have a minimum wage 51% of the median wage.

Only five out of 21 developing countries have a minimum wage that is over 80% of the median wage. Only two have a higher minimum to median wage ratio than SA. The average minimum wage in developing countries is just over 63% of the median wage.

No developed country has a minimum wage to median wage ratio higher than 70%.

Even the example held up by Cosatu, Brazil, has a minimum wage 78% of the median wage. So SA's proposed minimum wage to the median ratio of 92.5% is good by world standards.

So in relative terms, our minimum wage is high by all standards when compared with median wages.

Moreover, actual wages in purchase power parity - as measured by UBS's wages and earning around the world  Johannesburg wages (compared with 71 other cities around the world) are in the centre of the universe when using purchase power parity.

In fact, apart from one other emerging market, SA wages are the highest in the developing world. Our formal sector wages when compared via international research typically always fall on the top half of the top 70-odd countries.

Too high?

The question then becomes - is this minimum wage level too high for business and will it cause unemployment increases?

I'd argue that at least in the formal sector, outside of agriculture, most minimum wages are already way beyond the R3 500. (People often lie about their income, making it lower so as to not attract attention and that is why the labour side is so up in arms - yet they do hammer business about poverty wages and a median wage of R3 000, which has now come back to bite them).

Most of the formal sector already has much higher wages: mining, most manufacturing, transport and financial services are already paying far above the minimum wage.

As domestic and agriculture workers will only be required to be paid 75% and 90% of the minimum wage, these sectors get a little relief. For domestic workers, the minimum wages required will be R2 625 and the actual minimum in the cities from next month will be R2 422, which means that within a year or so the domestic wage in cities will be above the required minimum wage.

Over time, salaries do get adjusted and will be higher anyway. So, provided enough time elapses before implementation, many in vulnerable sectors will not have a problem either.

For farm and forestry workers, the current minimum is R2 607 per month so, given three years to reach the required R3 150, it's likely farmers and forestry companies will reach this level without too much hardship. (But the strife to mechanisation will continue).

So on the face of it, not many sectors will have a problem paying the minimum wage in say three years' time. But the reality is complex, and changes have taken place and will continue to.

However, the country has a complex labour market, and in many cases, the minimum wage will hurt or help change the structure and nature of employment.

Some problem may surface in personal care (e.g. hairdressers); taxi, hospitality, construction and garden service companies could struggle.

The report states that own-account workers can never be subjected to a minimum wage and are therefore permanently excluded and of course that is and always will be the case in real life too.

Currently, the taxi industry works on a ‘rent the taxi' basis and drivers pay owners rent and fill the tank every day before they make their money. The typical rent is R450 to R550 per day plus petrol. So the taxi driver is an own-account worker as he pays rent - and himself only after paying the rent.

Hairdresser ‘seats' are rented out every day, even in upmarket salons - hairdresser are, therefore, own-account workers. Garden service companies rent people on a daily basis - are these people also now own-account workers, or do you provide them with tools, they rent them and are paid per client's lawn cut?

Car guards pay for the privilege of looking after your car in shopping malls and often in public street places too - to someone who owns the space. (I hear beggars too have to rent a sign and robot.)

Smaller transport operators sell themselves and their trucks to agents who take a cut renting the driver / truck combo out.

Domestic work takes many different forms today too as they may be working in a washing and ironing place, where you can drop off your clothes, and get paid per kilogram washed and shirt ironed. In cases it works out cheaper, as operators employ large irons that can do the work in a fraction of the time.

So while the minimum wage is not going to affect the majority of people working - even if the Labour Market Dynamics Report says so - the impact will be in the continued mechanisation and specialisation that the SA economy is already undergoing.

I don't believe many jobs will be lost in the short term or indeed added either. I think that we are not doing the poor a service, as the structure will continue to change as even in the construction industry equipment rentals are catching on for the small operator as well as self-employed people.

The reality is a lot different because the questions asked in the survey don't take this reality into account. The worldwide impact of minimum wages at different levels of per capita income and the percentage of employed getting regular wages bears this out.

Below is a table showing how the share of regular-paid employees decreases the higher a minimum wage is set. Many more people earn money as own-account workers all over Africa. In Tanzania, you rent holes in walls to sell food through, and popular places on the pavement attract rent for informal traders, I was told.

From the activists parading as academics and industry and labour leaders, the economic reality is far ahead of you and continues to change. This is not only a South African phenomenon, but an international tsunami, as countries with relatively high minimum wages have less than 50% of adults receiving a regular wage.

Many adults receive income from own-account work in the countries that make up the table above. You rent the pavement or the table and serve your customers there. It's happening in SA too.

So set the minimum wage and the economy reacts differently to all the studies even in advanced countries?

Is the R3 500 proposed minimum wage good and fair?

Well relatively, I believe it's set slightly higher than achievable for some smaller business - but not so high as to upset the big formal economy and most regular wage employees will keep their jobs. But at the bottom end, the subsistence entrepreneurs will be in a bigger fight for survival. You will not hear big companies complain about it - I promise.

The changes will also re-arrange the structure of the economy. I believe we will see more survivalists businesses and traders, personal care people and backyard builders.

The growth in formal jobs will stay slower than population growth and the disparities in the economy in the form of inequality will continue to grow.

This is not damning, but it is certainly a very narrow approach, advocated for the few of us who have regular pay already. If we want small business to create jobs, then this flies smack into the face of that implementation.

If you want an equal society then this is not what you want - however fair it sounds.

Saying it any different is not true.