Minimum Wage Question 8

 
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A dozen questions about the National Minimum Wage

 
 

Question 8 of 12
 

8. What does the Panel say about the potential of an NMW of R3,500pm to destroy jobs?

 

The most important question to be asked about the proposed NMW is its likely effects on employment. This is an issue of overwhelming importance for a country in which nearly 40% of adults are unemployed.

 
The Panel is aware of the risk, saying that:

“… an NMW set above affordability levels could have negative employment effects. This risk cannot be taken lightly …It is not necessarily true that the mere presence of an NMW will lead to reduced employment opportunities, but the potential of such an eventuality was one of the foremost considerations in the decision about both the level and implementation path for the NMW.”

The identification of this risk is the key reason for the proposed exemptions and delays that the Panel proposes for sectors in which wages for large numbers of workers are lower than the proposed NMW, as well as for sectors in which the state employs many low-wage workers (see Question 7).

The Panel acknowledges that it was presented with evidence from economists, both at UCT’s Development Policy Research Unit (DPRU, and from the National Treasury. This evidence projected that a high NMW such as R3,500pm would lead to significant loss of jobs.

The DPRU’s submission used a model which estimated between 200,000 and one million job losses with an NMW of R3,400pm in 2014 rands, depending on the specification of the model’s parameters, while the National Treasury’s model estimated over 700,000 job losses would follow the imposition of an NMW of R3,200 in 2014 rands.

The Panel also notes that the National Minimum Wage Research Initiative (NMWRI) based at Wits presented a report arguing that an NMW of R3,500pm would be pro-poor, would reduce wage inequality, and would boost growth. However it does not include whatever the NMWRI’s model reported for its impact on employment.

Confronted with these contrasting estimates, the Panel notes (i) that the future is unknowable but that, as a general rule, the results of such models depend on their assumptions; and (ii) that international evidence suggests that minimum wages do not have the dire effects often predicted (see Question 9).

A key criticism of the Panel’s work, made most forcefully by Prof David Kaplan, professor of business/government relations at UCT and former chief economist of the Department of Trade and Industry, is that, when confronted by these results, the Panel has simply waved its hands and insisted that “it was not the business of the panel to judge the accuracy of these models”.

Kaplan argues that, properly conceived, the Panel’s task was to make explicit the extent to which there is a trade-off between the level of the NMW and the disemployment effects of implementing it. This, he says, it did not do.

Kaplan points to a passage in which the Panel says that, in reaching the recommendation for an NMW of R3,500pm, it “carefully considered all of the evidence, debated the issues at length and reached what we believe to be a carefully considered level”. He argues that what the Panel has effectively done is substitute its own inscrutable “careful considerations” for what was actually needed: a reasoned, empirically-grounded discussion of the potential negative employment effects of its proposal to weigh against its potential benefits. In the absence of this, he notes, it is disingenuous to claim as the Panel does, that “The proposed number is intended to be just below the threshold where the effects on employment change from benign to negative.”
(1) How many job losses are needed before the impact of the NMW ceases to be “benign”, and who should decide this?
(2) How does the Panel know that R3,500 is “just below the threshold” where a benign effect becomes a malignant one, and with what confidence does it hold this knowledge?

The report, in Kaplan’s words, “does not pose, let alone provide answers, to any of these questions.”

 
 
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